Out of the Covid-19 crisis we might see opportunities for savvy investment
If management is brave enough to understand the upside of going through a restructure, we might begin to see a more stable SA economy
Recently published statistics by the Companies and Intellectual Property Commission (CIPC) reflect 157 new filings for business rescue in the period April to August. These have affected the public sector (four), the private sector (122) and close corporations (31). The busiest regions for filings have been Gauteng (44%), Western Cape (13%), Eastern Cape (4%) and KwaZulu-Natal (9%).
According to the CIPC, the industry sectors that have been hardest hit are manufacturing (21), wholesale and retail (18), accommodation and food services (18), arts, entertainment and recreation (13), real estate (12), agriculture, forestry and fishing (11), transportation and storage (nine), construction (five), financial and insurance activities (five) and mining (three).
Clearly filing for business rescue is industry agnostic, affecting almost every sector in the SA economy. The aim of business rescue is to restructure the affairs of the company in such a way that either maximises the likelihood of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company than would ordinarily result from the immediate liquidation of the company.
The fallout from the Covid-19 pandemic will continue to be felt in the months ahead, both globally and in SA. Even with the gradual lifting of the lockdown (now to level 2), there will be both short and long-term economic implications as South Africans continue to grapple with an effective way to allow the economy to be kick-started in the near term.
Questions are continually being posed: will a recessionary economic climate be the new norm? What restructuring tools are available to promote businesses and jobs? How do directors, business leaders and professionals deal with the hard challenges of getting their businesses back on their feet, by reinventing themselves and becoming players in the local economy once more?
The imperative of ensuring the survival of the distressed entity might just feed into opportunities for those cash-rich investors and where strong balance sheets might allow for the purchase of distressed companies, their assets and/or businesses. Out of the pandemic crisis we might see opportunities for sound and savvy investments. This would in turn lead to the resuscitation of the struggling SA corporate, which could result in a much-needed boost for the SA economy. The objective being a more sustainable outcome for all stakeholders, creditors, employees and, most of all, the SA economy.
We have already seen significant fallout caused by the harsh trading conditions caused by the pandemic and lockdown. The airline industry, together with retail and construction, are severely constrained. This has caused SAA, SA Express (in provisional liquidation), Comair, Busby and Edcon to file for the business rescue process set out in the Companies Act of 2011. In addition, there remains severe financial hardship in sit down restaurants, hotels, hospitality, conference centres, entertainment venues, sports event companies and the transport sector. This list is certainly not exhaustive.
The retail sector reported an 11.9% plunge in sales in May and a 7.5% fall in June, as the recovery from the pandemic blow drags on. The pandemic has caused a sharp decline in the revenue earned by property groups, caused by lower rental fees paid by tenants hit by the effects of lockdown. Predictions are that we will see an average rental deflation of 3% in 2020, and 4% in 2021. Tenants have had no alternative but to ask for discounts, payment holidays and delays in payment of rentals, leaving landlords with a marked drop in rental income. In addition, confidence in the service sector — restaurants, hotels and hospitality — is at an all-time low.
There is no doubt that the prospect of companies and businesses not being able to “hold out”, has become a stark and concerning reality. Simply, certain distressed companies cannot continue to “kick the can down the road” and hope for the best. The upside to all of this is that Covid-19 provides struggling, financially distressed companies the opportunity for a “fresh start” (or financial rehabilitation).
Alternatively, a distressed company, once it has filed for business rescue, might be provided with the opportunity to sell its shareholding, assets or business to a third party investor. This might allow companies that were already financially distressed prior to the lockdown and consequent economic fallout to use the opportunity to restructure their businesses, either informally through a business rescue procedure, or through a sale in business rescue.
We have recently seen the purchase by TFG of Jet Stores (371 stores) from the business rescue practitioners of Edcon for R480m, which should be completed by September. In addition, it has been reported that SA Express’s provisional liquidators have received offers from 17 private equity investors for the purchase of the entire operations of the airline.
The business rescue practitioners of SAA have appointed Deloitte to consider potential investors in SAA, and the practitioners of Comair recently announced that they are considering three independent offers for Comair, which operates the British Airways franchise in SA together with low-cost airline Kulula. In addition, Phumelela Gaming and Leisure recently filed for business rescue and it has been reported that the Oppenheimer family have introduced loan finance of up to R100m to the company in business rescue.
Clearly the jury is out on the potential upside and transactional landing for all of these companies, but we may see a situation where these companies are indeed rescued, with significant advantages for employees and other stakeholders.
There is no doubt that companies that are facing a potential collapse or insolvency need to speak to experienced turnaround specialists/attorneys who are skilled in restructuring and assisting companies during these difficult times and who have a detailed knowledge of the rescue process set out in the Companies Act. If an intervention is required, the board can consider an informal restructuring process or, if it is appropriate, to file for business rescue or liquidation. Difficult but informed decisions need to be made.
The takeaway is that if directors and management are brave enough and are able to place themselves in a position to understand these opportunities and the upside of going through a restructure, both operationally and financially, then we might begin to see a better aligned and more stable SA economy.
SA faces continued unprecedented and tough economic trading conditions. Many SA companies that appeared to be financially healthy a few months ago now find themselves facing severe financial stress. How long these constraints will last is open for debate. Nevertheless there remain opportunities for investors to acquire good value companies in the distressed environment. Being proactive, diligent and astutely aware of the options available to struggling companies/businesses and investors will become critical in the days and months ahead.
• Levenstein is head of insolvency, business rescue and restructuring at Werksmans Attorneys.
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