Denel received an emergency government loan guarantee of R580 million in December to pay its 4 000 employees and suppliers and is confident it will pay be able to pay salaries and suppliers in January.
“The provision of the government guarantee is a short-term solution, and Denel still has to put in place a credible strategy, which must include a long-term solution with restructuring initiatives and an implementation plan to ensure Denel is financially sustainable,” Business Day reports the Treasury as saying on Tuesday.
The Treasury said it had provided the guarantee to Denel to resolve its “immediate funding crisis”.
Denel spokeswoman Pamela Malinda told Business Day that it would pay January salaries and suppliers “within agreed terms”.
Denel has been struggling with its cash flow and has had issues in paying suppliers and December bonuses. It also landed in hot water last year when it emerged that Denel’s auditor Sizwe Ntsalabu Gobodo (SNG) failed to properly account for irregular expenditure in its report of Denel’s financials and Denel ended up tabling incorrect financials.
Denel posted a profit of R333 million in 2016/17, according to its latest annual report, down from R395 million the previous year. “The decrease for the year under review can be attributed to softer local demand, as well as foreign exchange losses of R232 million mainly relating to the revaluation of revenue recognition debtors, partially offset by growth in export sales,” the company stated. As a result, “we have recognised that certain of our entities and cost structures require repositioning.”
Denel relies on a government guarantee to cover its debt. “The amount of R1.85 billion of debt is unconditionally guaranteed by the government and total debt amounted to R3.265 billion (2015/16: R3.717 billion) at year-end, resulting in net external interest paid of R249 million (2015/16: R184 million),” the 2016/17 annual report stated.
Business operations are funded through a combination of cash generated, short- and medium-term bank credit facilities, corporate bonds and commercial paper borrowings.
In order to fund the growth of the company, Denel increased its Domestic Medium Term Note programme (DMTN) from R2.2 to R3 billion in 2016/167. Of the R3 billion, R1.85 billion is government guaranteed with the guarantee maturing on 30 September 2017. Denel said it would apply to the shareholder (the state) to have this guarantee extended for a further five-year period.
According to its annual report, Denel “raised guaranteed interest bearing borrowings through the DMTN with a coupon value of R1.85 billion (2015/16: R1.85 billion). The debt consists of a R300 million 18-month corporate bond, R585 million five-year corporate bond and short-term commercial paper of R964 million. The balance of DMTN of R460 million is unsecured and R690 million is utilised by means of a five-year bond maturing in June 2018. The group’s borrowings are at an average interest rate of 8.64% (2015/16: 7.76%) that includes an average overnight borrowing rate of 9.38% (2015/16: 8.00%), and an average Commercial Paper Programme interest rate of 8.53% (2015/16: 7.50%), which resulted in borrowing cost of R288 million (2015/16: R252 million) during the 2016/17 financial year.”
In spite of its tenuous financial situation, Denel believe its R18 billion order book and other factors mean it has adequate reserves and cash resources to continue operating as a going concern.