STUART THEOBALD: SAA business rescue takes SA into uncharted territory

Posted in: i-Blog, SOEs, South Africa on December 9, 2019

Legal obscurity means things could easily end up in court, particularly with unions already sounding litigious

A version of this column was first published in Business Day 

In the coming weeks and months the business rescue of SAA is going to redefine our political economy. The decision to put it into business rescue was brave. Less brave ministers in finance and the department of public enterprises have previously kicked the can down the road, refusing to face up to the inevitable. But we are now so far down the road that the end point is visible on the horizon: the bankruptcy of the whole state.

I doubt anyone has taken that prospect seriously (and, to be clear, it is some way down the road). But if we don’t take it seriously now, we will find ourselves there before we know it. SAA has proved that it cannot evolve into a viable business in which revenue exceeds costs. It is losing money continuously and its liabilities swamp assets. The choice was simple: either the government funds its losses interminably or cuts it off.

We are, however, in uncharted territory. The business rescue of SAA is the biggest in SA history and the first in the public sector. The next largest was furniture retailer Ellerines, which went into business rescue in 2014 as a prelude to the collapse of its parent, African Bank. Ellerines, however, had less than a 10th of the revenue of SAA.

Business rescue was introduced as an option in SA through the Companies Act of 2008. Until then, liquidation was the only option. The law, however, was made for application for companies in general rather than state-owned entities. SAA is a creature of statute in the South African Airways Act of 2007, but that act specifies that it is subject in full to the Companies Act. So, legally, SAA should be treated no differently from any other company. And the act is very clear on what must be done.

The business rescue practitioner appointed by the SAA board is Les Matuson, who also presided over Ellerines. He has extensive authority to restructure the business. But I suspect he is going to have a battle on his hands in managing the government.

In terms of the Companies Act, the job of the business rescue practitioner is to develop a business rescue plan setting out a vision for the future. That is then voted on by external creditors, requiring 50% support before it can be implemented. If shareholders are affected, for instance if there is to be the introduction of new shareholders, they too can vote on it. But a plan that says, for example, that Mango, Air Chefs and SAA Technical are to be sold and the rest liquidated would not require a shareholder vote. Mango and Air Chefs are by all accounts good businesses, though SAA Technical has been mired in corruption.

The big uncertainty is what role the government has as creditor. We don’t yet know who the creditors are. The government has already put in R2bn of “post-commencement financing” to keep the doors open during business rescue, so it will definitely have a seat at the creditors’ table. It is also being called on to settle guarantees on R9.2bn of loans, but it is rather obscure as to whether the government then inherits the creditor rights invested in those loans. It doesn’t look like it does because the R9.2bn has been budgeted for as an appropriation and the loans paid on behalf of SAA, rather than the government effectively acquiring the loans. With such legal obscurity things could easily end up in court, particularly with unions already sounding litigious.

The leaked 2018 SAA financial statements showed it owed suppliers, lenders due in the current year, and bank overdrafts, R26.1bn. While much may have changed subsequently as suppliers would have reduced their risk by insisting on cash upfront, it is still likely to be tens of billions.

If the government does inherit the creditor rights from the R9.2bn in guarantees it might be the biggest creditor, but I can’t see it becoming the biggest. Especially with banks also putting in R2bn of post-commencement financing. In short, as a creditor, the government is not going to be a big player. The creditors we do know about include competitor Comair, which is still owed R600m from a Competition Commission settlement. Employees are also owed money and the SA Revenue Service (Sars) is a likely creditor. So even in the unlikely event that the government does inherit the right to vote the R9.2bn, I can’t see it being over 50% of creditor interests. It will therefore be the subject to the wishes of other creditors in the airline.

The case will test many precedents on business rescue. The process has been criticised historically as a way to delay liquidation, racking up costs unnecessarily. SAA, were it a normal company, would have been in liquidation many years ago. It has been able to accumulate more than R40bn of losses only because of continual bailouts from the state. One might assume those have stopped, but the R2bn of post-commencement financing shows they have not quite done so.

How the business rescue practitioner factors the intentions of the government into his plan will be a very tricky path to walk. Government promises and inclinations will be difficult to test and rely on. And it will set many precedents for dealing with other financial crises in the public sector, with Eskom the most glaring example.

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