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Guns, drugs and now a complicated financial securitisation programme are driving one Gauteng school to the brink of bankruptcy.
Wiseman Cele Secondary School in Roodepoort outside Johannesburg is an example of how one bank’s inclusion of schools into its securitisation programme has turned school debts into investment products that have to forcefully collect on dues.
Investment bank Sasfin’s securitisation programme is suing the school for R270 000 after it fell less than R30 000 behind on monthly payments for its leased photocopiers and a telephone system.
Securitisation is the conversion of an asset, especially a loan that is owed to an entity, into units, typically for the purpose of raising cash by selling them to investors. If the person or entity that took out the loan defaults on the required payments, the originator of the securitisation units will sue the person or entity directly on behalf of investors.
South Africa’s securitisation industry has historically been dominated by bonds for residential property. However, since late 2016, the industry has shifted to packaged instalment debts – payments on rental agreements for equipment and instalment sales – that now make up 74% of securitised debts banks have sold to investors. This mostly involves rentals to small businesses, but schools also make up a portion of these securitised debts.
It is not the first time a school has found itself being sued for large sums by banks they had no idea they owed money to.
At Wiseman Cele, Sasfin securitisation bought rental agreements from two of its providers, the Rental Company Trust (RCT) and Corporate Rental Solutions, which, like other companies offering rented equipment, have long-term deals to offer all its rental agreements a securitisation programme.
There are usually a number of intermediaries ultimately offering the agreements to a bank – in this, case Sasfin, which has a securitisation programme worth R3.2 billion and is the second-largest participant in the sector after FirstRand, which has a R10 billion securitisation programme.
FirstRand’s programme focuses on vehicle finance through its subsidiary WesBank and has no exposure to schools.
A school under siege
Wiseman Cele is struggling due to a number of other issues. Its principal, Chris Mathebula, was killed by a stray bullet last year and the drug problem at the school has reportedly forced teachers to flee from gangs. It cannot afford to pay the Sasfin claims.
Sasfin is “suing lots of schools”, said a district education official.
The rental agreements with RCT for a telephone system and photocopiers that were sold to Sasfin were, in retrospect, massively unfavourable towards the school.
The contracts with the school were at pains to say that there were no guarantees that the equipment was up to scratch.
Both contracts contain conditions that, should the school default at all, it loses the equipment and has to immediately pay the entire amount it would have paid for the duration of the contract.
How the debt BALLOONED
For the first set of equipment originally from RCT, this meant a 36-month period and a debt of R13 951.95 ballooning to R66 573.77. This excludes interest that will become payable, as well as legal fees. The contract the school signed automatically makes it pay the other side’s legal fees, and Sasfin is unlikely to use cheap lawyers.
However, the deal that will break Wiseman Cele’s back is for two photocopiers. Here, the school was in arrears for three month’s worth of debt of R15 000.
Now it owes Sasfin R207 000 plus interest and legal fees.
SASFIN SAYS
Sasfin is the only bank with large securitisation exposure to schools. The programme’s exposure to education is about 10%, Sasfin’s head of legal, Howard Brown, said in a response to questions.
A total of 70% of the programme is tied to small and medium-sized enterprises, he said. He added that less than 1% of the bank’s R3.2 billion securitisation programme had to be recovered through courts during any given year.
Other schools have been pursued for payment, but the bank could not divulge how many.
“Our approach to recoveries is based on regulatory, legal, economic and social factors,” said Brown.
There have been other cases involving schools and financial service providers that buy up and resell their rental agreements.
One case made it to the Supreme Court of Appeal when Laerskool Generaal Hendrik Schoeman in Hartbeespoort, North West, found itself being sued for R461 318 plus VAT plus interest in 2006.
In that case, the school defaulted on the very first instalment of a deal made in 1999 to rent photocopiers for five years. After missing one payment, the copiers were taken away and, seven years later, a summons for almost R500 000 was sent for the full five years worth of rental.
After a long legal battle, the school won.
In principle, there is nothing wrong with securitisation. The idea is that it frees up money in the economy by letting companies like RCT on-sell debts and receive cash with which to do more business immediately.
It can, however, lead to a relatively powerless entity like a school suddenly finding itself squaring off against the legal might of a big bank it didn’t realise it was indebted to.
