Denel is technically insolvent amid worsening short-term liquidity and could run out of cash by March, bringing it to the brink of collapse.

National Treasury’s chief director of sectoral oversight Ravesh Rajlal on Tuesday told Parliament’s Standing Committee on Appropriations that Denel risked running out of cash at the end of March and would need an additional R500 million in funding.

Denel made a loss of R1.9 billion in the 2019/20 financial year due to a decline in revenue brought about by liquidity challenges. In a presentation to the Select Committee on Public Enterprises on Wednesday, Interim Group CEO Talib Sadik said Denel “is structurally and operationally inefficient, requiring reforms including revenue generation, programme management, cash management and cost reduction.”

In the short term, Denel has a high probability of not meeting contractual performance obligations; is unable to raise adequate working capital; is unable to raise performance bonds on new contracts and is unable to honour full salary obligations to all employees and payments to creditors. It is also facing demands from suppliers for upfront payment.

Denel’s problems are compounded by the declining local defence budget, weakened relationships with key customers and suppliers, the inability to retain or attract skilled personnel, ongoing salary disputes and a Fitch ratings downgrade.

Within the organisation there is poor programme execution and low productivity; most divisions are in dire financial position or loss-making and the balance sheet is weak.

Major restructuring is needed for Denel to become a trusted and reliable supplier of products and systems, and globally competitive, the company said in its presentation. This process includes supplying the security cluster and government, diversifying products and capabilities, divesting non-core capabilities and acquiring equity partners.

In August 2019 Denel was allocated R1.8 billion by the state for recapitalisation including restructuring. This was to be supported by the disposal of Denel’s property portfolio (R800 million), disposal of non-core assets (R1.6 billion) and the conclusion of strategic equity partnerships (R2 billion). However, there has been slow progress in the sale of non-core assets and exit from loss-making businesses, although progress has been made with exiting the Aerostructures business and LMT.

Sadik noted that selling Denel property has proved challenging as many properties are national keypoints and selling land to the Department of Defence is problematic as it does not have much money itself.

Denel’s presentation said that despite turnaround activities, the company remains rooted in a liquidity crisis with an order book which is significantly exposed to risk. Consequently, it has seen Denel downgraded by Fitch to ‘CC(zaf)’ due to delayed and insufficient support from the state, resulting in a weakened Standalone Credit Profile. Banks and financial institutions are no longer willing to provide facilities critical for operations and winning new business. In fact, banks are reducing facilities.

Parliamentarians heard that reputational damage is hurting Denel’s ability to win new contracts and treaties signed in the Middle East with the USA are changing Denel’s traditional export advantage where access has been limited for western suppliers.

Denel’s debt has worsened and short-term debt amounts to R3.2 billion and negative equity R2.3 billion. For the 2020/21 financial year National Treasury allocated Denel the remaining R271 million of R576 million most recently promised to it for recapitalisation. Importantly, Treasury waived conditions on the use of the money allowing Denel to use it to restart operations with priority on revenue-generating projects. R167 million of the R271 million was allocated to projects that can deliver a return in the short term – R753 million is planned to be generated to deal with the creditors’ backlog.

In its presentation, Denel noted that a particular concern is that lenders are unwilling to advance funding for projects and an application for bridge funding has been declined. Denel’s going concern status is at risk from debt providers and creditors – Denel owed creditors R600 million as of 25 January 2021, compared with R723 million on 25 October 2020.

Going forward, Denel is prioritising creditors to allow daily operations to continue, and is trying to better manage client funds to rebuild trust and reliability. However, it warned that poor programme execution threatens its trusted and reliable supplier status.

Sadik said that Denel is developing its Next Strategy which talks about repositioning and expanding its offerings beyond defence – emerging requirements that need high class technology include virtual reality, renewable energy, and the automotive sector, amongst others. “How do we reposition or expand Denel’s offering to meet these requirements?” Sadik asked. He said the company has eight workstreams underway at present with regard to the Next Strategy.