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M30 million LNDC loan under scrutiny

Business

Staff Reporter

The Lesotho National Development Corporation (LNDC) board of directors has approved a trade finance request amounting to M30 million in favour of a local company, Mendi Group.

The request, which was presented to the board on an urgent basis by the LNDC management last month, sought approval for a trade finance facility to facilitate a diesel supply contract for Letšeng Diamond Mine.

The diesel, to be sourced from Sasol in South Africa, is estimated to amount to one million to 1.5 million litres per month, with a total monthly cost of M24 537 000 before transport and logistical expenses.

While the closest financing instrument to the request by the Mendi Group is the Supply Chain Finance (SCF), which was approved for operation by the LNDC board in November 2023 with a threshold of M10 million, the requested amount of M30 million far exceeds this threshold by threefold.

Despite this glaring discrepancy, the LNDC management pushed for a special trade finance agreement to meet the demands of the Mendi Group.

In a resolution, the LNDC Board approved the request for a bespoke Supply Chain Finance loan of M30 million for Mendi, with a three-year term and an annual interest rate of 7.5 percent.

The board has stipulated certain conditions for the approval, including a signed contract between LNDC and Letšeng ensuring that funds due to LNDC will be transferred directly to its account.

Additionally, funds for diesel procurement must be deposited directly to Sasol based on an invoice, with proof of availability of 20 percent of the contract cost price prior to disbursement.

According to documents seen by this publication, the resolution and conditions for approval were recommended to the board by the LNDC Special Investments Committee.

“On its sitting of the 6th February 2024, the Executive Committee proposed support to Mendi for M30 million on a three-year term and an interest rate of 7.5 percent per annum,” reads the documents.

This decision was made despite the acknowledgment by the executive committee that although Mendi Group met the eligibility criteria of the Supply Chain Finance (SCF), the approved supply chain limit by the board of directors is only M10 million, while Mendi required M30 million.

The committee also acknowledged the tenure approved by the board is up to 90 days while Mendi requested for a tenure of three years, far exceeding the approved threshold.

“The Executive Committee is confident that the proposed application will draw more benefits than setbacks and therefore requests to go above the stipulated threshold and tenure to finance the application in a bespoke manner under other trade finance instruments. The returns are worth the risks inherent to the transaction,” the documents further read.

The committee also noted that Mendi Group’s application, by virtue of its submission time, preceded LNDC processes, as all suppliers wishing to utilise the facility are required to be registered in the LNDC business registry database.

However, it said, LNDC was still in the process of signing Memorandums of Understanding with buyers such as mining companies, oil companies, and large corporates to participate in the scheme.

“A meeting with mining companies is scheduled for the 12th February 2024; however, for purposes of this transaction, if approved, a meeting with Letšeng can be brought forward,” the committee said.

Furthermore, the committee added: “The application’s turnaround time is targeted at 72 hours, which may be a challenge in this case as contracts are yet to be signed with Letšeng. The facility management and administrative support, inclusive of monitoring, are yet to be strengthened with the recruitment of the trade finance team.”

In justifying the approval of Mendi Group’s application, the committee emphasised the significant benefits it offers to the LNDC and the private sector.

“The application offers LNDC an opportunity to demonstrate the long-awaited trade finance instrument by both the private sector and the institution,” the committee stated. “Furthermore, being the first application, it brings in a reputable contractor with a strong financial capacity and ability to pay for services required, which will contribute to the success of the transaction.”

Moreover, the committee highlighted the invaluable experience that would be gained by the technical team through the proposed contract. “The experience gained will draw lessons learned that will be incorporated into other transactions following the success of the current one,” it added.

The committee also underscored the broader economic benefits of approving the application. “The application provides an opportunity for LNDC to participate in a business that is a high contributor to the country’s Gross Domestic Product (GDP) and offers opportunities for local companies to participate in supply chain opportunities,” it stated. “Both opportunities are directly aligned with the LNDC strategy.”

Regarding the budget allocation, the documents reveal that the supply chain finance and other trade instruments budget for the 2023-2024 financial year stands at M40 million following a mid-term budget review.

This implies that Mendi Group’s application will consume three-quarters of 75 percent of the budget.

In a statement yesterday, LNDC said it is piloting a Supply Chain Finance instrument intended to catalyse participation of local enterprises in sectors which are difficult for local enterprises to participate in, due to lack of access to suitable finance.

It said it has piloted this instrument through support of Mendi Group “which is a wholly Basotho-owned business operating in the Energy sector”.

The statement read: “The facility offered an off balance sheet solution to this  company that supplies fuel to one of the local mines which is deemed as a blue chip client based on its contribution to the economy of the country.”

LNDC also stated that it is supporting the government to ensure domestic investors and foreign direct investors have equal opportunities in business.

“These two instruments that are being piloted will be fully launched in the next financial year. In this manner, the Corporation demonstrates its commitment to the theme of the LNDC Strategic Plan 2023-24 to 2027-28,” it said.

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