South African President Cyril Ramaphosa has taken the decision to put South African Airways, the cash-strapped national flag carrier, into voluntary business rescue. Caroline Southey from the Conversation Africa asked Professor Marius Pretorius to explain how the process works.
What is a business rescue?
It’s what is known in the European Union as a pre-insolvency procedure – that means a process that’s designed to save a company from being shut down. All countries have their own version of the procedures that need to be applied when a business is in distress. One of the best known ones is the US’s Chapter 11.
South Africa’s process is set out in Chapter 6 of the Companies Act, which came into effect in 2011. It indicates what needs to be applied when a business is in distress.
What’s the aim?
The aim is to address distress in a business, when it’s not performing. Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems. Like a sick person. You have to see a doctor when you’re sick.
The aim is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down.
In South Africa, a company applies for business rescue under Chapter 6 of the Companies Act. It’s basically a last-ditch attempt to save a business. That’s why it’s called a pre-insolvency process.
It’s understandable that the government is trying to avoid liquidation: if SAA went the route of liquidation rather than rescue, the government would be forced to repay creditors. But in a rescue situation, a moratorium is put on relief payments. Creditors don’t have to be paid immediately. It gives a company a bit of a lifeline while the rescue practitioner works out a plan for the business.
SAA has accumulated unsustainable levels of debt.
When should business rescue be sought?
The act makes a provision for when a business is in financial distress. It’s then obliged to file for business rescue. This would arise, for example, if a company was unable to meet financial commitments due over the next six months. Under these circumstances, the company is obliged to file for voluntary business rescue. Research shows that company directors take the voluntary route 90% of the time. The reason for this is that if they don’t, they could face being delinquent directors, making them liable for the company’s debt.
How is a company placed in business rescue?
The directors file through a procedure under the Companies and Intellectual Properties Commission, which then confirms the appointment of a rescue practitioner and licences him or her. There is a full process of accreditation and set of requirements set by various professional bodies for practitioners. They are usually lawyers, accountants or business people. And there are conditions specifying how much experience they must have had, depending on whether they are senior or junior.
The process of appointing the rescue practitioner can take up to five days. Once appointed, the person takes full charge of the company. That means they have the power to make all decisions, including running the company’s finances.
The main aim is for the rescue practitioner to investigate the affairs of the company and ultimately prepare a rescue plan. They have 25 days in which to do this. But normally the rescue practitioner would call a creditors meeting to inform them that he or she is applying for an extension to that time. The creditors must agree to this.
The rescue practitioner must also meet with the employees.
When the rescue practitioner has drawn up a plan for the business, it needs to be presented to the creditors for approval. They must vote on it. It can only go through if 75% are in favour of implementation. Alternatively, they can ask for revisions which the rescue practitioner is obliged to follow up.
If there’s no agreement, the business must go into liquidation, and be shut down.
But if the plan is agreed, the next task is implementation. There’s no particular timeline for this – it can take anything from, say, six months to four years.
Once the plan has been implemented, the company must apply to the Companies and Intellectual Properties Commission to have its status reversed to being a going concern.
What happens to the directors during the process?
Most of the time it’s the directors that got the business into trouble in the first place by making bad decisions.
They are obliged to support the rescue practitioner in whatever he or she requires. Their co-operation is very important. For example, they must supply him or her with information. But they no longer have any powers to make decisions. They will still be paid – though, depending on the plan, this is where cuts are usually made immediately. But this will depend on the rescue practitioner and the plan.
And the employees?
Employees are unfortunately very vulnerable during the process. Quite often you’ll find that the good employees leave because they can find other jobs. Nevertheless, they are also protected. If the company does go into liquidation they get preference and are the first of the unsecured creditors to be paid from the available money.
The airline is a state-owned enterprise. Has one of these ever been put through this process before?
Not that I know of. I believe that this is why there was so much hesitancy to do it.
In late November the trade union Solidarity, which represents mainly white, Afrikaans-speaking employees, asked the Johannesburg High Court to place the airline under business rescue. The union argued that this was the only way to save the airline.
I think it’s doubtful that the airline can be saved. The question you have to ask is this: is there a business?
As soon as this process starts, the business takes a body blow. Nobody trusts it anymore. Nobody wants to take the risk and book tickets because there’s a high risk they will lose their money.
South African Airways (SAA) said on Friday it has applied to enter ‘business rescue’, a form of bankruptcy protection it hopes will save the cash-strapped state carrier from collapse.
SAA, which has been making losses since 2011, is deeply in debt and has received more than 20 billion rand ($1.36 billion) in government bailouts over the past three years — all of which has achieved little more than keeping it barely afloat.
A government memo on Wednesday said President Cyril Ramaphosa had ordered SAA to seek the business rescue — in which a specialist takes control of a company with the aim of rehabilitating it, or at least securing a better return for creditors than liquidation would bring.
After years of government dithering, the distressed state entity’s crisis was increasingly seen as a test of Ramaphosa’s resolve to carry out badly-needed economic reforms.
Years of corruption and mismanagement have put several state owned enterprises in dire straits, including power utility Eskom, whose financial problems have left it struggling to keep the lights on.
South Africa’s credit rating is teetering on the brink of junk largely because of these problems. All agencies but Moody’s have cut its rating to below investment grade, risking billions of dollars of investment outflows if Moody’s does follow suit.
How Ramaphosa handles SAA’s restructuring, in the face of fierce opposition from unions, could be taken as a signal his resoluteness in a much bigger, immanent battle with Eskom.
A strike last month left the airline without enough money to pay salaries, then two major travel insurers stopped covering its tickets against the risk of insolvency. It has been granted a 4 billion rand ($272 million) lifeline from the government and banks to launch the rescue plan.
On Thursday Les Matuson from Matuson Associates was appointed to restructure the company. He is already reviewing payments to creditors and is scheduled to come up with a plan for how to handle them within 25 days.
His appointment spurred an outcry from two of the largest trade unions at SAA, the National Union of Metalworkers of South Africa (NUMSA) and South African Cabin Crew Association (SACCA), who argued that he should have been independently chosen.
“We don’t trust a process where a shareholder and the board get to hand pick a business rescue practitioner,” SACCA President Zazi Nsibanyoni-Mugambi told Reuters on Friday.
“We can’t leave it to the same people that we’ve been complaining about for many years,” she said.
The opposition Democratic Alliance (DA)’s shadow minister for public enterprises, Ghaleb Cachalia, approved the plan, saying: “we hope that ANC government will take a stand ... in the best interest of South Africa and the economy.”
SAA flights appeared to be operating normally according to the existing schedule, ahead of the publication of a new provisional flight schedule soon.
Forty of the 46 airplanes grounded this week owing to faults at the maintenance unit of state-owned South African Airways (SAA) have been returned to service, South African Civil Aviation Authority (SACAA) Chief Executive Poppy Khoza said on Thursday.
Khoza said SACAA had made five findings during its audit at SAA Technical, two of which were serious. The two serious findings were that unqualified personnel had signed off on maintenance work and that maintenance checks on flight data recorders and cockpit voice recorders had not been done correctly.
South Africa’s new Finance Minister Tito Mboweni said on Thursday that struggling state-run South African Airways (SAA) should be closed down, adding that decisions over the future of the state carrier were not under his remit.
SAA, which has not generated a profit since 2011, survives on state guarantees and is regularly cited by credit ratings agencies as a drain on the government purse.
“It’s loss-making, we are unlikely to sort out the situation, so my view would be close it down,” Mboweni told an investor conference in New York televised live on South African public broadcaster SABC.
“Why I say close it down is because it’s unlikely that you are going to find any private sector equity partner who will come join this asset,” Mboweni added.
In August, President Cyril Ramaphosa transferred oversight of SAA to the public enterprises ministry which is led by Pravin Gordhan from the finance ministry. Ramaphosa has pledged to revive struggling state firms, including SAA.
SAA CEO Vuyani Jarana has said he is mapping out a punishing austerity plan to turn the flag carrier around. He has said layoffs and other cuts were unavoidable.
In a dramatic fall from grace over the past decade, SAA has lost its place as Africa’s biggest airline and a symbol of patriotic pride to become a source of frustration for taxpayers who have forked out more than 30 billion rand ($2 billion) since 2012 to keep it in the air.
South Africa has promised another 5 billion rand ($400 million) capital injection to help its struggling state airline meet urgent financial obligations, the CEO of South African Airways (SAA) said.
SAA has not generated a profit since 2011 and has already received state guarantees totalling nearly 20 billion rand. It needs the money to help pay debts and prop up the business as it implements a turnaround plan.
The promise of more government cash comes after SAA Chief Executive Vuyani Jarana told parliament in April that the firm needed the capital injection “now”.
“Government has committed to inject another 5 billion rand into SAA. Part of that 5 billion rand we will repay some of the creditors, suppliers, then the balance will support us for working capital until around October/November,” Jarana told Reuters in an interview.
The Treasury said it would follow its normal budgetary process, which entails seeking cabinet approval.
“The outcome of this process is expected to be finalised in time for the 2018 MTBPS (Medium Term Budget Policy Statement),” the Treasury said.
The MTBPS is usually presented to parliament in October.
Jarana said that while waiting for the funds, the company would negotiate for some breathing space with lenders.
“If Treasury needs a certain period of time to do this, lets say up to September, between now and then, we are negotiating with lenders to give us a bridging facility on the back of that commitment,” he said.
SAA is regularly cited by ratings agencies as a drain on the government purse, but the Treasury is hopeful that new executive leadership led by Jarana, a former executive at telecoms company Vodacom, would return the airline to profitability. The government has said that SAA needs an equity partner to pump money into the company to address its liquidity crisis and to help with the implementation of a turnaround plan.
The airline was looking at several measures to cut costs and Jurana said reducing the current workforce of about 10,000 people was “inevitable”.
“Whether it’s pilots, cabin crew, administration, we are going to rationalise the workforce. It’s an unavoidable thing. We have been talking to trade unions about how we work together,” Jarana said.
“The first priority for me is job preservation, how do you find alternative jobs for people as a starting point before you go into the hard issues of retrenchments.”
Jarana said the company hopes to break even in three years time and “there onwards, everything else equal, it will be able to start paying for its own operations in terms of positive cash flows.”
South African Airways needs R5 billion. NOW.
That is what the national carrier’s new CEO Vuyani Jarana told Parliament’s Standing Committee on Public Accounts (Scopa) on April 24.
The R5 billion is in addition to the R10 billion it got from the fiscus in the previous financial year to restore its status as a going concern.
And that is nowhere near the end of it. Not even close.
According to deputy finance minister Mondli Gungubele SAA needs at least R20 billion in order to break even by 2021. That is R9.2 billion to repay debt that matures in March next year and another R12 billion to address its “negative equity position”.
To give a sense of scale, it cost about R27 billion to construct the Gautrain system. And Comair’s market capitalisation is R3 billion. R21 billion is equal to the allocation in the 2018/19 Mpumalanga provincial budget for education and amounts to 43% of the total provincial budget. At an operational level SAA loses money on each and every domestic and most international routes. In the first nine months of 2017/18 its loss was 71% above budget at R3.7 billion. Operating costs increased. Revenue and passenger numbers declined.
Expenses exceed income by R370 million per month.
To be profitable and compete with its peers, it needs new aircraft. It cannot buy new aircraft, because nobody would lend it money on the basis of its weak balance sheet. Jarana in fact called it a “catch 22”.
Against this background trade union Solidarity is planning to apply to the High Court to place SAA in business rescue. Head of Solidarity Research Institute Connie Mulder told Moneyweb the trade union will file its papers on May 15 and has decided on this course of action in an effort to prevent SAA from being liquidated.
Solidarity believes SAA can still be saved and with it, the jobs of a few hundred of its members.
Free Market Foundation executive director Leon Louw differs sharply. He says the only viable options are liquidation or privatisation. It is too late to “rescue” SAA, Louw says. “Bailing out SAA is financially reckless and irresponsible. The scale of the amount of money required is so gargantuan that it can never be fixed and it will certainly never be a going concern able to compete in the world of modern aviation,” Louw says.
SAA’s troubles are nothing new. In 2015 its own acting CEO Thuli Mpshe and legal counsel Ursula Fikelepi advised the SAA board that the group is financially distressed, trading under insolvent circumstances and therefore trading recklessly. The board should apply for business rescue or liquidation, they stated.
Moneyweb has seen a board resolution dating back even further, to September 19 2014 and signed by seven of the eleven board members, that SAA would proceed with business rescue proceedings unless government committed to providing a going concern guarantee within a week.
Transport economist Dr Joachim Vermooten points out that the court would only grant Solidarity’s application if it can show that there is a reasonable prospect of rescuing the group.
It is very late in the day for SAA, Vermooten says. Whether the court can be convinced, remains to be seen. The Auditor-General has stated that it is not a going concern. Vermooten further points out that over and above the required amounts provided to parliament, no number has yet been put to the turnaround plan.
A proper restructuring would require additional funds for SAA to buy out onerous agreements and employment contracts.
So far, the plans are totally unrealistic, he says. And even if the plan were realistic, it would have to be funded.
Vermooten says it will be much more efficient to wind down SAA in its current form and start a new, focused airline, free of all the legacy contracts, over-staffing, inefficiencies and culture of reliance on the shareholder.
This has been done before, he says.
When state-owned Swiss Air landed itself in trouble through over-expansion the Swiss government refrained from bailing it out and allowed it to be liquidated. It subsequently bought Cross Air and successfully converted it into Swiss International, an airline with a limited mandate that was later acquired by Lufthansa.
In a similar example the Belgian government decided against bailing out struggling Sabena Air. The provincial government in Brussels instructed Brussels Airline to service selected sustainable routes. This new airline traded profitably and was also later bought by Lufthansa.
Vermooten says rather than scaling down existing SAA operations, government should start a new airline that does not necessarily need to be government-owned in the long run. Such an airline, if it reflects the values of the South African nation, could still serve as a national carrier, Vermooten says.
He says government should carefully consider what it is it needs from the national carrier and only focus on that. Sell low-cost SAA subsidiary Mango, split SAA Technical into a separate business and consider listing it and sell Air Chefs, he says. When Scopa met the SAA leadership last week, Scopa chairman Themba Godi listened to all the plans to address the multiple problems at SAA. New policies, new staff, new inventory management systems, new IT systems….
Godi remarked that it sounds as if the theme is building a whole new airline.
Perhaps that is exactly what they should be doing.
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