Founder Turnaround Talk
In terms of a root cause of distress, the Covid-19 Pandemic forced many companies to place themselves into business rescue because of the reaction that was needed to manage the Pandemic.
We have already seen SAA being put into business rescue. This was followed by Edgars and now Mango Airlines. South African companies are struggling to come to terms with the Pandemic.
We are still feeling the impacts of managing this Pandemic now, a year after President Cyril Ramaphosa announced harsh measures to prevent the spreading of the virus. At the end of 2020, Eric Levenstein (Director and Head of Insolvency, Business Rescue & Restructuring Practice at Werksmans Attorneys) penned an article titled: 2020 has put the South African business rescue procedure on steroids.
We will profile that article below and then look at 2021 and the impact that this year has had on the business rescue industry.
A unique but significant event
Levenstein pointed out that the onset of the Covid-19 pandemic in 2020 created a new playing field for the restructuring and business rescue of financially distressed companies.
South Africa has seen major companies such as SAA, SA Express, Comair, Edcon, Phumelela, Busby, and others, having no choice but to file for the formal business rescue procedure offered by Chapter 6 of the 2008 Companies Act. In all of these instances, these entities could no longer hold on and where severe cash flow constraints prompted the need for such drastic intervention. In each case, the pressure brought about by creditors wanting payment of debts due, required the imposition of a statutory moratorium on claims against the company and the need for an independent business rescue practitioner to be appointed who would supervise the company’s affairs and business in the hope of a restoration to solvency.
Levenstein added that Covid-19 has affected businesses across the world in a big way. Financial distress in these unprecedented times is completely industry agnostic and affects sectors across the board. Most badly affected is the global and South African tourism industry, with over 120 million jobs at risk, and where globally it has been reported that USD1 trillion will be lost due to the shrinkage in tourist numbers. It is said that the drop in tourism will shave 1,5% – 2,8% off global GDP, and UN World Tourism figures indicate that international tourism will have dropped by 56% across the globe. As we have seen in South Africa, airlines such as Comair had no choice but to file for business rescue in May 2020, and SAA having already filed in December 2019. Virgin Australia filed for administration in in April 2020 and Avianca Airlines (Latin America) filed for Chapter 11 in May 2020. Air Mauritius also filed for administration in April 2020. Reports indicate that 75% of global flight revenues have contracted in the last few months.
Iconic brands in trouble
Levenstein pointed out that McKinseys have reported that the auto industry has had many iconic brands drop off the cliff by 20 – 30% and that profits are expected to fall in this sector by USD100 billion. International banks have had had no choice but to revisit their numbers due to cascading bad credit risk. In South Africa, we have seen a R14,6 billion decline (65%) (year on year) in bank headline earnings in the first half of 2020, with a steep rise in credit impairment of 2,3 times.
In the retail and hospitality sectors, there have been many casualties. South Africa is hoping for an uptick in the normally busier December/January peak holiday season, with the prospect of an increase in online sales over the Christmas shopping period and with more people travelling on their end of year holidays.
Levenstein added that, with companies coming to the end of payment holiday periods provided as a result of the pandemic, and with quieter months for trade looming in early 2021, we could see an increased number of companies filing for much needed rescue mechanisms next year.
The creation of a Golden Age
Levenstein asked, has the Covid-19 pandemic been a boon for business rescue practitioners and insolvency and restructuring professionals? Controversially, the answer must be yes.
The number of business rescue filings has definitely increased with the Companies and Intellectual Property Commission (CIPC) reporting that we have had 233 filings so far this year, the majority in Gauteng, followed by the Western Cape and KZN. In the main we have seen fallout (in descending numbers) in manufacturing, wholesale and retail, real estate, accommodation and food service activities and construction.
Levenstein added that, in South Africa, there is a dire need for experienced restructuring professionals to get involved with struggling companies and where urgent intervention is required to get the company back onto its feet. Business rescue envisages a process where the business rescue practitioner can provide a breathing space (moratorium) for the company and its management and where the practitioner is placed into a position where he/she can restructure the burdensome debt of the company. In addition, prejudicial contracts can be renegotiated and management can be more efficiently deployed to the more profit generating divisions of the enterprise.
Levenstein concluded that compromise would be the name of the game and where creditors would generally be expected to take a debt haircut so that the company can rid itself of historical debt, enabling it to trade on a solvent basis into the future. Placing a restructured company back into the South African market must be good for that company, for its suppliers, employees and, most importantly, for the South African economy. The extent of continued filings for rescue will be seen in the months ahead.
Photo By: Gallo Images
Enter 2021
If 2020 was the year that put the business rescue process on steroids, what can be said about 2021? In terms of value lost, it has been a significant year.
The delta variant of the Pandemic has proven to be the deadliest variant to date and one that South Africa has battled to manage. The country was just starting to recover from the economic impact of spending much of 2020 in lockdown when President Ramaphosa announced that the country would be returning to Level 4 to battle the Third Wave of the Pandemic which was characterised by the delta variant.
We are now at Level 3, but the impacts of Level 4 were telling. All travel to and from Gauteng (except for business travel) was banned. This meant that hotels and bed & breakfast venues would see significantly lower volumes. Tsogo Sun even took the bold decision of closing some of its hotels entirely during this period. How long will it be before these companies seek the help of BRPs?
The move to Level 4 saw the return of the ban on alcohol sales. This was a controversial call with many associations in the alcohol industry imploring Government to reconsider its decision. A report done by the South African Liquor Brand Owners Association points to some shocking statistics:
- the cumulative impact of the three alcohol bans has put over 200 000 jobs, supported by the alcohol value chain, at risk in the nation’s informal and formal economy;
- the sales revenue lost as a result of the bans is approximately R36.3 billion;
- the country’s annualised GDP loss due to the bans is approximately R51.9 billion; and
- tax revenue loss (excluding excise) to the fiscus from the value chain arising from the bans amounts to R29.3 billion.
What will the economic impact of this ban be?
Perhaps the most telling event in 2021 that will most certainly have an impact on the business rescue industry was the recent riots and protests. Companies in Gauteng and KwaZulu-Natal were either closed or looted and damaged during the weeklong unrest. Some companies were able to open their doors fairly quickly after the riots, others will not have that luxury.
The busy times for BRPs will extend as long as the crisis has an impact on industries. We are currently 18 months into the Pandemic with some experts predicting that it will take 30 months to see any form of recovery. My own feeling is that BRPs will find that their services will be in demand for at least another 18 months after that. Does this mean that the Golden Age of business rescue will last until 2024?
