The banking sector will be rocked by allegations of corruption this week, when Transnet tells the commission of inquiry into state capture about Nedbank’s involvement in a controversial deal which saw the bank pocket R780 million from the parastatal.
This week, Transnet’s acting chief executive, Mohammed Mahomedy, will appear before the state capture inquiry where he will detail how Nedbank made R780 million after changing the interest rate terms of a multibillion-rand loan three days after making the loan.
Mahomedy replaced Tau Morwe, whose six-month contract was not renewed when it expired early this month. Nedbank is the latest in a long list of private sector companies to be implicated in state capture.
Mahomedy’s statement shows that in August 2014, Transnet started negotiations for a R12 billion syndicated loan to finance the acquisition of the controversial 1 064 locomotives.
The loan is broken down as follows: Bank of China R3 billion; Absa R3 billion; Nedbank R3 billion; Futuregrowth R1.5 billion; and Old Mutual Specialised Finance R1.5 billion. The syndicated loan was facilitated and arranged by the Gupta-linked Regiments Capital.
On December 1 2015, Transnet signed the R12 billion syndicated loan with Bank of China, Absa, Nedbank, Futuregrowth and Old Mutual Specialised Finance.
When the loan was signed that day, the parties had agreed to use market-related floating interest rates.
But three days later, on December 4 2015, Regiments executed an interest-rate swap between Transnet and Nedbank as a counterparty, on R4.5 billion of the R12 billion.
An interest rate swap agreement is usually concluded when a company with a market-based floating interest rate wants predictable, but often more expensive, loan repayment terms. It would then sign a contract with a third party, which would usually be a bank or an investment company which has an appetite for risk, and swap its floating rate for a fixed interest rate.
It all means the company which wants predictable interest rates outsources the risk of a market-based floating interest rate to a third party, albeit at a premium.
Furthermore, the statement shows that on March 1 2019 Regiments executed another interest rate swap – on R7.5 billion, the remainder of the R12 billion syndicated loan.
Although the statement is not clear about when and how, it goes on to show that Regiments later executed another interest rate swap deal between Transnet and the parastatal’s pension fund – known as the Transnet Second Defined Benefit Fund (TSDBF) – as a counterparty.
“The decision to swap from floating interest rate to fixed interest rate has resulted in the following additional interest cost to Transnet as of February 25 2019: R785.3 million in respect of the Nedbank transactions, and R696.6 million in respect of the (TSDBF) transactions.”
Regiments, the statement reveals, was rewarded handsomely for arranging the interest rate swap deal.
“Regiments advised and executed the interest rate swaps with Nedbank and TSDBF as the counterparties,” said Mahomedy.
“Regiments is paid significantly by Nedbank and the TSDBF for the interest rate swaps.
“From the documents reviewed, we understand that Regiments was paid approximately R227 million from the TSDBF. Nedbank has not confirmed the value paid to Regiments to date.
“The payments to Regiments by both Nedbank and Transnet’s pension fund constituted a conflict of interest on the part of Regiments,” said Mahomedy.
Mahomedy will further testify that an additional 20 basis points had been added to the fixed interest rate in order to make provision for Regiments’ fees.
“For these transactions [interest rate swap deals] a fee of 20 basis points was included in the additional interest margin that arose in order to fix the interest rate cost, as a fee payable by Nedbank and TSDBF, respectively, to Regiments. The rates were fixed at 11.83%.”
The acting chief executive also argues that the decision to secure the R12 billion on a fixed or market-based floating interest rate should have been decided when the loan was signed to avoid unnecessary costs of revising the position three days later.
Mahomedy dismissed Transnet officials’ claims that the interest rate swap deals were executed because interest rates were expected to rise in the short term.
“While there may be circumstances where, because of market conditions, the outlook for interest rates change to such an extent that it is necessary to address the interest rate risk, this was not the case here, as the decision was taken only three days after executing the loan transactions.”
A source close to the state capture inquiry said it was wrong for the Nedbank group to fund half of the R12 billion and also become a party to the interest rate swap.
“In effect, they became referee and player. But also, why change the interest rate three days after signing the loan agreement? It amounts to profiteering. Why did they not agree on interest rates on the day the loan agreement was signed?” asked the source.
Mahomedy also slammed the decision to use Regiments to facilitate a raft of loans, including the R12 billion syndicated loan, between Transnet and a number of financiers.
“This was facilitated by Regiments, even though the Transnet treasury team was capable of executing this transaction. The Transnet treasury team had sufficient expertise to enter into loan transactions without the need for external support.
“In my view, there was no need for the abovementioned loan arrangement fees to be incurred. Regiments was paid about R166 million in order to facilitate the loans between Transnet and a number of funders,” said Mahomedy.
In a statement, Transnet spokesperson Molatwane Likhethe said: “Transnet has noted with concern pre-empted coverage of the Zondo commission regarding Transnet’s submissions by the City Press.
While Transnet respects the role and responsibility of the media to report on such matters, the state-owned company is requesting that it be allowed an opportunity to make its representations before the commission without pre-empting on the issues that are yet to be public.”
In the statement, Likhethe added that Transnet wanted to remind City Press of the commission’s regulations, which stipulate that its documents may not be published until the person concerned has testified, and that doing so constitutes an offence.
Nedbank spokesperson Sharda Naidoo said: “Nedbank can confirm that there was nothing untoward with Nedbank’s involvement in the interest rate swap transactions, executed in December 2015 and March 2016, that hedged Transnet’s interest rate exposure to the club loan in which Nedbank participated with other lenders.
“In executing the interest rate swaps, Nedbank followed due process and obtained confirmation of the rates directly from mandated individual(s) at Transnet. The swaps were commercially sound and the profit and return on equity for Nedbank was fair, reasonable and appropriate. Nedbank can confirm that no fee was paid, at any time, by Nedbank to Regiments in respect of the swaps.”
The bank declined to comment about Mahomedy’s upcoming testimony. However, it said it was becoming increasingly clear from Transnet’s evidence at the Zondo commission that many key decision makers and employees at the state-owned enterprise were compromised by state capture.