How IDC lost R1.5bn on dud steel plant - TimesLIVE

A senior Industrial Development Corporation (IDC) dealmaker is fighting back against his dismissal over a botched billion-rand steel mill deal, after a scathing report placed him at the centre of a string of irregularities that could end up costing taxpayers R1.5bn.

Paul Nyathi, who led the team behind the SA Steel Mills transaction, is appealing the outcome of his disciplinary hearing after the IDC found itself facing losses of up to R1.5bn, including interest, after the steel manufacturing company entered business rescue.

While the inquiry found him guilty of failing to disclose critical changes to the transaction and shortcomings to the post-investment committee, Nyathi contends that the IDC prematurely dismissed him before his appeal was heard, misapplied its own policies, and contradicted statements made under oath in court proceedings regarding the deal’s fulfilment.

Documents related to the inquiry suggest that the ill-fated investment was plagued by critical contract breaches shortly after signing, including unregistered property bonds, funds on-lent to non-contracted entities and unapproved drawdowns totalling hundreds of millions of rands.

Nyathi’s legal representative, Tokelo Moloi, said his client had raised 12 points challenging the disciplinary outcome.

“The appeal has not yet been heard. What he seeks is a correct interpretation of the agreements and a proper application of the IDC’s own disciplinary policy, neither of which he believes was achieved,” Moloi said.

The deal goes back to 2017, when the IDC’s special credit committee approved a multilayered R514m loan facility for SA Steel Mills to expand manufacturing operations in Meyerton, south of Johannesburg. Under a clause of the construction loan agreement (CLA), the borrower was required to acquire project land and register a R444m first mortgage bond in favour of the IDC.

The borrower did not acquire the land, which was instead purchased and registered by the holding company, SA Steel Rolling Mills (Sasrom).

Instead of informing the post-investment committee of the breach, Nyathi filed a credit appraisal memorandum (CAM) in March 2018 to approve changes to the three loan agreements, totalling R514m, related to the transaction.

The R514m was broken down into three separate agreements: R308m for plant and equipment; R108m as a construction loan for part-financing the building and construction; and R48m as a working-capital loan.

These changes were all approved without going back to the special credit committee that had approved the deal.

The memo became central to the misconduct charges against Nyathi. The inquiry’s chair, Andrew Redding SC, found that it failed to inform the post-investment committee of the breach, thereby depriving the committee of the opportunity to assess the organisation’s cancellation rights and enforcement risks.

“The failure resulted in the delegation matrix not being applied appropriately in this regard,” Redding said in his findings report. “Most importantly the [post-investment committee] was not accurately apprised of the position and the IDC’s options in this respect.”

Nyathi had argued that this change represented nonfulfilment of a condition precedent rather than a breach, but Redding rejected this defence. He found that the agreement affirmed the materiality of the land sale to SA Steel and that the failure to finalise that specific acquisition constituted a material breach of the contract.

The change in the original land sale agreement meant that the project’s physical assets were held by a different entity from the one carrying the debt at the start of the transaction. Nyathi’s alleged nondisclosures therefore concealed a departure from the deal structure originally approved by the corporation.

On March 26 2018, Nyathi submitted a CAM requesting amendments to the loan suite. The memo proposed allowing SA Steel Mills to on-lend a R108m building facility to Sasrom. It further recommended replacing the primary mortgage bond in the borrower’s name with a surety mortgage bond issued by Sasrom, the entity that had acquired the land.

Additionally, the inquiry found that Nyathi cleared drawdowns for plant and equipment using forward-exchange cover (FEC) contracts from the Habib Overseas Bank that lacked borrower signatures. Nyathi testified that foreign-exchange management was an ongoing undertaking, but Redding found that clauses in the CLA made valid FEC documentation a mandatory requirement for disbursement.

Mr Nyathi was not found guilty of the case set out in the charge sheet. On several of the allegations the findings depart from what was put to him, and that is among the grounds of appeal

Moloi also said Nyathi challenged the substantive allegations, highlighting that in court recovery proceedings the IDC stated under oath that all conditions precedent were duly fulfilled, contradicting the disciplinary charges. Regarding the FEC documentation, Nyathi maintained that the original drawdown conditions had been deleted from inception by formal amendments issued by the IDC’s own legal department.

He argued that key deal changes and security structures were fully disclosed to, and approved by, the post-investment committee; legal opinions originated from the legal services department; and failures in post-investment monitoring stemmed from institutional gridlock between departments rather than individual misconduct.

“Mr Nyathi was not found guilty of the case set out in the charge sheet. On several of the allegations the findings depart from what was put to him, and that is among the grounds of appeal,” Moloi said.

Last month, the IDC refused to comment on information received by the Sunday Times that it had written off the debt and lifted Nyathi’s suspension, as well as that of head of legal Russell Wallace, saying it was in a closed period ahead of the release of its financials.

Last week, it expressed “grave concern” over “the persistent unauthorised leak of confidential information to external parties, including the media”.

“While the IDC is still establishing how these disclosures occurred and the motive behind them, we wish to place on record that the irresponsible or deliberate leak of confidential information undermines due process, compromises internal operations and governance processes, exposes sensitive commercial and institutional information, and may prejudice the broader interests of the corporation, its employees, stakeholders and the investments it supports,” it said in a statement.

“The issues raised in your questions concern matters that remain subject to confidential internal governance, management and employee-relations processes.”