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Denel upgraded by Fitch Ratings as it closes aerostructures business

21st February 2020 BY: Rebecca Campbell
Creamer Media Senior Deputy Editor

South Africa’s State-owned defence industrial group, Denel, has welcomed the recent decision by Fitch Ratings to affirm its long- and short-term ratings for the group and to upgrade its outlook. Fitch affirmed Denel’s national short-term rating at ‘B(zaf)’ and its national long-term rating also at “B(zaf)”. The defence group’s outlook was raised from ‘negative’ to ‘stable’.

Fitch observed that it assumed that Denel’s revenues would continue to fall but that there would be a “return to solid growth” after the 2022 financial year. It expected Denel to reduce its operating losses and to restore profitability from the 2023 financial year.

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The ratings agency further noted that the programme by Denel’s management and board to re-create good corporate governance at the group was bearing fruit. It described the South African government’s R1.8-billion recapitalisation of Denel as a “significant capital injection” which would probably allow the reinitiation of operations but would probably not allow any significant short-term deleveraging by the group.

Denel Group CE Danie du Toit described these ratings as encouraging and affirmed that they would increase the momentum of the policies to re-establish the group’s credibility. Denel was embroiled in the massive ‘State capture’ corruption scandal, which involved many of the country’s leading State-owned companies.

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“We note the many concerns about aspects of the business that are still raised by Fitch and continue to implement measures to mitigate these factors,” he said. “But we are also heartened by the positive aspects of our turnaround plan that are highlighted in the ratings report.”

He added that the decision by the ratings agency had given Denel “breathing space” in which to continue its restructuring. This programme included withdrawing from noncore businesses and finding new markets for its products and services, which were advanced and high-technology offerings.

“We are confident that we will receive further support from our shareholder (government) and that we will meet all the expectations of government, our clients and the South African public to turn Denel into a viable business again,” he assured. Regarding Fitch’s concerns about Denel’s lack of liquidity and the poor operating performance of its business units, Du Toit stated: “We are addressing all these issues in a structured manner and with the support of our stakeholders in government. It is, however, clear that the turnaround is gathering momentum and I am confident that this will be increasingly reflected in the views of analysts and the broader business community.”

A few days before Fitch issued its latest ratings for the group, Denel had reported that the closing down of “the greater part” of its aerostructures business had reached “an advanced stage”. It gave the assurance that it had taken “major steps” to minimise job losses within the group. The business was being closed because it was not sustainable for the group.

“We have really worked hard in trying to keep job losses to a minimum and some of the employees will be transferred to other positions within the Denel group, while voluntary severance packages have been offered,” said Denel Aeronautics divisional CE Mike Kgobe. There would also be retrenchments.

Labour Relations Act Section 189A consultations with organised labour, representatives of nonunionised employees and other stakeholders had been concluded. The process had been facilitated by a senior commissioner of the Commission for Conciliation, Mediation and Arbitration.

The departments of Public Enterprises and Finance last year formally gave the Denel group their approval to wind up Denel Aerostructures (DAe). This was done under the Public Finance Management Act’s Section 54. Production of the components made by DAe had been transferred to other manufacturers in other countries through mutual agreements with customers.

The decision to wind up DAe was taken in terms of Denel’s long-term strategy, explained Du Toit. This was aimed at repositioning the group and restoring its profitability. The closing of the aerostructures business will not affect the other businesses and operations of Denel Aeronautics, which is based at OR Tambo International Airport, in Kempton Park.

These businesses and operations include aircraft maintenance, repair and overhaul for the South African Air Force and other clients. They also include support for Denel’s own Cheetah fighter (still in service overseas), its Oryx transport helicopter, and Rooivalk combat (gunship) helicopter. Denel Aeronautics also supports Lockheed Martin C-130 Hercules transport aircraft. 

EDITED BY: Martin Zhuwakinyu Creamer Media Senior Deputy Editor

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