SAA’s fate lies in hands of corporate SA

It was inevitable, but it still came as a shock — the meddlesome Department of Public Enterprises stood back long enough to allow the SAA board to apply for voluntary business rescue, a process that was completed on Thursday 5 December 2019.

The board has appointed Les Matuson of Matuson Associates as the business rescue practitioner in South African Airways' voluntary business rescue process. 

This puts to bed the vexed question of just who is in charge at SAA. The acting CEO, executive chair, board and shareholder minister all defer to the BR practitioner.

Within 10 working days, a meeting must be held where creditors prove their claims against the airline. This provides a very clear idea of the liabilities.

Within six weeks, the Matuson must present a turnaround plan to creditors, though he could apply for a slight extension.

This plan must be approved by 75% of creditors and 50% of the company’s independent creditors, which excludes the shareholder.

This gives creditors, presumably the private sector, enormous power over the future of SAA.

If the plan involves a change in shareholding, once approved by creditors it must be approved by the shareholder.

But even here the state’s power to intervene is limited. The alternative is liquidation.

“This is a smart move,” says Neill Hobbs, a director of corporate restructuring firm Hobbs Sinclair. “It depoliticises the entire process and puts SAA in the hands of a team that will exercise their mind independently and with the viability of the firm in mind.”

The ability to dodge bureaucracy and move fast — whether to cancel suspicious, inefficient or expensive contracts, cut staff or sell assets — is what will give SAA its best hope of recovery.

The process will lead to one of two outcomes, says PJ Veldhuizen, a partner with Gillan & Veldhuizen.

“Either the company will be restructured to the point that it becomes a going concern, or it will be liquidated. In the latter eventuality, it will happen in an orderly fashion with creditors receiving more on their rand than in the case of a disorderly liquidation.”

It is worth noting that government pencilled in a commitment during the Medium Term Budget Policy process in October 2019 to repay SAA’s existing R9.2-billion in debt, and provide it with R2-billion in operating capital, a fact that was reiterated in the late-night government statements on the business rescue process.

This means that creditors will not take as severe a haircut as would normally be the case such instances.

Whether SAA lives or dies, it seems certain that a sale of assets will occur.

The board, working with the Department of Public Enterprises, had already been working on its “radical restructure” with the sale of Air Chefs and SAA Technical on the table.

Mango, which is a going concern, was to be ring-fenced, giving rise to interesting possibilities for the orange airline.

It seems likely the BR practitioner will at least glance at the options explored by the board in the past few months.

While the BR practitioner is empowered to work with the board and management, SAA has a big management team and it is likely that this will be pared down.

“Management tends to behave strangely once a BR practitioner is appointed,” Hobbs says. “It could be that they have a vested interest, an agenda or an interest in covering up failures. It’s easier to work without all but the most essential people. It also leaves the employees, who know what is going on, free to speak.”

SAA is already engaging with trade unions on the retrenchment of 900 staff. While these discussions had been deferred to the 31 January 2020, they could be accelerated.

It is also possible that the practitioners, who are unlikely to have airline expertise, will employ a specialist adviser or consultant. Someone like former CEO of Comair Erik Venter could be considered.

The decision to apply for voluntary business rescue was eventually the last choice standing.

The other option was liquidation, the consequences of which would be dire: 9,000 staff would have to line up with other creditors for their share of the rand; small businesses that depend on SAA would possibly fold and all current and future obligations would come due.

It is difficult to put a figure to this, but it is most certainly well north of the R40-billion that has been bandied about.

The radical restructuring was the other option, but the time for this action had run out.

Once local and international insurers withdrew their insolvency cover on SAA tickets, sales fell off a cliff, drying up cash flow.

Funders were not prepared to come to the party and the snowball was gathering speed.

Forcing the board’s hand further was trade union Solidarity, which had applied to the courts for SAA to be placed in business rescue.

The difference between a court-ordered rescue process and a voluntary process is profound.

In the case of a court-ordered process, the court — not the SAA board — chooses the business rescue practitioner.

Also, a judge will only sanction business rescue if there is a reasonable prospect of the business surviving. Considering SAA is insolvent, the judge could have ordered the company be liquidated instead.

This is where the post-commencement finance — R2-billion from National Treasury and another R2-billion in loan guarantees — was essential as it keeps the ship afloat during the business rescue process.

SAA’s board may have averted a major disaster, but the airline’s future is far from certain. BM