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Many things in life, and especially in the financial world, hinge on the perceptions of people and the markets they operate in.
It is much easier to leverage from a strong position rather than doing it from a weakened position. The increase in political uncertainty in South Africa has led to a more volatile economic environment.
The ability to leverage from a strong position is diminishing rapidly.
Nisha Dharamlall, head of restructuring services at Deloitte, says during these times it is important to be able to see through the fog.
She quotes Albert Einstein who said: “In the midst of every crisis lies opportunity.”
Now is the time to apply agility and proactivity in order to be able to identify and manage the uncertainties surrounding businesses in SA, she says.
Deloitte recently published its fourth survey on the views of a cross-section of restructuring specialists in SA on the year ahead.
Almost 60% expected a very busy year for the restructuring industry because of the increasingly precarious position companies are finding themselves in.
The specialists expressed the view that companies with declining performance are still perceived in a positive light.
Once the company becomes stressed and even distressed, the options and choices become limited. That is when the wolves move in.
Despite the current window of opportunity for companies to restructure before that happens, many have not done so.
Daniel Terblanche, associate director at Deloitte, says there is a “bubble” forming. “Many companies should be restructuring (selling non-performing or underperforming assets).
However, under current market conditions they will not get a proper value for it, so they are simply keeping the company afloat, hoping things will change.”
The distress curve
Restructuring is normally triggered when there are changes in the health of a company. It might be a decline in performance or even underperformance.
Terblanche says the perception game is played out between solvent and insolvent restructuring. The one offers better value and better options – the important difference between restructuring and business rescue.
“There may be specific reasons why it is not competing at full capacity – and that can be restructured. Even if the company is under stress there are a number of mechanisms to restructure it to create value without having to go into business rescue,” he says.
The use of “pre-packs” is a restructuring procedure in which a company arranges to sell all or some of its assets to a buyer before appointing a business rescue practitioner to facilitate the sale.
This is an excellent way of cutting out all the “bad fruits”. The part that is performing well, making money and is still viable, may attract new money or even sell at price that offers better returns to shareholders.
“This approach has high potential if carried out with complete transparency; however, the shortfalls in the legislation to support these procedures are the main reason this has not been used more to date,” says Terblanche.
More needs to be done to inform and educate stakeholders of this option, potentially through the updating of legislation.
Terblanche says even if the company still goes into business rescue, once the stakeholders sanction the “pre-pack” it simply means the company does not have to go into a bidding process post-business rescue.
The company can present its offer to the market, what has been done to get to the offer and what is the liquidation scenario if the offer is not considered.
The only downside to this procedure is that it has been used for the wrong reasons. In many instances the shareholders of the existing company realise they may have to close doors if nothing is done.
“They then make an offer, but it doesn’t always mean it is the best offer. There is a transparency issue here as well. People wonder why the shareholders get the opportunity to buy. Are they getting it for a steal?”
Business rescue
Terblanche says business rescue is only a small component of the restructuring industry – a new tool introduced through the Companies Act.
It is a more formalised and legalistic way of restructuring companies in distress. That is the important difference – the company is not underperforming or stressed, it is already in distress.
“Only when you get to a point where you physically cannot make a difference to the company does one enter into business rescue. It is a lengthy and costly process,” says Terblanche.
The top 10 business rescue practitioners in the country probably has a combined success rate of about 80% or even 90%, he says. They are “adamant” about the risks they take. It is for that reason that they do not take on matters where there is no reasonable prospects of success.
The timing
The company that is in distress must flag this quickly to be able to offer the business rescue practitioner enough options to save it. Once the horse has bolted it is much more difficult to gain control again.
“Business rescue is a splendid process, but the problem is the risk for the practitioner, and the timing of the process. If it does not start quickly enough, it takes away the real opportunity to achieve success.”
In the Deloitte survey 75% of the respondents feel that business rescue is effective.
The reasons behind their thinking are:
- improved legal advice prior to commencing with the business rescue process;
- companies are entering business rescue earlier, providing a better opportunity for the business to be saved;
- an increase in the number of assignments that started the process for the right reasons; and
- an increase in the understanding of the shift in the roles of the board of directors and the business rescue practitioner.
However, Terblanche does note that the respondents in the survey were quite emphatic that the majority of companies entering into some form of restructuring process are 70% more likely to be successful than those who enter into business rescue.
It is all about perception.
This article originally appeared in the 29 June edition of finweek. Buy and download the magazine here.
