China Development Bank provides $1.5 billion buyer's credit loan for Locomotive Equipment Acquisition Project (Linked to Project ID#58603, #70774)

In 2013, Transnet launched its Market Demand Strategy (MDS), a ZAR 337 billion ($24.6 billion) investment program that included a plan to expand its fleet by 1064 locomotives. Then, in December 2014, President of South Africa Jacob Zuma and President of China Xi Jinping signed a Memorandum of Understanding, which included a pledge that China Development Bank (CDB) would provide a $2.5 billion loan to Transnet SOC Ltd (or “Transnet”), a South African state-owned railway company (Transnet老旧机车升级计划). Transnet reportedly considered the pricing of the CDB loan to be too expensive, and after 12 months of negotiations, it announced that it planned to borrow only $1.5 billion from CDB and supplement the loan with a separate R12 billion loan from a group of South African banks. Then, on April 16, 2015, a senior Transnet official concluded a ‘mandate letter’ for a CDB loan related to the acquisition of 232 diesel and 459 electric locomotives from China South Rail (CSR) Corporation and China North Rail (CNR) Corporation. Then, on June 4, 2015, Transnet and CDB signed a $1.5 billion term (loan) facility agreement (Contract No.: 4110201501100000685) with the option of accessing an additional, ZAR-denominated 'standby facility' (worth ZAR 3 billion or $1 billion). The agreement was signed by Siyabonga Gama, the Acting Group Chief Executive of Transnet, and Li Gang, a Vice President of CDB. The $1.5 billion loan carried the following terms: a 15 year maturity, a 4.5 year grace period (54 months after the loan's first utilization date), an interest rate of 3-month LIBOR plus 257 basis points, a default (penalty) interest rate of 2%, a commitment fee of 0.8%, and an arrangement (management) fee of 1.18% ($17,700,000). It was backed by two sources of collateral: a first fixed legal mortgage and a first fixed and floating charge ranking security over the locomotives procured from CNR and CSR. The borrower also reportedly purchased a buyer’s credit insurance policy from Sinosure. Under the terms of the facility agreement, Transnet is allowed use the proceeds of the loan to finance up to 85% (eighty five percent) of three commercial contracts: (1) a March 17, 2014 commercial contract that it signed with CSR E-Loco Supply Proprietary Limited (CSR) for the design, manufacture, test and supply of up to 359 new dual voltage electric locomotives (“electric locomotives"); (2) a March 17, 2014 commercial contract that it signed with CSR for the design, manufacture, test and supply of up to 100 new class 20E locomotives; and (3) a March 17, 2014 commercial contract that it signed with CNR for the design, manufacture, test and supply of 232 diesel locomotives. CSR and CNR reportedly complied with the minimum local content criteria for a rolling stock of 60% for electric locomotives and 55% for diesel locomotives. On June 4, 2015, Transnet reported that it planned to draw down on the first $1.5 billion tranche of the loan over the next four years. Loan disbursements amounted to $464 million in 2016, $667 million in 2017, and $317 million in 2019. By the end of 2019, the $1.5 billion loan had achieved a 98.66% disbursement rate ($1.48 billion out of $1.5 billion). The borrower is responsible for repaying the loan in 43, equal, quarterly installments on March 12, June 12, September 12, and December 12 of each year. The purpose of the project was to acquire 232 diesel and 459 electric locomotives from CSR and CNR. As of 2016, Transnet had procured 591 of these locomotives. However, the project was plagued by controversy and allegations that Transnet agreed to overpay CSR and CNR for their equipment in exchange for kickbacks to businesses owned by the wealthy Gupta family. On September 9, 2021, Reuters reported the South African Special Investigating Unit (SIU) froze $296.84 million belonging to CRRC E-Loco Supply Ltd., a local unit of CRRC Corporation Limited. SIU and the current management of Transnet asked for permanent confiscation of the funds. The action appeared to be in response to a long-running bribery scandal linked to former president Jacob Zuma and his business associates who allegedly received kickbacks for major infrastructure tenders in the country. According to SIU investigators, China South Rail (CSR) Corporation and China North Rail (CNR) Corporation, which later merged into CRRC Corporation, paid approximately 20 percent of the total amount of its deal with Transnet to a front company, Century General Trading, owned by the Gupta family, who were among Zuma’s business associates and who have been sanctioned by the U.S. Treasury Department. In its 2022 financial statements, Transnet noted that it was 'working closely with the SIU in recovering losses suffered as a result of wrongdoing. Following a report from the SIU about the conduct of a previous [Transnet] Group Executive, Transnet dismissed the Group Executive and successfully litigated with the SIU in the SIU Special Tribunal obtaining a judgment on 31 August 2021 in terms of which the previous executive was ordered to pay back to Transnet [ZAR 26.4] million for disgorgement of secret profits he earned while employed by Transnet. Transnet and the SIU also launched proceedings in the SIU Special Tribunal for the seizure and forfeiture of funds held by CRRC E-Locomotive Supply (previously known as China South Rail, one of the OEMs contracted to deliver locomotives in terms of the 1,064 locomotive supply agreements). Transnet and the SIU obtained an ex parte order against funds of CRRC held in various South African bank accounts and a final judgement in the matter is pending. Transnet is preparing legal papers to pursue further civil recovery in respect of parties implicated in SIU investigations and the findings of the Zondo Commission Report.'

Additional details

1. In 2015, CNR and CSR merged to form China Railway Rolling Stock Corporation (CRRC). 2. AidData has recorded the loan’s borrowing terms as they were reported in 2014, one year before the loan contract was finalized. Borrowing terms from the final loan contract are not available, but one source ("Guptas siphoned R100m-plus from China loan, evidence shows”) indicates that the final face value of the loan was lower but the borrowing terms did not change. 3. The term sheet for the loan notes that ‘[t]he Lenders' security package shall include, but not be limited to the following: (a) a security agreement granting a first fixed legal mortgage and a first fixed and floating charge ranking security over the Locomotives in [favor] of the Security Agent (acting on behalf of the Finance Parties) on and from the transfer of title of such Locomotives and each part thereof to the Borrower.’ Also, in a 2019 deposition, Mohammed Suleman Mahomedy, the former CFO and acting CEO Transnet referred to the CDB facility as a ‘securitised loan, meaning that the locomotives that are procured from CNR and CSR are taken as a bond.’ Elaborating on this point, he said that ‘like a lease HP, higher purchase agreement where the vehicle is always owned by the lender until it’s fully paid off and that’s the current situation with the CDB loan.’ 4. No sources explicitly state that this is a buyer's credit loan. However, AidData has coded it as such for the following reasons: (a) the loan is provided to a foreign borrower, (b) the loan is denominated in USD, (c) the loan is insured by Sinosure, which provides export credit insurance, (d) the proceeds of the loan are earmarked for the acquisition of equipment from Chinese companies. 5. CDB agreed to participate in a cross-currency swap transaction in order to convert the USD based loan to a local currency ZAR loan. The purpose of the cross-currency swap was to allow Transnet to service the loan in local currency (ZAR). 6. This CDB loan is also linked to Project ID#58603 and Project ID#70774, which record two tranches of a ZAR 3 billion loan from Bank of China for the same project. 7. A draft version of the CDB term sheet (from 2014) can be accessed in its entirety via https://outa.co.za/web/content/132931. 8. AidData has estimated the all-in interest rate by adding 2.57% to average 3-month LIBOR in June 2015 (0.283%). 9. The 2015 term (loan) facility agreement (Contract No.: 4110201501100000685 between CDB and Transnet can be accessed in its entirety via https://www.dropbox.com/s/qs5ar54evvo10sp/South%20Africa%202015%20CDB%20Transnet%20Term%20Facility%20Agreement%20for%20Locomotive%20Acquisition%20Project.pdf?dl=0 10. The locomotive mortgage agreement is included in Schedule 8 of the 2015 term (loan) facility agreement. 11. The 2015 term (loan) facility agreement defines that 'locomotive mortgage' as 'each special notarial mortgage to be registered by the Borrower in favour of the Lender over the locomotives as described in and delivered pursuant to the terms of the Commercial Contracts and owned by the Borrower as security for the obligations of the Borrower to the Lender under the Transaction Finance Documents substantially in form of Schedule 8 (Locomotive Mortgage Agreement).' 12. A cross-currency swap was necessary to hedge Transnet's liability to repay the loan in the currency in which it was received. A cross-currency swap is an off balance sheet (over the counter) transaction in which two parties exchange principal (principal portion of the loan) in different currencies. The hedge takes the liquidity risk out of the equation. The CDB loan was arranged as a floating rate loan denominated in USD with periodic drawdowns that occurred to pay either CNR or CSR in respect of the 1064 locomotive procurement. The locomotive supply agreements between Transnet and CNR and CSR provided for payments to be made in ZAR. Consequently, the CDB (loan) facility needed to be swapped from USD to ZAR at each drawdown. Transnet accordingly entered into hedging transactions with JP Morgan in the form of a series of cross-currency swaps. JP Morgan in this case acted as the sole hedge counterparty to lead and underwrite the equivalent ZAR amount for a loan of $1.5 billion. 13. Ashurst was a legal adviser for the transaction

Number of official sources

23

Number of total sources

35