Investec maintains that clients will not be adversely
The collapse of construction company Cosira proved to be the last straw for First Strut – a company that appears to have been in its death throes despite receiving nearly R1-billion in funding from investors.
The liquidation of First Strut, trading as First Tech, is the biggest corporate bond default to investors in South Africa's history. But the Mail & Guardian has discovered that there may be as many as 10 000 creditors for First Strut and its subsidiaries, pushing the estimated debt much higher than the current R3.5-billion.
The M&G has been told that First Strut has put up the same assets – namely its plants, equipment and inventory – for many of its loans, which will be devastating news for investors. First Strut took over Cosira in December 2012.
Cosira's liquidation, just days before the death of First Strut chairperson Jeff Wiggill, received widespread media coverage because of that company's involvement in the conflict-ridden Medupi project.
But it was First Strut that became the real focus after rescue practitioners trying to save Cosira realised the full extent of the financial problems facing the parent company.
Court papers called for urgent provisional liquidation and warned of chaos as disgruntled creditors removed equipment at sites, unpaid guards abandoned a building containing copper wiring and R6-million in salaries went unpaid.
The extent of the intricate web of lies and financial wrangling around First Strut's deals surprised seasoned business rescue practitioners.
Describing the scene that greeted him when he arrived at its head office in Benrose, Johannesburg, in July, rescue specialist John Louw said: "Staff could not even say how many people they employed, and this was a company with over 20 subsidiaries and 15 trading divisions. When I asked for the financial records – what records? There was nothing."
It has emerged that Wiggill, who also acted as the financial officer, had kept all the accounts and transactions in his head.
Investec was the firm most exposed to the default. It had sufficient confidence in First Strut not only to invest R435-million of its clients' money through a credit fund but, out of its own pocket, also provided the manufacturing, mining and power industry supplier with a R240-million direct loan.
Investec made up part of a special investment vehicle, Bacarac, which included Sanlam Capital Markets with R263-million in bonds, Fairtree Capital with R131-million in bonds, Prudential Portfolio Managers with R51-million, Rand Merchant Bank with R50-million and Stanlib Asset Management with R22-million.
What is still not clear is how these investors were duped into putting R925-million into a company with no financial records, according to lawyers and rescue experts.
Global Credit Ratings was sufficiently unimpressed by the inability of Wiggill and chief executive Andris Bertulis to provide paperwork that they downgraded the company from a BBB+ to a BBB. Yet other institutions such as the JSE, which is required to vet companies before issuing or buying bonds, were unaware of the firm's financial position.
A statement by John Burke, JSE's director of Issuer Regulation, provides no further details, saying only that the JSE has "strict listing requirements" that include reviewing the "financial statements and general disclosure of business".
Investec's Ursula Nombrega said: "We would have done credit-worthiness and collateral evaluations and nothing untoward was picked up in the operations of the company."
A statement by the company said Investec Bank's personal exposure was "fully secured on (undisclosed) underlying collateral, which is predominantly property".
"We do not anticipate Investec will be directly exposed on this loan," said Nombrega.
Clients are expected to lose out on the R435-million if it is not recovered, but with over R40-billion in corporate debt management by Investec, "clients can still expected a positive return for the year ahead", the statement said – albeit with slightly reduced returns.
Other investors look a similar line, with most saying that the loss will not affect the positive returns expected for clients. Standard Bank, which provided First Strut with a R103.3-million performance guarantee facility, declined to comment, citing client confidentiality agreements.
Shortly before liquidation, Wiggill had attempted to lodge an application against the Da Silva Group that sold them Cosira, but reviews done by, among others, auditors BDO, indicated that First Strut had weak legal agreements and by February 2012 was aware that Cosira was spending more than it was earning.