THE Treasury has agreed in principle to extend Denel’s government guarantee of R1.85bn, which expires at the end of September 2017, on condition that it is significantly reduced by R650m by 2020.
The state-owned arms manufacturer has raised debt on the basis of the five-year guarantee, some of which matures in September next year.
Last week, the Treasury approved a guarantee estimated at about R5bn to financially beleaguered national airline SAA so that it could maintain its status as a going concern and finalise its annual financial statements for 2014-15 and 2015-16.
Over the past few months, the Treasury has clashed with Denel over what it says was the company’s unauthorised establishment of a joint venture — DenelAsia — with VR Laser Asia, a company owned by Gupta-linked Salim Essa.
Denel’s 2015-16 annual report tabled in Parliament on Monday said the group would submit a formal application to the Treasury for an extension of the R1.85bn guarantee during the current financial year. It said it was "on track to reduce its reliance on the guarantee as per expectation".
However, Denel said that its FitchRatings rating of AAA long term and F1+ short term "relies heavily on government support. Fitch has indicated that Denel’s rating would be influenced should the government guarantee not be extended in that Denel may be rated on a standalone basis.
"Although Denel is concerned about the possibility of a sovereign rating downgrade, it should not influence the rating or the ability to secure funding in the capital market. Denel only issues local paper, and we believe local investors still prefer government and bank paper due to liquidity. Denel could see a pickup in the liquidity spreads but does not foresee a negative influence on our liquidity.
"The gearing ratio is set to improve as Denel continues to post profits and normalises its growth, thereby reducing its dependency on borrowings," the annual report said.
Debt reduction is a key objective as last year borrowings rose sharply from R2.2bn to R3.7bn and the debt:equity ratio increased to 1.6:1 from the previous year’s 1.1:1.
"The group remains highly geared with debt of R3.7bn of which 45% is due in the next 12 months," the report said. Denel said phenomenal growth in revenue from R3.6bn in 2011-12 to R8.2bn in 2015-16 had placed "significant strain on its cash resources".
Last April, Denel Vehicle Systems acquired BAE Land Systems SA for R855m, which made it subject to the Public Finance Management Act and Public Procurement Policy Framework Act as well as Treasury regulations.
Denel has applied to Finance Minister Pravin Gordhan to be exempt from the requirements of the legislation and regulations so that it can get its internal controls in place. If the exemption is not granted, Denel would be faced with 21 cases of potential irregular expenditure for not evaluating valid clearance certificates before the bids were issued and for deviations from the procurement process, which was not adequately approved. Supply chain management processes were not adhered to.
"The cases are still being investigated to determine if any disciplinary steps/criminal proceedings are required," the report said.
Net finance costs jumped to R203m last year from the previous year’s R123m.
According to the annual report, former group CEO Riaz Saloojee, who was suspended in September last year and whose contract was terminated in April, earned R4.7m for the year.
Revenue rose 41% to R8.2bn (R5.8bn) in 2015-16 and after-tax income 46% to R395m (R270m).
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