Iscor and its auditors have a struggle on their hands to clarify the embattled steel giant’s debt position Mungo Soggot The auditors for Iscor, the mining and steel producer, this week conceded that the company’s level of debt was unclear from its balance sheet and said that they were seeking to clarify the figures in its forthcoming financial results.
The auditors, KPMG, were responding to queries about an extra R500-million of debt not recorded on Iscor’s balance sheet. The level of Iscor’s debt has serious implications for its current plans to split up or “unbundle” its mining and steel operations. According to accountants approached by the Mail & Guardian, and according to Iscor’s accountants themselves, the extra debt is difficult to detect from the balance sheet. Iscor’s auditors, KPMG, say the company has not breached the generally accepted accounting practice (GAAP) rules on disclosing debt, but that it will nevertheless seek to make its debt position clearer in its next annual report on the company’s finances. A KPMG representative said this week: “The auditing team and our client [Iscor] have got this very much in focus and … attention [is] being given to presenting it fairly so that analysts can understand the debt position.” By then, however, Iscor may have already been unbundled. According to Iscor, the off-balance sheet debt relates to the steel division specifically the financing of the company’s new plant in Saldanha Bay. The extra debt would raise doubt about the steel division’s viability after unbundling. The steel industry worldwide is currently going through a slump. Iscor’s steel division, which employs nearly 15 000 people, would kick off with a R1,6-billion debt, which would mean interest payments of about R200-million a year. People familiar with the company say that while Iscor has a positive forecast for the steel division as part of its upbeat unbundling proposals, the division has not made that kind of money R200-million in recent years. The steel division, which has historically been a drag on the company, has recently reported, with unaudited figures, a substantial turnaround, on which the unbundling plan has been predicated. The National Union of Metalworkers of South Africa (Numsa) has been opposed to the unbundling plan, fearing it will effectively kill the steel division. Numsa national organiser Osborne Galeni says the unbundling is “based on unaudited figures. Our experts [consulted by the union] say it cannot be a viable proposition.” He said there is a danger that the resulting steel company could be “immediately bankrupt”. After fielding several sets of questions about its debt position, Iscor painted a highly complicated picture different from the one immediately apparent from its financial reports. For the latest financial year Iscor declared net debt of R 1,6-billion. The discrepancy in Iscor’s debt figures is first signalled by its finance charges the amount it has to pay to service its debt and its total debt on the balance sheet. In the company’s results for the half year to December 2000 these two sets of figures suggest it is paying an average interest rate of about 20% on its debt far higher a rate than it should be. These figures suggested that Iscor is either paying too much for its debt or that its debt levels are higher than, at first glance, appears to be the case. Iscor has confirmed there is an off-balance sheet debt of R500-million, which was raised to help finance Saldanha Steel. Iscor says the money was arranged with a “special purpose entity [SPE]”. Iscor says the SPE did not have to go on balance sheet because Iscor had no say or stake in it, but declined to divulge who this special benefactor was. In essence, according to Iscor, the scheme boiled down to receiving this R500-million from the SPE, with no contingent liabilities or guarantees and a return of 17%. Iscor says it first mentioned the R500-million in its 1999 financial report. The wording then was: “Iscor’s R500-million share of the additional shareholder funding has been arranged through a financial institution and will be effective for a minimum period of three years after which Iscor may elect to extend the period for up to a further seven years or take over the financing itself.” Ian Thomson, a technical partner at KPMG, said that back in 1998, when the scheme was conceived, KPMG and Price Waterhouse believed it complied with GAAP.
Asked whether the SPE’s only purpose was to get the debt off balance sheet, Thompson said: “This was carefully structured in such a way it met all the requirements of the standard. There was quite a bit of discussion about it at the time. Iscor didn’t control the SPE. So the scheme had that exact effect.”