Debt-heavy, but Denel still confident as key units show growth

At the end of March, Denel held R3.7-billion in debt, “of which about 45% is due in the next 12 months”, according to its annual report released on Monday. Another R1.98-billion is due for repayment in no more than two years.

The state-owned aerospace and defence enterprise said that finding the money to refinance those debts should not be a problem, because South African institutions have historically been happy to fund it, whatever foreign investors may think.

“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,” it said.

“Denel only issues local paper and we believe local investors still prefer government and bank paper due to liquidity.”

But that is no longer as certain as the historical appetite for its debt suggests.

In late August, Futuregrowth Asset Management, the largest fixed-income money manager in the country, said it would halt lending to state-owned enterprises. Denel was not on its initial list of companies it had concerns about.

But a dealer at one institution said he had been warned to be wary of bonds issued by stateowned enterprises, including Denel, because, if there is a collapse in the liquidity of their paper, the Futuregrowth announcement could be interpreted as having been fair warning, which would have serious consequences for those who ignored it.

A dealer at a different institution said he would have “extreme trepidation” in buying Denel bonds if there were less controversial investments available.

Denel’s debt skyrocketed as it bought its way into new lines of business and sought to develop lucrative new weapons systems.

In the past financial year, for instance, it wrote off R159-million in development costs for its longrange, missile-capable Seeker 400 drone aircraft, which it has been developing since 2010.

It sold a demonstration unit to the South African Defence Force and, in 2013, there were reports that it had struck a deal to sell the platform to Saudi Arabia.

But “there has been no progress in finding an international launch customer for the product”, Denel said this week, and “management does not have reasonable comfort that an order will be secured in the immediate future”.

Such failures notwithstanding, many of its key business units showed growth this year, with revenues leaping more than 40% to R8.2billion in the year to the end March, with a net profit of R395-million.

The company paid an average interest rate of 7.76% for the year for its borrowing, achieved in part thanks to a government guarantee for R1.85-billion, which runs until September next year.

That debt cost it R256-million in interest for the year, a jump of more than 67% compared with the previous year.