The law firm helping to clean up Transnet has advised it to haul Nedbank to court if necessary to claim back the R1.5 billion it allegedly lost in an “irregular” deal related to the controversial tender to buy 1 064 locomotives.
In its advice to the state-owned logistics company, Mncedisi Ndlovu & Sedumedi (MNS) Attorneys charges that Nedbank and Gupta-linked company Regiments “apparently colluded” to “defraud” Transnet.
This is the latest salvo by Transnet, which has already instituted claims against former employees and companies totalling R1.458 billion related to the R54.5 billion locomotives deal that saw Gupta-linked businesses rake in more than R5 billion in kickbacks. Regiments has already been slapped with a R189 million summons and Trillian Capital Partners with one for R146 million.
The locomotives deal is one of the transactions at the centre of Transnet’s testimony before the Zondo commission of inquiry into state capture, which has taken place for the past two weeks.
In a presentation to Transnet, which City Press has obtained, MNS Attorneys has advised it to go to court to cancel and set aside the interest rate swap agreement which Nedbank executed for a nearly R12 billion club loan.
Transnet sources told City Press this week that the swap deal will cost Transnet an estimated R5 billion in additional interest by the time it is paid in 2030.
MNS has also advised Transnet to explore every avenue to get out of the interest rate swap deals concluded with Nedbank, and to “stop the bleeding”.
“Our preliminary view is that the execution of the interest rate swap transaction was irregular due to the following: the decision to conclude the interest rate swaps was irrational; [an] appearance of collusion to defraud Transnet ... conflict of interest; [and] noncompliance with statutory and internal Transnet prescripts.”
It further advised Transnet to seek “just and equitable remedy” from Nedbank, which sources close to the law firm and Transnet told City Press this week would be in the region of R1.5 billion.
This amount includes the almost R780 million the bank allegedly received from Transnet, flowing from the “irrational” interest rate swap deal, about which Transnet’s acting group chief executive Mohammed Mahomedy testified this week before the state capture commission.
Nedbank, however, has strongly denied receiving the R780 million, and maintains that it acted above board in all its dealings with Transnet.
Transnet spokesperson Molatwane Likhethe said the state-owned company had “begun engagements” with Nedbank and would continue doing so.
In its advice to Transnet, MNS states that it “has a duty to institute court proceedings to declare the decision to conclude the interest rate swaps to be irregular”.
A senior Transnet source said: “The advice is to go to court and set aside the contracts.” The advice states: “Our preliminary view is that the execution of the interest rate swap transaction was irregular due to the following: the decision to conclude the interest rate swaps was irrational; [an] appearance of collusion to defraud Transnet ... conflict of interest; [and] noncompliance with statutory and internal Transnet prescripts.”
This week, Mahomedy piled pressure on Nedbank during his testimony before the commission.
He told the commission that Nedbank earned 90% of the R780 million following a decision to swap the interest rates of the multibillion-rand loan from floating, or market dependent, to fixed.
He further testified that Nedbank sold on some of the risk to the Transnet Second Defined Benefit Fund, the parastatal’s pension fund, which pocketed about 10% of the R780 million.
An interest rate swap agreement is usually concluded when a company with a loan at a market-based floating interest rate wants predictable loan repayment terms. It then signs a contract with a third party, usually a bank or an investment company, and swaps its floating rate for a fixed interest rate, but at a hefty price.
When the club loan was signed on December 1 2015, the parties involved agreed to use market-related floating interest rates.
But three days later, Regiments executed the interest rate swap between Transnet and Nedbank as a counterparty on R4.5 billion of the club loan. Three months later, Regiments executed another interest rate swap on the remaining R7.5 billion.
But before Mahomedy testified, Nedbank wrote to the state capture commission last week, asking that his testimony be postponed by six weeks.
The letter from Nedbank’s lawyers, Allen & Overy, which is dated May 7 and which City Press has obtained, states that because of the technical nature of Mahomedy’s allegations, Nedbank would need six weeks to prepare for verbal testimony, a written submission and an application to cross-examine him.
However, a source close to Transnet told City Press that Nedbank withdrew its request to cross-examine Mahomedy.
Nedbank has strongly disputed some of Mahomedy’s testimony, saying it contained “factual inaccuracies, inaccurate inferences, lacks context and has the potential to cause confusion, misunderstanding and unintended inferences”.
In an affidavit filed before the commission, Neil McCarthy, Nedbank’s head of corporate investment banking risk, disputed “suggestions that Nedbank used complex financial instruments to extract undue benefit for Regiments and Trillian”. He also denied that the interest rate swaps were “prejudicial” or “executed on instruction from Regiments instead of Transnet”.
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He disputed that the “fixed interest rate was inflated in order for Nedbank to be able to pay Regiments” or that the swaps flouted Transnet treasury’s risk management framework or were not commercially justifiable.
In response to questions from City Press, Nedbank insisted that the bank did not pocket R780 million as a result of the interest rate swap deals.
Nedbank spokesperson Kedibone Molopyane said: “The inference that may arise from Transnet’s testimony at the Zondo commission that Nedbank made R780 million after fixing the interest rate, subsequent to granting the loan, is simply incorrect.
“It is important to note that the figure did not accrue to Nedbank,” Molopyane said.
“The loans and swap transactions were commercially sound, and the return on equity – a key measure of bank profitability – earned by Nedbank on the series of transactions was fair, reasonable and appropriate at 15.5% over the life of the transactions,” she said.
“Being part of the financing arrangements, and subsequent hedging, is hardly unusual and is standard industry practice. No adverse conclusion can thus be drawn from Nedbank’s participation in both the lending and interest rate swap arrangements.
“In executing the interest rate swaps, Nedbank followed due process and obtained confirmation of the rates directly from a mandated individual at Transnet.”
The decision on whether to select fixed or floating interest rates was made by Transnet and Regiments Capital and had nothing to do with Nedbank, Molopyane said.
“These trades form part of a structure and the all-in fixed swap rates were provided to Nedbank by Regiments Capital, the formally mandated adviser for Transnet, and were confirmed and settled directly by Transnet.”
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However, Mahomedy testified that there had been no procurement process in place for the swaps, which went ahead without approval. He also testified that a review that Transnet conducted of the swap deals found that Nedbank asked for written approval for them after they had already been executed.
Mahomedy told the commission that Nedbank official Moss Brickman wrote to Transnet’s treasury head, Phetolo Ramosebudi, three months after the first swap took place to thank him and ask him for “the special authority granted to you to go ahead” with the deal.
Brickman told Ramosebudi in the letter that Nedbank’s compliance unit needed written confirmation that Transnet was satisfied with the transaction.
Mahomedy further testified that on the same day that the letter was sent, Ramosebudi replied with what looked like a “copy and paste job” of what Brickman said he wanted.