In order to make good Steinhoff’s commitment to providing additional funding to L102, the PIC ensured that the funding and security arrangements relating to the L101 and L102’s acquisitions of STAR shares were included as conditions precedent in the transaction agreements. File Photo: IOL
PRETORIA – The Public Investment Corporation (PIC) should have insisted on a commitment related to the funding of Lancaster Group’s BEE special purpose vehicle (L102) prior to the release of securities, says the PIC’s acting executive head of legal counsel, Lindiwe Dlamini.

She said this would have been regardless of the fact that such a move would have had a prejudicial effect on Citi Bank’s funding and the listing of Steinhoff Africa Retail (STAR) and possibly collapsed the transaction.

Lancaster Group is owned by businessman Jayendra Naidoo.

Dlamini was testifying yesterday before the Commission of Inquiry into alleged improprieties at the PIC, led by retired Judge Lex Mpati, assisted by Gill Marcus and Emmanuel Lediga.

“In order to make good Steinhoff’s commitment to providing additional funding to L102, we ensured that the funding and security arrangements relating to the L101 and L102’s acquisitions of STAR shares were included as conditions precedent in the transaction agreements.

“In addition, when on the date of fulfilment of the conditions precedent, it became clear that such commitment was not provided to L102, we insisted on an arrangement which was aimed at ensuring that the PIC would not release the securities until this commitment is provided.

“However, due to time pressures relating to the listing of the STAR shares, the PIC made a concession to release the securities to enable the injection of Citi funding into L101 and therefore the listing of the STAR shares,” said Dlamini.

She related to the commission how Lancaster 101 (L101) entered into a five-year average-term collar with Citi Bank pursuant to which L101 ceded and pledged - as primary ranking security - its rights, title and interest in and to 75percent of the Steinhoff shares as security for its obligations under the collar to Citi Bank.

The balance of the 25percent of the Steinhoff shares was ceded and pledged to the PIC as security for L101’s obligations under the PIC loan agreement.

Following the conclusion of this transaction, according to Dlamini, Lancaster Group and L101 approached the PIC to request support for Lancaster’s proposed equity participation in STAR that would house Steinhoff’s African assets 22.73percent equity interest in Shoprite.

In order to facilitate the L102 transaction, the PIC agreed to effectively subordinate its security interests under the initial L101 transaction.

Some of the key terms of this new security package was that as security for L101’s obligations under the Citi Bank loan, the PIC would relinquish its rights over the primary ranking cession over 25percent of Steinhoff shares not pledged to Citi Bank such that Citi Bank would have primary ranking security over 100percent of the Steinhoff shares.

The PIC would then acquire reversionary security over 100percent of Steinhoff shares pledged to Citi Bank and Citi Bank would be entitled to downside protection from the proceeds of the collar option on a primary basis and the PIC would instead obtain downside protection on a reversionary basis. Dlamini said this transaction had been approved by the PIC’s investment committee in July 2017.

In closing, she told the commission that the role of legal in any transaction was limited to assessing, identifying and mitigating legal risks.

“Commercial decisions do not fall within the purview of legal. Ours is to ensure that the legal documentation reflects the commercial agreement between the parties

“The decision to relinquish security in favour of Citi Bank and replacing it with new security over STAR (Pepkor) shares was purely a commercial one.”

She said: “Undoubtedly, one could never have foreseen the eventual decline of Steinhoff shares and consequential losses to, among others, shareholders and funders”.

The commission is in adjournment until May 14.

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