Searching for value: who gets what in the Comair liquidation?

Anyone that has been on a safari (game drive) and have been lucky enough to witness a kill will know that after the predators have had their share, there is a significant jockeying for position to see who gets the greatest portion of what’s left of the carcass. Unfortunately, the same analogy can be made when it comes to liquidation. With Comair going into liquidation, there will be many creditors hoping to get their share of value.

There were significant concerns about Comair’s liquidity in the week leading into the liquidation announcement with labour unions up in arms about the fact that the company was struggling to fund its wage-bill. The reality is that expectations will now need to be managed; the ship has all but sailed on creditors receiving a full return on their investment. In the case of employees, they should not expect to receive the full amount owed to them.

Who owes what and what is the pecking order when it comes to the Comair liquidation? A recent News24 article tries to unpack this.

Lining up

The News24 article points out that creditors will be lining up to claim their share as embattled local airline Comair’s provisional liquidation is set in motion. And while the details still need to be ironed out, the amount owed could be close to R8 billion.

This is partly because Comair was undercapitalised and incurred huge losses during its business rescue, according to aviation economist Joachim Vermooten.

“Comair’s financial position – as per its draft balance sheet at the end of April 2022 – reflected a very low level of net equity of R84 million in comparison to the book value of liabilities of R3.971 billion,” says Vermooten.

The article adds that this excludes liabilities relating to Comair’s agreement with US aircraft manufacturer Boeing for the purchase of its 737 MAX planes. Comair is fighting a legal battle in the US to try to get out of the agreement.

“Comair incurred accumulated losses of R2.599 billion, which was partly set-off by [a] creditor settlement, in terms of its business rescue plan, of R1.486 billion and other fair value adjustments … resulting in a net accumulated loss of R420.6 million, which is off-set by Comair’s equity of R504.6 million,” says Vermooten.

“The list of creditors provided lists a cumulative amount of R5.058.6 billion identified as ‘voting interests’ [compared to] R7.826 billion for ‘claims received’ [so far]. The differences of R2.768 billion … may represent special acceleration, unwinding of financing structures and other default penalties. These higher amounts claimed to the book value of the liabilities would have to be negotiated by the liquidator.”

What can creditors hope for in the liquidation process?

The article points out that it is still too early to say how much Comair’s creditors will get back and who will stand first in line to get paid if the company’s provisional liquidation is made final.

Comair’s business rescue practitioners (BRPs) told Fin24 on Wednesday that a liquidator first needed to be appointed.

The article adds that Comair operated its own low-cost airline kulula.com as well as local and regional flights under a British Airways franchise agreement. Comair has been in business rescue for two years and its business rescue practitioners (BRPs) had to suspend flights on 31 May due to a lack of further funding to continue operations. On Thursday they announced that they have had to apply for liquidation.

The application for provisional liquidation was necessary for Comair to preserve its fleet of aircraft, valued at about R3.5 billion, for the benefit of creditors. All affected parties have until 26 July to provide the court with reasons why the provisional liquidation order should not be made a final order.

The article points out that, a look at a list of claims Comair has received from creditors so far, shows who its lenders are and how much they are claiming. Nedbank has put in the biggest claim so far, namely for a total of R1.6 billion. Other claims from lenders are the US-based Private Export Funding Corporation (PEFCO) with a claim of R192 million, followed by Citibank (R611 million), Investec (R552 million), Absa (R332 million) and RMB (R180 million).

All the lenders’ claims are secured except for a R258 million portion of what is claimed by Nedbank.

A Nedbank spokesperson told Fin24 on Wednesday that Comair has been a valued client of Nedbank for nearly 20 years, having operated successfully in South Africa since 1946.

“Unfortunately, in recent times Comair has been impacted by external events adversely affecting [its] operations and financial viability, the most material of which has been the Covid-19 pandemic. We believe that Comair’s liquidation will leave a tangible void in the South African aviation market,” according to Nedbank. The bank’s unsecured exposure relates to un-flown ticket liabilities.

The article adds that Comair received claims totalling R1.6 billion from aircraft lessors. The biggest claims are from GY Aviation Lease (R1.1 billion), Sasof IV Aviation Ireland (R177 million), and Alterna Aircraft (R122 million). All the lessors’ claims are concurrent and not secured.

As for claims from trade creditors, these include fuel suppliers BP SA (R17 million) and Engen Petroleum (R98 million). For maintenance services SAA Technical, a subsidiary of South African Airways, put in a claim of R110 million, which is indicated as secured. Lufthansa Technik put in claims totalling R387 million, of which R14 million is secured. Airline booking company Sabre has put in a claim of R772 million.

Comair is also heavily indebted to various state-owned companies in the aviation industry. Claims were received from Airports Company SA (R107 million), Air Traffic and Navigation Services (ATNS) for R53 million, the SA Civil Aviation Authority (R8 million), and SA Weather Services (R4 million).

Lanseria Airport put in a claim for R31 million, the civil aviation authority of Zimbabwe one for R51 million, and British Airways PLC, with whom Comair has a franchise agreement, a claim for R51 million.

Consultancy firm Metaco Holdings, put in a claim of R70 million.

Order of payment in liquidation

Tobie Jordaan – head of business rescue, restructuring, and insolvency at law firm Cliffe Dekker Hofmeyr – told News24 that the ranking of claims is extremely important to creditors.

“When business rescue proceedings are superseded by a liquidation order, one must first distinguish between the allocation of proceeds from the sale of encumbered and unencumbered assets. The proceeds from the sale of encumbered assets will first be applied to the costs incurred in maintaining, conserving, and realising the encumbered assets and thereafter to the creditors who hold security over the specific asset,” explains Jordaan.

The proceeds from the sale of the unencumbered assets will be applied as follow:

• the costs of liquidation;
• payment of the business rescue practitioner’s remuneration and expenses;
• remuneration due to employees which became due and payable after the commencement of business rescue proceedings;
• payment of unsecured post commencement financiers;
• preferent creditors, such as employees, but taking note of the statutory limitation on the preferent portion of their claims; and then lastly
• concurrent creditors.

“Concurrent creditors are all creditors who do not hold any security for their claims and includes the remaining portion owing to employees after deduction of the preferred portion,” says Jordaan.

The issue of the ranking of creditors has been controversial and has been discussed by Turnaround Talk in the past.

Further reading:

• Ranking of creditors in business rescue: the buck stops here; and
• The challenges associated with post commencement financing in business rescue proceedings.

Still an opportunity for redemption in liquidation

It was a sad day when it was announced that Comair was to be liquidated. However, as we all know, sometimes liquidation is the only option as there is no use flogging a dead horse.

There is still an opportunity for Comair’s BRPs to show their worth. The task now will be trying to get the best possible value out o the liquidation. It is important that this process is managed professionally, and Comair’s BRPs will be cognisant of the fact that all eyes will be on them, any wrong move will trigger the simmering tensions that are already palpable. The statement made by the National Union of Metal Workers South Africa that the business rescue process is a sham is an indication of the tough task that the BRPs have in front of them.

Jordaan and a full panel of experts from CDH will be joining Turnaround Talk for its Round Table tonight where the drama surrounding the Comair fiasco will be discussed. A strong focus will be placed on post commencement financing and the importance of securing it early on in the business rescue process. To book your place to join the discussion, send an email to editor@tunraroundtalk.co.za