The judicial commission of inquiry into state capture has wrapped up Transnet-related testimony from Dr Jonathan Bloom of Multi-Purpose Business Solutions.
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Zondo excuses Bloom from the witness stand, and thanks him for his time and testimony.
Zondo adjourns proceedings for the day. Back tomorrow at 10:00.
Pretorius asks Bloom if these transactions, including the original club loan, and the changes made to decisions concerning these transactions, were pre-planned or subject to an intervening market change.
Bloom: “In my view, this was pre-planned, and one of the reasons for that is there are so many components to these various transactions that have occurred. They’ve also occurred in a very short period of time. In order to orchestrate something like this, substantial planning needs to have occurred.”
Pretorius now moves to summarise Bloom’s evidence, before wrapping up his testimony.
Pretorius eventually asks Bloom who benefitted in the gamble with using the TSDBF as a counterparty for a swap transaction. Bloom says it was the pension fund that benefitted, by an amount of R720-million.
Pretorius: “Regiments are the fund managers…there will be evidence that as fund managers, Regiments are entitled to a significant portion of the investment upside, so they would get a cut of that R720m.”
Zondo asks if it would be in addition to fees. Pretorius says Regiments would get their fees from Transnet for doing the swap.
Pretorius: “They get paid by Transnet on the one hand for doing the swap, and on the other hand they get a cut of the profits made by the pension fund, to a significant amount.”
Bloom explains that a Transnet pension fund was used as a “counterparty” for a swap transaction, which was very unusual.
Before moving on to the next transaction, Pretorius confirms with Bloom that the fees that were paid to Regiments, for executing the swaps, “that the manner of calculation of the fees and the resultant amount accrued to or paid to Regiments is the subject matter of further investigation”.
Bloom agrees, and Pretorius notes they will deal with that at a later stage.
Pretorius confirms with Bloom that what is significant in his graph, is that the blue line, which reflects the weighted average of all debt, spikes, “and that spike is caused by the fact that expensive interest rate swaps are being entered into…”
Bloom: “Yes, in other words, more fixed debt is being added to the total debt of Transnet, at a high interest rate.”
Pretorius directs Bloom’s attention to a graph in evidence, and asks Bloom to explain what’s happening.
Pretorius: “What you have done in this graph is you have attempted to show the cost of debt, in interest rate terms, to Transnet, on average… and there are two ways in which you’ve portrayed that, in the blue line, and in the red line, and we’ll explain that in a moment.”
Pretorius: “Then in comparison to that, you have attempted to show what the cost of debt was in relation to the club loan… and your comparison illustrates the basis of your conclusion…”
Bloom confirms this is correct.
Bloom says the fact that Regiments benefitted, was most likely “planned”, in response to Zondo asking whether or not this could have been coincidental.
Back from the lunch adjournment, Bloom continues his testimony, led by Advocate Pretorius.
Bloom carries on detailing the interest rates and transactions, with regards to Regiments.
Lunch break adjournment
Transnet lost R850m on the swap alone.
Total loss is R1.8bn, says Bloom
Instead of paying between 8% and 10%, Transnet paid a much
higher rate, says Bloom
Pretorius says that the fixed rate Transnet paid was much
higher than the market rate
Yes, says Bloom
The rate that was agreed as part of the swap agreement
compared to the market was substantially different, says Bloom
To fix a large amount of money was not justified, says Bloom
The change of mind resulted significant fees for Regiments,
at the expense of Transnet, says Bloom
Bloom answers that a strategy is required to manage debt.
We see “extreme decisions” at Transnet made for a very
large amount of money
Chair Zondo questions the length of time for a loan
Bloom says prior to entering into the Club Loan on a floating rate basis, Transnet officials would have intended to effect interest rate swaps effectively converting the loan into a fixed interest based loan. Tweet from @StateCaptureCom
Adv Pretorius says there is evidence to the effect that prior to entering into the club loan on a floating rate, it was known that Transnet would at a later stage enter into the fixed rate swaps( the matter is subject to further investigation).
Bloom: Yes. Tweet from @StateCaptureCom
The speed of the change indicates that Transnet officials
must have known that they were going to swap the interest rate, says Bloom
Bloom says few days after entering into the loan, the first interest rate swap was executed at fixed rate and effectively converting R4.5bn of the loan to a fixed rate. Tweet from @StateCaptureCom
Transnet’s acting group CEO, Mohammed Mahomedy detailed how funds at the state freight and rail company were plundered in loan agreements through interest rate swaps.
When Transnet borrowed R12 billion from the Club and Transnet had previously adopted a âfixed rateâ strategy as a matter of policy. Bloom says compliance with the trends would have suggested that the Club loan be entered into fixed interest rate basis. Tweet from @StateCaptureCom
There was no justification for Transnet changing its mind on
floating and fixed interest rates within a few days, says Bloom
You would not to this analysis in order to justify a swap,
You will rarely find that institutions will forecast a 15
year interest rate, says Bloom
Pretorius says this was done at great cost to Transnet.
Bloom confirms that
It is clear that there was some kind of understanding of how
the execution of these transactions would take place, says Bloom
Loan should have been entered into on a fixed rate basis,
Bloom says up until 30 April 2017, the Transnet Treasury Dealing Room team comprised of four Traders and a Market Analyst. The team was rated as one of the best in the world by McKinsey in a 2010 Survey. Tweet from @StateCaptureCom
Bloom highlights the fixed rate strategy at Transnet
Bloom holds a view that Transnet treasury team had and still has the expertise to handle swap transactions without the support of external transaction advisor or execution agent (Regiments). Tweet from @StateCaptureCom
Advisory firm Regiments Capital earned an “excessive” R265.5m from Transnet to facilitate loan transactions for the state freight and rail entity to finance its 1064 locomotive project, the state capture commission of inquiry heard.
Bloom says these swaps are routine
Bloom told commission that the swaps were executed in two tranches, R4.5bn on 4 December 2015 and a further R7.5bn on 7 March 2016. Tweet from @StateCaptureCom
We’re back in session
Bloom confirms that risk swopping was a practice that
Transnet used to protect from future interest rate spikes
Chair Zondo questions bullet points
Despite JP Morgan using its IP to conduct the transaction, Regiments
was paid R5.7m for the transaction
Bloom highlights the complexity of the Transnet transaction
“It was also quite transaction”
Even if there was an arrangement, it would be strange
because Regiments was part of the JP Morgan stable, not part of Transnet, says