Nolwandle Mthombeni | When the business rescue process is in need of rescue

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.