Johannesburg - Absa did not have direct claims against Retail Apparel Pty (RAP) because its lending exposure was to Retail Apparel Group (RAG), which holds 100 percent of RAP, it emerged at the 417 inquiry into the liquidation of RAP.
The inquiry resumed yesterday and focused on the evidence provided by two Absa executives.
Trevor Murgadroyd, the head of Absa's credit and risk management unit, told the hearing that
"Absa itself does not claim to be a creditor of RAP, but we are indirect creditors in RAP and have a claim against the security trust".
The security trust was a special purpose vehicle that guaranteed the banks' debts by giving them title to RAP's debtors.
Murgadroyd said that as early as July 2000, Absa's credit committee had a number of concerns about RAG.
"There were concerns about the type of business in which the company operated and also the manner in which it operated."
He added that there was a flaw in the way the business model was structured and implemented.
In about July 2000, Absa received a credit application from RAG, which included a request to convert some of the existing debt into convertible debentures.
The request for additional facilities was declined, as was the request to convert existing debt into debentures.
"The risk associated with RAG was unacceptable, and the conversion proposal did not make any sense to us," said Murgadroyd.
"It was unacceptable because the RAG debtors book was not acceptable; the extent of the provisions, the write-offs that were being made and the extent to which the debtors were in arrears" were all unacceptable to Absa.
There was no advantage to Absa in supporting a conversion of part of its debt into debentures as the existing loan was repayable on demand. The debentures could be classified as shareholders' funds.
At the time of the application Murgadroyd questioned whose interests would be served by converting part of the debt into equity and suggested that this process might have a positive impact on the share price.
He asked:
"Was it in the interests of the shareholders or of the company itself?"
Murgadroyd said that between July 2000 and May 2002, when RAP was placed in liquidation, the overall performance trend of the company was one of "continual decline".