BUSINESS RESCUE: SA companies get lifeline
26 June 2014 | Stafford Thomas
A number of factors appear set to boost the industry in South Africa
COMPANIES in financial distress were thrown a lifeline in April 2011 with the introduction of business rescue as an alternative to liquidation. “[This option] is now accepted and no longer causes shock and horror,” says Adam Harris, a Bowman Gilfillan director.
The number of distressed companies opting for business rescue is modest. The Companies & Intellectual Properties Commission (CIPC) reports that between 2011 and 2013, 1 324 companies chose this route compared with 11 197 ending their days in liquidation. The success rate of business rescues is unclear. The CIPC puts it at 55%, but business rescue players dispute this. Mazars business rescue head Daniel Terblanche puts the success rate at 12%-15%. Wanya du Preez, Deloitte senior manager, restructuring services, agrees with that figure.
Success cannot be measured by companies restored to good health alone. If a company can’t be restored, better value for creditors can often be achieved in business rescue through a managed sale of assets than through liquidation, says Harris. This principle was enshrined in a ruling by the supreme court of appeal in 2013. But even when business rescue could succeed, it faces a big impediment. “A lack of available funding to keep a business in rescue going is the biggest problem,” says Harris. “Banks and other creditors are not happy to put in working capital,” says Riza Moosa, banking & finance head at Norton Rose Fulbright SA.
The problem is reflected in a survey of SA business rescue players by Deloitte in which 62% of respondents indicated that distressed funding in 2014 would be “insignificant”. Banks, one respondent noted, have a “liquidation mind-set”. The situation appears about to change. “Foreign banks and asset managers are looking to set up a distressed [SA] debt market,” says Moosa.
A distressed SA debt market similar to those in developed markets would provide a big underpin to business rescue. In the US, for example, the Stern School of Business estimates that about 200 financial institutions have US$400bn-$450bn invested in distressed company debt. Restoring a company is not the only route to success in business rescue. Trade sales of companies as a means of repaying creditors are gaining ground in SA, says Moosa. Successes in 2013 include fashion retailer Meltz, sold to The Hub, a unit of African Procurement Agencies, and the sale of restaurant chain Moyo to Fournews.
In another big trade sale, Chinese media group StarTimes snatched satellite TV firm On Digital Media out of business rescue. Du Preez views this as a signal of bigger things ahead for Chinese involvement in business rescue. “Deloitte conducted a seminar in Beijing recently to explain the workings of business rescue in SA,” says Du Preez. “There was a huge amount of interest from Chinese investors.” Business rescue could also receive a boost of a very different kind. It would come from a proposed change by the master of the high court to the way liquidators are appointed. Under the proposal, a panel of liquidators would be appointed and receive assignments on a next-in-line basis, says Harris. This creates the risk of the appointment of a liquidator totally unsuited to an assignment, he says.
Also worrying to some, the proposed panel would be race-based, with white women accounting for 20% and white men 10% of the panel. “I understand the rationale but in practice it does not seem realistic,” says Du Preez. “The structure of the liquidation industry is the reverse of that proposed, with older white males in the majority by far.”
The proposed change is subject to a pending high court hearing. If it is given the go-ahead, Harris says, banks are likely to adopt a far more positive approach to business rescue and out-of-court settlements.