During the past week, Comair and Phumelela Gaming joined the list of companies filing for business rescue.
We can expect many more over the next few months as the economic calamity our country is facing sends businesses deeper into a downward financial spiral. The purpose of business rescue is to give the company some breathing room from creditors and other affected persons whilst business practitioners step in to restructure the company out of financial distress.
A company in financial distress, as defined by the Companies Act of 2008, is one that appears to be reasonably unlikely to either fulfill debt obligations or remain solvent during the ensuing six months. For the likes of Comair, it would have been the former, whilst SAA and Edcon would have most likely fallen under the latter.
This leads me to question whether we are likely to have hundreds of companies filing for business rescue over the next few weeks, if not months, and how many of them can be rescued.
We’re now in our second month of lockdown with no end in sight. There are already many companies that have been unable to fulfill their debt obligations or expenses from the first month, never mind for the following six months, to meet the Companies Act definition of a company in financial distress.
Should all these companies be in business rescue? I imagine the debt relief measures provided by the banks have helped mitigate the plight of many more filings for business rescue.
The provision of payment holidays means debt repayments are pushed out three to six months. The Companies Act, however, also makes provision for other affected persons such as employees. So even if a company does not have to worry about making debt repayments, it will likely still have the obligation of paying salaries, among other things.
When you compare Comair and SAA, there are stark contrasts in the amount of restructuring required to get either company out of financial distress. One has a long track record of being profitable, with an added advantage of a stable board and management team.
The other has been loss-making for the majority of the last decade, has had a revolving door for management, and has the seemingly rudderless role of being the official national carrier. If given a choice between the two, I imagine any business practitioner would choose Comair over SAA because a look through Comair’s financial statements will give you reasonable certainty that there is a chance of success in placing the company under business rescue.
Comair has a revenue problem brought on by lockdown restrictions. SAA’s woes, on the other hand, have been passed around from ministry to ministry, across different CEOs and boards, whom in all their wisdom have struggled to resolve the many strategic and operational issues. How then have we ensured that the business practitioners are sufficiently equipped for the mammoth task of restructuring a national carrier?
It is not every day that an airline ends up in business rescue – there simply aren’t enough airlines, as the barriers to entry in the industry are high. The cases are few and far between.
The business practitioners are going to experience unprecedented challenges in ensuring SAA’s survival.
Restructuring a business that is undergoing financial distress due to the lockdown is quite different from restructuring a business that has an unsustainable business model.
SAA’s problem is not limited to debt and salaries, but also unprofitable routes, expensive fleet, and government interference. The political aspect of saving SAA makes it a task outside the scope of merely restructuring a company in financial distress. Even the most experienced business practitioners were always going to be out of their depth with SAA.
As we wander through this unknown territory of an economic shutdown and inevitably more companies succumb to business rescue, some will have a reasonable prospect of success, while others may inevitably end up being liquidated.
As with any case of business rescue, saving jobs remains a high priority, however, this needs to be for businesses that have a reasonable prospect of being saved.
One of the first tasks set out by the Companies Act for the business rescue practitioners that have been appointed is to establish whether a company can be rescued by undergoing restructure. Any political and structural impediments to success need to be carefully identified and evaluated, as they add a new layer of complexity to an otherwise solvable problem.
From SAA, lessons should be learned about how state-owned enterprises may not bode well under the usual methods employed under business rescue practice.
Rescuing a business should not be premised on financial bailouts. The integrity of the business rescue process can be maintained by not politicising it and ensuring businesses that undergo the process do have a reasonably good chance to be rescued.
* Nolwandle Mthombeni is an analyst at Mergence Investment Managers. Views expressed are her own.