Banking industry steering clear of Denel

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South Africa’s major financial institutions are staying away from Denel following allegations of capture and political interference. This comes after asset manager Futuregrowth canned R1.8 billion in new loans to state owned companies.

The market has been upset by the planned Presidential co-ordinating committee on state owned enterprises that will be chaired by President Jacob Zuma as well as the conflict between Finance Minister Pravin Gordhan and Zuma.

Futuregrowth chief investment officer Andrew Canter said last week “watching events, and especially those of the last week or so, we realised that we could not make a rational decision over whether to go ahead with the loans.” He was referring to three proposed loans to state owned companies. Canter said there are six entities which there are concerns and these are Eskom, Transnet, the South African National Roads Agency, the Land Bank, the Industrial Development Corporation (IDC) and the Development Bank of Southern Africa.
“We cannot provide finance without having clearer sight of, and comfort around, the governance and decision-making of the SOEs,” Canter said.

Canter told BizNews that “the secondary SOE’s like Denel or ACSA could easily be companies that we’ll review in the near term, but on the other hand are not borrowing from us at the moment…we’ll get to the rest of those later.” He added Denel is not in the capital markets looking for money right now.

According to a source in the financial industry, a deal note has been distributed saying traders should avoid Denel after Futuregrowth’s move.

Unconfirmed reports indicate Futuregrowth, Absa Capital, Standard CIB, Nedbank, RMB, Investec, Old Mutual, Coronation, Allan Grey and Stanlib have sent out simultaneous dealer notes stating that swaps should not be underwritten for Denel.

Denel will not have to approach Treasury for cash and will struggle to raise capital on international markets.

The Public Enterprises Ministry issued a statement on Tuesday indicated government was committed to engage all affected parties as well as improve channels of communication to avoid what it termed are “unfortunate actions”.

The statement did not refer specifically to Denel but indicated in the case of Eskom and Transnet that quarterly reports and an annual integrated report requiring unqualified and clean audited annual financial statements had been received from these State owned companies.
“The reports comply with the Public Finance Management Act, the Companies Act, the King 111 Report, the memorandum of Incorporation, the Shareholders Compact, the Strategic Statement of intent and the established legislation of the entities,” the statement said adding the reports demonstrated good economic and financial governance and having appropriate institutional structures in place.

Denel has been in the spotlight over the establishment of a joint venture with VR Laser to create Denel Asia. Late last month it said National Treasury’s willingness to go to court to stop the joint venture is “political, sheer opportunism and grandstanding” and that “any litigation will be a violation of Chapter Three of the Constitution and it will be vigorously opposed”.

Denel went ahead with the establishment of Denel Asia without approval from Treasury and in violation of the Public Finance Management Act after Treasury apparently did not respond to the notice last year.