Legal Affairs Correspondent
BANKS amended their security agreement six days before Retail Apparel Group (RAG) was liquidated to ensure that they would get their money back if the company went under.
Absa bank's workout and recovery unit head, Trevor Murgatroyd, conceded at an inquiry into RAG's liquidation yesterday this would extend "the ambit of the security to the other banks, which did not previously have security under the original document".
Some of the banks had lent money to RAG's subsidiaries, and despite an earlier decision by the banking consortium for all the banks to move their exposure to RAG, which was covered by a guarantee, some had still not done so by the time it was decided to liquidate the company.
The security document was amended to ensure that security was provided for debt from any member of the RAG group.
Murgatroyd said Absa agreed to the amendment, despite the fact that it believed it had a valid claim to the security to "honour an oral undertaking by the banks that they would share in that security".
Murgatroyd said that the fact that this had not been put in writing was an oversight.
Documents presented by court-appointed advocate Stephan du Toit reveal that First National Bank had contemplated the liquidation of RAG as early as January 2001, in a report on the potential recapitalisation of McCarthy Retail, RAG's parent company. But it concluded at the time that the banks "would have to take a direct write-off of approximately R100m".
The report said: "Of McCarthy's R363m loan funding to RAG, only R200m convertible debentures will share equally with the R230m bank loan. If a value of R240m is realised on liquidation, McCarthy will have to write off its R163m loan to RAG as well as another R99m of the debentures. The banks will accordingly write off R114m of their combined loans."
Murgatroyd denied that the banks put off liquidating RAG in 2001, because of losses they would suffer, but later admitted that such a loss would also have been "unacceptable" to Absa.
He also admitted that he knew RAG would not have been able to survive "indefinitely" once its credit lines were slashed from R210m to R160m at Absa's urging, and then again to R129m at FNB's request. He also admitted that insufficient time was given for the company to develop an acceptable business plan.
Cash flow projections suggested that RAG needed R160m to stay afloat. Murgatroyd said the idea was to force RAG to develop a new business model. At that stage the company had presented at least two other businesses models to the banks.
The facility was increased to R140m days before the company was liquidated on May 28 last year, but Murgatroyd admitted it would have only taken the facility tied to the company until the end of the month.
"The idea was that we would get an updated business plan by the end of the month, at which time we could then reconsider the level of facilities," he said.
Du Toit pointed out that a business plan had been presented to the banks on May 14 last year which they had not accepted.
Murgatroyd admitted the company had not been given enough time to develop a new plan.
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