Founder Turnaround Talk
During the Age of Discovery, an English historian once described the ports of England, Spain and Portugal to be absolutely bustling with activity. He went on to add: never before had anyone witnessed ships lining up behind each other to venture into the unknown.
One of the apparent initiators of the Age of Discovery was the desire to find a more direct route to India and China as the existing the Spice Route and Silk Route was becoming increasingly perilous.
As an event, Covid-19 can be seen as one of the major contributors to the dawn of the Golden Age of Business Rescue. Over the past few weeks, we have been focusing on a report by Deloitte regarding the current state of the industry. This week, we end our review of the report and look towards the future of the industry.
Who will rescue business rescue?
The report points out that the Covid-19 Pandemic has led to a record number of BR cases, resulting in increased media attention and a spotlight on the industry. As a result, the suitability of BR as a turnaround tool is being called into question, following the varied fortunes of those in the BR process.
The report adds that a number of high-profile BR cases at the start of the Covid-19-19 pandemic are household names; but BR is not confined to the big corporates or State-Owned Enterprises (SOEs): 29% of survey respondents indicated that their portfolios comprise more than 51% BR matters.
Despite this, recent media coverage of more high-profile BRs has somewhat impacted public perception of BR as a negative process to the extent that the unfavourable stigma attached to companies in BR has become a challenge to the success of a formal restructuring process.
Some respondents believe that the recent BR proceedings involving SOEs have tainted the use of BR for private companies. Others indicate that the odds are against a successful BR process, given the interest of various stakeholders with differing objectives.
Africa Restructuring Services Leader Deloitte
Inherent conflicts
The report points out that the Companies Act is deemed to be unsuitable for a formal restructuring process of SOEs, as indicted by 71% of survey respondents.
The primary reason provided by survey respondents relates to the tension between the Public Finance Management Act (PFMA) and Chapter 6 of the Companies Act insofar as decision-making authority is concerned. If a BRP’s ability to make independent decisions is hindered by the PFMA, this would support the views of the majority of respondents that a formal restructuring process, like business rescue, is not suited to SOEs.
The report adds that the biggest hindrance to a successful formal restructuring process continues to be the lack of post-commencement finance (PCF). This is interesting to note seeing as the availability of PCF is still considered to be crucial when seeking to increase success rates of BR, and the determination of available PCF is particularly important in the pre-assessment stage.
The experience with BR proceedings over the past 10 years has re-emphasised the critical importance of a robust preassessment in facilitating a successful BR.
A pre-assessment is a contingency planning tool whereby a company and its advisors carefully consider the suitability of BR as a formal restructuring mechanism.
The report points out that greater clarity on the availability of PCF is required for a successful BR process, followed closely by the pre-existing level of support that is forthcoming from the stakeholder landscape.
The second tier of critical factors that require pre-assessment include company specific factors, such as the existing level of financial obligations, the business model and competitive position, as well as the internal management and personnel capacities to support a successful BR process.
Having an experienced BRP at the helm is increasingly important and stakeholders are willing to reward skilled practitioners.
Limited skills
The report points out that limited skills and expertise appear to be some of the challenges that hinder BRPs from adequately performing their duties – thus posing challenges to successful BRs going forward, especially given the anticipated volumes of distress over the forthcoming years. However, 65% of respondents believe that BRPs are neither adequately skilled nor qualified to perform their duties.
Most respondents highlight experience level as the main reason BRPs are inadequately skilled and qualified to perform their duties. Other key contributing factors that impede BRPs from executing their duties adequately are issues of ethics and integrity, evidenced by key industry stakeholders preferring to work with a limited number of BRPs on complex matters, and the extent of regulation and accreditation in the industry.
The report adds that while 71% of respondents believe that the uplift in fees requested by BRPs is fair, 44% of these respondents indicated that this is because BR is a complex process and the fees need to reflect this. Furthermore, 27% of respondents feel that the fees in the Companies Act are outdated. It is important that the legislation provides overall support for an uplift in fees to account for both complexity and the outdated fee schedule.
Potential improvements
The report points out that, in anticipation of the proposed legislation reform, most respondents believe that there is a need to update and amend Chapter 6 of the Companies Act 71 of 2008. Some of the sections that respondents feel need to be updated include Section 135, in relation to PCF rankings, and Section 143, which refers to the remuneration of BRPs. Some respondents emphasised that in order to motivate good outcomes, BR rates and fee structure need to be reconsidered, while others believe that PCF rankings need to be clarified to entice foreign distressed funds to South Africa.
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The majority of respondents (61%), most of them being lawyers, BRPs, Chief Restructuring Officers (CROs) and commercial bankers, feel that BR matters should not need to prove urgency as part of an application to court, to enable greater efficiency and acknowledge the already urgent nature of the proceedings.
The report adds that, ultimately, South Africa is not deemed to have a rescue culture – a similar sentiment expressed in the 2017 survey results.
Technology and restructuring
The report points out that the restructuring industry can improve its use of digital technology to increase efficiency throughout the process. Scope for improvement is vast and therefore there is an expectation that technology will have an impact on the restructuring process over the next five years.
For example, 52% of respondents believe that technology will enable a greater analytical capability over the next five years, while 19% believe using technology will speed up effecting a restructuring.
The report adds that technologies expected to have a transformational impact on the restructuring process in the next five years include CRM tools, data analytics, visualisation, cloud as well as AI and machine learning. While there are various types of digital technologies used in several industries, respondents believe that the ability to load large volumes of data quickly will be useful in restructuring over the next five years.
Furthermore, digital tools are expected to be used for staging a data room and sending email outreach to creditors in the same period.
