State arms company Denel said on Monday it was attending a major global defence exhibition in Abu Dhabi this week. Photo: Supplied/Denel
State arms company Denel said on Monday it was attending a major global defence exhibition in Abu Dhabi this week. Photo: Supplied/Denel

Denel not in tailspin over adverse rating

By Edward West Time of article published Mar 7, 2019

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CAPE TOWN - Denel, the government-owned weapons maker grappling with big financial losses, governance and its involvement in “state capture”, claimed yesterday that it remained positive about its future, in spite of a ratings downgrade by Fitch Ratings earlier this week.

Minister of Public Enterprises Pravin Gordhan last year raised the problem of state capture at Denel when he questioned the relationship between Gupta business lieutenant Salim Essa’s VR Laser Asia, and VR Laser SA, a company of former president Jacob Zuma’s son, Duduzane, which was allegedly doing a joint venture aimed at “exploiting Denel’s intellectual property and proprietary information in India”.

Denel reported a loss of nearly R2billion in 2017/18.

About R500million of irregular expenditure was noted.

“The significant losses clearly show a business that has had a difficult year, marked by lapses in governance, mismanagement and poor contract execution that resulted in severe liquidity challenges,” the annual report said.

“This had been further compounded by a R500m in irregular expenditure and a disclaimer audit opinion by the auditor-general,” the report added.

However, recently appointed chief executive Danie du Toit said in a statement yesterday that they firmly believed that the issues raised by Fitch Ratings would be resolved once a “new strategy” was implemented by the embattled state-owned entity.

Fitch downgraded Denel’s national long-term rating from "AA-(zaf)" to "B(zaf)” on Monday.

Du Toit said the government was aware that they needed additional funds to rebuild the business. Denel hoped to secure some of the R13billion that Finance Minister Tito Mboweni set aside as a contingency reserve in his February Budget speech.

Du Toit said that a strategic review had been undertaken to establish “the extent and timing of the required government support”.

He added that the board had made much headway in support of the turnaround of the business.

A team had also been set up to investigate irregular expenditure and recommend corrective action.

There would be consequences for executives implicated in irregularities, including disciplinary and legal action, Du Toit claimed.

The company was also co-operating with the judicial commission into state capture, the Zondo Commission of Inquiry, and investigations by the Special Investigating Unit and other government agencies.

Part of the new strategy involved selling non-core assets and entering into shareholder partnerships to strengthen market access and access new technology.

Fitch said, according to reports, that the downgrade came from its evaluation of much weaker government support at Denel.

The short-term nature of the capital structure had restricted liquidity at Denel impacting on its ability to deliver on divisional projects.

Denel was being supported in the capital market through a government irrevocable and unconditional guarantee of R3.4bn for the company's R4bn domestic medium-term notes.

This guarantee had been extended to September 29, 2023, but Fitch believed it wasn't sufficient to address operational requirements at Denel.

According to reports, Fitch, however, said that its rating reflected its anticipation of the continuation of some form of government support for Denel.


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