Another case of Government putting its hand up as a root cause of financial distress

In terms of financial distress, we already know that Government is becoming a major root cause of distress with its inability to find a resolution to the ongoing energy crisis.

Before we go onto the topic of this particular article, we need to put this into perspective. Turnaround talk published an article last year which pointed out that the country loses an average of R500 million/day that the country experiences loadshedding (no matter the stage). Loadshedding data from January 2015 to March 2020 shows that there were no days lost to loadshedding in 2016 or 2017. However, an estimated 5.8 days were lost in 2018, an estimated 22.2 days were lost in 2019 and an estimated 24 days were lost in 2020 to loadshedding. The country broke records in 2121 with an estimated 48.5 days lost to loadshedding. This was blown out of the water in 2022 where we lost almost 134 days to loadshedding. Multiply these numbers by R500 million and do the maths.

As you can imagine, this has a significant impact on all businesses who have to invest in alternative power sources to counter this. Businesses that cannot afford these alternatives have no other option but closing down.

To the topic of this article. Government is also becoming a root cause of distress in another way. One of the largest business rescue cases we have witnessed in South Africa was SAA. The rescue is still ongoing as there is no clarity on the private equity potion that would have provided the cash needed to complete the rescue. Part of this rescue is Mango airlines. Given that the country is experiencing a disruptive airline industry, one would have hoped that Government would be working hard to resolve the Mango issue. However, I recently read an article which points out that Mango is in worse trouble than ever.  

Subheadings were inserted by Turnaround Talk.

Clouded prospects of success

The article points out that in the fourteenth business rescue update for the group, the BRP said that a sudden turn of events had clouded the airline’s successful turnaround prospects.

While the BRP believes there is a reasonable prospect of rescuing the company, holdups from Mango’s main shareholder – the government – may make this impossible.

This is because the group is yet to receive a decision from the Department of Public Enterprises on an application for approval to dispose of South African Airways’ shares in Mango.

The article adds that Mango was placed in voluntary business rescue on 28 July 2021, with business rescue practitioners appointed in August of that year. The group was allocated R819 million to execute a rescue strategy, which involved reducing operations and cutting staff. Ultimately, all staff were either given severance packages, retrenched, or resigned.

As part of the business rescue plan, the government, through the DPE, wants to dispose of its shareholding in the group and have the airline snapped up by private investors.

The article points out that towards the end of 2022, despite a back-and-forth between SAA and Mango’s BRPs over the disposal details, the practitioners provided an optimistic update at the end of November, saying most of the issues were ironed out. At this point, the winding down of Mongo was deemed “unlikely”.

Change of tone

The article adds that, however, in the final update for 2022 – published in mid-January – the BRPs’ tone has changed significantly, with the process having apparently stalled as the group has not received confirmation of the disposal from the ministry.

“We understand that the Minister wrote to SAA on or about 20 December 2022, expressing a view that he was not completely satisfied with the responses to the queries raised by SAA.

“We further understand that SAA was also meant to receive a letter from National Treasury, communicating National Treasury’s view that the application will have to be resubmitted directly to National Treasury, and until that happens, National Treasury does not believe that the submission of the Application to DPE is complete,” the BRP said.

“The BRP has not been provided with copies of the letters from the DPE and National Treasury referenced above. However, following an SAA board meeting on Tuesday, 10 January 2023, the BRP was provided with a letter from SAA dated 11 January 2023 summarizing the DPE and National Treasury’s concerns.

“The BRP is considering the SAA letter to determine whether the issues raised are capable of resolution, and feedback in respect hereof will be provided to affected parties in due course,” it said.

Abandon and wind-down

The article points out that, given this sudden turn of events, however, there is now the possibility that the transaction or investor process contemplated in the rescue plan may have to be abandoned and for the BRP to implement the wind-down process already incorporated in the adopted business rescue plan, the group said.

Mango’s position is complicated by the group having had its air licenses suspended in August 2022 for two years after it remained grounded beyond the 12-month grace period afforded by the Air Services Licensing Council.

Reluctance to not be a root cause of distress

In a recently published article, Turnaround Talk pointed out that There is a significant demand for airline tickets on the weekends, and lower demand during the week as many businesses embrace online (virtual) meeting platforms.

This is great news for the five operators that managed to survive the Covid storm as the price of these tickets increased significantly as players exited the industry. Obviously, this is bad news for consumers who are facing increased pressure on their finances as the global recession vultures start circling.

How would this have changed had Mango still been operational and 35 000 seats were not placed back into the market. Once would have thought that Mango would have been a major benefactor of the Comair liquidation and that Government would have been pushing to have the airline in the air once Comair sank.

Moving to the loadshedding information in the intro, Government would argue that the (mis)management of Eskom is something that is out of its control and that the breakdowns at South African power plants were not caused by them. However, Eskom is an SOE so it is the sole responsibility of Government to ensure that the entity is well run as it is a vital component to economic growth. Government knows what it has to do to start the business turnaround process at Eskom, yet it is reluctant to start the change management process.

We have to have a serious look at Government and its apparent reluctance to not become a root cause of financial distress.