In the third week of December Cabinet announced it had approved the appointment of Daniel (Danie) du Toit as new the new group chief executive officer of Denel. This is after it emerged that South Africa’s state asset manager has bought up most of Denel’s bonds.
A statement issued by Adrian Lackey of the Department of Public Enterprises (DPE) notes the new boss of the state-owned defence group brings “a wealth of experience in the defence and manufacturing sectors” as well as a solid career track record that “will be of value” to Denel.
“We look forward to working with Mr du Toit to provide direction to Denel and its divisions, in line with the company’s vision, core values and strategic drivers,” Monhla Hlahla, Denel board chair, said.
“Together, the board and management will continue with the implementation of solid initiatives to strengthen governance, inject liquidity and restore the company’s reputation and credibility.”
Du Toit was, according to the DPE statement, an external candidate for the position. He has a Master of Commerce (MComm) and completed the Gibbs executive development programme.
He will move into the chief executive’s office at Denel’s Irene campus in Centurion on 14 January. Du Toit recently vacated a managing director position at SAAB Medav Technologies in Germany and previously held executive posts at SAAB and Altech Multimedia.
“The reputational damage Denel suffered over the past two years led to a loss of confidence from stakeholders, including the banking and investment community, who, in turn were unwilling to extend credit facilities. The turnaround is meant to arrest the current decline in the company’s performance, inculcate a culture of sound corporate governance underpinned by ethical values and integrity – including instituting sound internal controls – and restoring the company’s position as a strategic national asset and industry leader, Hlahla said.
“Denel shares government’s commitment to contribute to the broader socio-economic upliftment of society especially in the fields of job creation, poverty alleviation, enterprise development and the growth of our technology skills base. We will continue to work with stakeholders to ensure these objectives are achieved. Our immediate priority is for the company to return to profitability and operational sustainability.”
According to the statement, the Denel board working with DPE and National Treasury is committed to ensure the turnaround plan will set Denel on “a trajectory of sustainable growth”.
“The plan, in part, includes exploring joint venture partnerships at product and divisional levels for increased export market access.
“Plans to turn around the company are further supported by the Department of Defence (DoD). It is essential to ensure critical sovereign assets, intellectual property and critical skills within Denel in support of national security, are retained.”
A further shot in the arm for Denel comes from the Public Investment Corporation (PIC), which bought up almost 90% of Denel’s bonds in the past 12 months, according to data from the country’s main securities depositary.
Reuters on 20 December reported the previously undisclosed funding by the PIC, which manages R2 trillion of investments for government, sheds new light on the precariousness of Denel’s financial position.
A senior lawmaker in the biggest opposition party, the Democratic Alliance (DA), said the purchase of Denel debt by the PIC amounted to a bailout by stealth.
“This is a state bailout, irrespective whether it is a grant from National Treasury or a PIC investment via bonds,” said Kobus Marais, the DA’s shadow minister for defence. “Denel must be sustainable on its own.”
The PIC held around 350 million rand of Denel bonds in March 2017, but from December 2017 it started to dramatically increase those holdings, data from South Africa’s Central Securities Depositary analysed by Reuters showed.
As of 14 December, the PIC owned R2.8 billion of Denel bonds, out of the company’s total issuance of R3.15 billion. The PIC purchased the bulk of that debt via private placements in December 2017, September 2018 and December 2018.
It bought almost R2.5 billion of debt “” issued to refinance older borrowing “” in September alone. That same month, Denel was unable to pay senior staff in full because of what it called “liquidity challenges”.
Two former Denel executives told Reuters many banks and large private investors refused to lend to Denel since December 2017, citing governance concerns. They said by September 2018 the company did not have enough cash to meet maturing debt repayments, putting it at risk of default.
Asked about the PIC’s purchases of Denel’s bonds, the arms company’s spokeswoman said: “Denel has been successful in raising sufficient funds from the bond markets to ensure it is in a position to honour its obligations. … It will soon become profitable and operationally sustainable.”
The PIC’s current holdings of Denel’s debt are held on behalf of the Unemployment Insurance Fund and Compensation Commissioner, two funds the state uses to pay benefits to unemployed, sick or injured people.
“State-owned entities, in which the PIC is invested on behalf of its clients, service their interest payments as required and to date there have been no defaults,” the PIC said in a statement to Reuters, confirming it owned R2.8 billion of Denel bonds.