The Nuclear Option: What does business rescue mean for SAA?

After threatening for a number of years, Solidarity has decided that it too has had enough of SAA’s long deathbed struggle and so the trade union has launched an application to force the airline into business rescue.

Solidarity argues that if drastic action is not taken, the airline will collapse – leading to the loss of 240 of its members’ jobs. These 240 members may be tiny compared to the cacophony of threats, counter threats and intimidation emanating from the cabin crew and metal workers unions’ (Sacca and Numsa) strikers, but Solidarity’s business rescue application is potentially a far more serious threat to the airline’s existence and will have a huge impact on the government’s finances.

Solidarity is a trade union with the skills and resources to mount a proper business rescue application – and it has a management team with a turnaround plan waiting in the wings. If Solidarity’s application is successful, it would be the first time that a state enterprise has been forced into business rescue.

SAA is properly bankrupt. At the time of writing it has still not submitted its 2018 and 2019 financial results due to it being unable to certify it is a going concern. Further, the airline fails almost every solvency and going-concern test: SAA’s liabilities are in the order of R100-billion, while realisable assets are less than R10-billion. It also fails basic liquidity and corporate governance requirements. Losses have increased from an average of R1-billion a year to R5-billion a year. Yet we the taxpayers are expected to continue to bale it out.

Any privately owned business in a similar state would be liquidated and those owed money when it shuttered its windows would enjoy what are wryly called the “cold comforts of concurrent creditors”. But SAA staggers along, being drip-fed just enough taxpayer money to keep it going. Meanwhile, the mountain of debt grows. It is not sustainable.

The most disturbing motive behind the current strikes is that the airline has become a pawn between two power factions in government: the reformists, and the trade unions who support a labour aristocracy. Business rescue will force management to run the airline purely on business terms and thus free it from the yoke of political baggage and interference.

What are the options? Should it be put into business rescue? Is business rescue equivalent to airlines in the US seeking Chapter 11 bankruptcy protection?

In South Africa, the business rescue process, (as defined by the Companies Act of 2008), would provide SAA with the opportunity to reorganise and restructure its affairs and to structure a payment scheme with its creditors, while saving jobs and allowing the business to continue trading as an economically contributing entity.

Unlike the American Chapter 11 Bankruptcy Protection, South African business rescue protects the rights of employees. Those employed by the company when it goes into business rescue have their jobs secured – and on the same terms and conditions.

Airline workers in the US have no such protection. Which is why, in the US, Chapter 11 bankruptcy is almost a rite of passage for airline owners seeking to rid themselves of excess staff and onerous supplier agreements.

In South Africa, there is a temptation to consider business rescue an equivalent to the US’s Chapter 11 and thus useful for local airline turnarounds. However, under Chapter 11 the business and creditors come up with a plan for the majority of the creditors. The main difference is that in the South African business rescue process, an independent practitioner takes over the running of the business – whereas in the US the company still maintains control.

Second, in the US, the creditors need not agree on the proposed outcomes since the court can impose them, whereas in South Africa the creditors (or other stakeholders) have a much greater say in the outcome. Further, in the US the companies seek the protection of the court while in South Africa the creditors (or other stakeholders) seek the intervention of the court.

South African business rescue thus results in negotiated settlements between the business and its creditors. In contrast, US Chapter 11 bankruptcy protection allows a court to override contracts without the agreements of all parties. In effect, an airline in trouble in the US can use the uncertainty of the court’s ruling as a negotiating tactic. Furthermore, during the US process, the business is protected from creditors and the recalling of loans.

It must be noted that business rescue has a poor success rate. There is international evidence that only 5% of business rescue cases are successful. In South Africa there are estimates that this rate is somewhere between 10% and 12%. The failure of 1time airline under business rescue is a case in point.

So business rescue in SA is substantially different from American Chapter 11 protection and there are huge problems with trying to apply business rescue to SAA. This is one of the reasons Public Enterprises Minister Pravin Gordhan has threatened to close the airline down rather than allow it to go into business rescue. One of the key problems is a booby-trap bomb embedded in the airline’s aircraft leases.

A memo, dated 6 November 2015, was sent to the SAA board of directors by the then acting CEO, Thuli Mpshe. A key component of the memo relates to SAA’s commitment and exposure to Airbus for pre-delivery payments for the then-new Airbus A330-300s. SAA attempted to suppress the memo, as it brought to light some extremely important consequences of any compromise with creditors. This included any compromise effected by business rescue proceedings.

The key condition refers to SAA defaulting or compromising with its creditors on any of its leases or other loans: “... if a specified amount (typically $10m) of Financial Indebtedness is not paid by SAA after being declared due, repayment of the debt may be accelerated.” So, all debt could become due at once – and that would be an estimated R64-billion just for aircraft leases. And then there’s the 30 or so billion rand owed to the banks. Add in staff severance and it’s a chunky R100-billion.

And that’s not all. The memo goes on to note: “Almost all of the finance/leasing agreements are subject to a Cross Default clause so that, if SAA is in default on one loan document/financial indebtedness, this will cause a default in all the finance/leasing agreements.” This includes Eskom’s loans on power stations. Estimates suggested that this exposure may be in the order of another R300-billion.

It would bankrupt the country. So while business rescue is a useful strategy, and possibly the only one capable of forcing the government to make difficult political decisions regarding job cuts and the loss of patronage, it needs to be handled with the care of a nuclear bomb.

There are solutions out there – but government’s hope for a so-called strategic equity partner is unlikely to be found unless all debt is written off and the partner can have more than the current 25% ownership limit allowed by law. But what is possible is a joint venture with operational control in the hands of an experienced airline partner – that can add skills and route connections to SAA’s dwindling network. SAA almost had that deal with Emirates until Dudu Myeni scuppered it at the last moment.

Business rescue would free SAA from the clutches of government – and it could even make SAA great again. DM