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Nedbank faces more litigation woe over Transnet and relationship with Gupta-linked Regiments Capital

Nedbank faces more litigation woe over Transnet and relationship with Gupta-linked Regiments Capital
Ray Mahlaka
By Ray Mahlaka
29 May 2024
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Months-long mediation between Transnet and Nedbank to avoid messy litigation has broken down. This paves the way for Transnet to institute legal proceedings against Nedbank, bringing into the open the dispute over the bank’s role in restructuring its interest on debt.

Nedbank is set to defend itself against legal proceedings from a second state-owned enterprise (SOE) for the commercial bank’s role in executing financial transactions allegedly tainted by corruption during the State Capture era. 

This time, Transnet plans to institute legal proceedings against Nedbank over the bank’s role in carrying out interest rate swap transactions for the state-owned transport entity’s operations — transactions that the SOE believes were corrupt and cost it billions of rands in losses. 

In these interest rate swap transactions, Nedbank was essentially involved in restructuring the interest on the debt that Transnet used to fund its freight rail and port operations, while the bank would receive fees for doing so.

Nedbank already faces a similar complaint from state-owned airport operator, the Airports Company South Africa (Acsa), which has referred the bank to the Special Investigating Unit (SIU) over its role in the interest rate swap deals. 

The SIU is a body that investigates allegations of corruption at state organs and entities and has the power to institute legal proceedings to recover losses.

Like Transnet, Acsa believes that it was prejudiced by Nedbank when it restructured interest rates and wants any losses it incurred to be recovered from the bank.

State Capture and the Guptas


Nedbank’s role in the interest rate swap deals at Transnet and Acsa is detailed in the first and second parts of the State Capture commission reports, which have also examined the bank’s relationship with Regiments Capital, a financial services firm that was linked to the Gupta family. 

Transnet and Nedbank have been in mediation talks for months to settle the dispute amicably and avoid messy litigation. However, mediation talks have broken down, which paves the way for Transnet to institute legal proceedings against Nedbank and make the dispute public. 

Nedbank has provided an account of how mediation talks have since gone awry, saying it “rejects any attempt by Transnet to blame the bank for its own governance failures”. 

“Nedbank was not, and could not have been, aware of the apparent collusive relationships that the Regiments Group had forged with senior officials at Transnet or the links that the Regiments Group apparently had with the Guptas. Nedbank is not aware of, nor has it been provided with, any evidence of collusion or corruption on the part of Nedbank or its staff, despite numerous requests for disclosure of such evidence, should it exist,” the bank said in a statement on Tuesday, 28 May.

In response, Transnet also confirmed that mediation talks had failed, saying that the SOE had not settled with the bank. 

Transnet disagreed with Nedbank’s views on its role in the interest rate swap transactions and believes that the commercial bank has a case to answer. “Legal proceedings will imminently be instituted by Transnet against Nedbank, which will set forth the basis for Transnet’s case,” said Transnet, adding that it could not give further information about the mediation talks as they were bound by “confidentiality constraints”. 

Judge Raymond Zondo, in the State Capture Commission reports, did not make a definitive finding of wrongdoing against Nedbank, but merely questioned its work at Transnet and Acsa, and recommended that the interest rate swap transactions should be further investigated. 

Nedbank’s relationship with Regiments has arguably been the most destructive at Transnet.

Zondo, in his second State Capture report, which dives deep into the affairs of Transnet, has found that Nedbank’s work at the SOE has caused it “significant prejudice”, as Transnet incurred losses of about R1.8-billion that might never be recovered. 

How the interest rate swaps happened


The involvement of Nedbank and Regiments at Transnet started after the SOE embarked on a massive capital investment programme in 2011 to modernise its fleet of locomotives. Transnet ended up procuring 1,064 locomotives from Chinese manufacturers, mainly China South Rail and China North Rail.

Read more in Daily Maverick: How the Guptas’ R9bn locomotive heist went down

Transnet wasn’t in a strong financial position to fund the purchase of the locomotives and needed to mobilise funding from lenders.

It approached a consortium of lenders for a loan facility of about R12-billion. The loan from the lenders is broken down as follows: China Development Bank R3-billion; Absa R3-billion; Nedbank R3-billion; Futuregrowth R1.5-billion; and Old Mutual Specialised Finance R1.5-billion. The loan, which was approved on 1 December 2015, was facilitated and arranged by Regiments.

Transnet needed help to negotiate the terms of the loan, as the portion from the China Development Bank was denominated in US dollars and any volatile fluctuations in the rand exchange rate would make the loan more expensive. It also needed help with negotiating the terms around the interest rate on the China Development Bank portion of the loan. After all, the China Development Bank loan (about R3-billion) carried a high interest rate of between 12.9% and 13.3%, whereas Transnet’s average cost of debt (or interest) was about 9.4%.

Around August 2014, Anoj Singh, the Transnet group CFO at the time, pushed for the SOE to appoint Regiments as an adviser to manage the R12-billion loan and the interest rates associated with it. Singh sidestepped Transnet’s internal treasury team, which would normally be responsible for managing the company’s money, debt and financial risks.

Read more in Daily Maverick: Here it is: Transnet’s sweetheart deal with Regiments Capital

Singh argued that the R12-billion loan from the consortium of lenders was too complex for Transnet’s treasury team to manage, necessitating the SOE’s request for help from Regiments.

Zondo found that the use of outside help by Transnet, in the form of Regiments, was highly irregular. Eventually, Singh hired Regiments in August 2014, a decision supported by former Transnet group CEO Brian Molefe and Siyabonga Gama, the SOE’s former CEO of the freight rail division.

Start of Nedbank’s relationship with Regiments


Regiments also needed outside help to restructure the interest on the R12-billion loan. So, it approached Nedbank for help on 4 December 2015, three days after the loan from the consortium of lenders was approved.

Involving Nedbank would arguably create a conflict of interest for the bank, as it partly funded the R12-billion loan while also helping to restructure Transnet’s interest rate on the loan. Put differently, Nedbank would effectively be a player and referee.

To restructure the interest rate on the loan, Regiments executed an interest-rate swap arrangement between Transnet and Nedbank. At a basic level, an interest-rate swap happens when two parties agree to swap the kind of interest rate they pay on loans, which would include swapping a floating/variable interest rate for a fixed one. Swaps are essentially a gamble on what interest rates will be in the future. During a rising interest-rate cycle, fixing an interest rate could make a loan and interest payments cheaper. But down the line, fixing interest rates (especially below-market interest rates) costs more later.

With each interest-rate swap, fees would be paid to Regiments and Nedbank for their work. From 2014, Regiments scored fees of more than R265-million for work that could have been ordinarily done by Transnet’s treasury team. In the same breath, Nedbank earned fees, but it’s unclear what the full amount is.

In its entirety, the swap deal had cost Transnet R1.4-billion in additional loan costs by February 2019. The full set of swaps is likely to cost Transnet a further R3-billion by the end of the R12-billion loan term in 2030.

Nedbank was also involved in the restructuring of interest rates at Acsa. In the first State Capture report, Nedbank is highlighted for its “disturbing” involvement in the interest-rate swap deal worth R3.5-billion involving Acsa. Nedbank also worked with Regiments at Acsa.

Nedbank argued that its work at Transnet was above board. 

“Nedbank believes the swap transactions were commercially sound and the bank’s margin was reasonable for the risks assumed,” the bank said. “Nedbank did not make any profits, at Transnet’s expense, from the decrease in interest rates over time.” The bank has also maintained the same position in its involvement at Acsa. DM

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