Riza Moosa provides an insight into the business rescue concept in South Africa and accentuates the need for further development of restructuring and insolvency procedures in the region.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
The South African economic environment has had an adverse bearing on a number of different industries. Particularly hard hit sectors have been commodities, agri-business and mining. This has led to several business rescues and restructurings which remain ongoing. The last twelve months have also seen renewed focus on Black Economic Empowerment (BEE) transactions, several of which are coming to term following earlier rounds of BEE transactions and others which are taking into account the new BEE legislation. These three sectors will continue to drive restructuring activity levels over the next twelve months.
2. What is the market view on prospects for the coming year?
The economic outlook remains flat in the short term. Low growth is likely to result in a continuing upward trend in the interest rate cycle. Compounded by a sliding exchange rate between the Rand and other major currencies, the result is that restructurings, workouts, business rescues and insolvency are likely to present ongoing opportunities and activity.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
Business rescue, which was introduced in the 2008 South African Companies Act, has continued to drive restructuring activity. This is a formal process along the lines of English law administration and is capable of being commenced without court intervention. Informal restructurings remain possible and often bank lenders use this as an initial step to attempt to restructure distressed or potentially distressed loans. Formal winding up and liquidation processes are court-driven and are not actively used as a restructuring mechanism. There is also the option of creditor compromises by way of schemes of arrangement, but these too seem to be less utilised since the advent of business rescue proceedings. While business rescue is designed as a speedy process, very often the permissible extensions allow these to continue for lengthy periods exceeding a year. The reported success rate on business rescues remains low which does not assist in assessing its utility.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
Given the size of our market and the access to mezzanine and junior debt, it is the senior lenders who call the shots. In some cases in highly leveraged transactions, foreign hedge funds have, by virtue of their instruments, been economic owners of the business or we have seen them come to the fore in driving the restructuring processes. Valuation disputes are not that contested and seldom have these landed in court until recently. Dissenting shareholders have appraisal rights under the Companies Act, but these are excluded in transactions when the company is in business rescue.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
Capital structures are evolving for various reasons. Preference share funding seems to be on the decrease. Several of the larger leveraged buy-outs of the early 2000s had New York law-governed tranches of high yield debt. The performance of some of those issuers led those bonds to come under water. In addition, issuers battled the hedging costs due to the volatility of the Rand against major currencies; with the result that foreign currency high yield debt is not as prevalent and we may start to see fewer foreign participants in South African restructurings.
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
While there has always generally been interest from distressed debt funds, particularly foreign-sponsored ones, it seems that the Rand’s volatility over the last few years has borne heavily on decisions to establish them in South Africa. The cost of a depreciating Rand means that distressed recoveries render even less when converted. So, the activity is, in my view, not significant yet. Notwithstanding this, disposals of loan books are being continued by South African banks, although these are often more focused on retail credit assets. The need for post commencement finance (a business rescue concept) has seen renewed interest in the establishment of entities or funds providing this form of funding to distressed companies.
7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
Business rescue, as mentioned above, is the most unique feature of our restructuring landscape. Its utility is being tested and common law around it is being developed, which will have a bearing on its success. It also relies on the skills of independent business rescue practitioners who take over and manage the business of the distressed company and formulate a plan for its rescue. There is a sense that this is still a skillset that is being developed in South Africa. Until the shortage of these critical resources is addressed, the outcomes and length of business rescues may remain uncertain.
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
The company law working group, under the auspices of the Companies and Intellectual Property Commission, has called for submissions and met with industry representatives on possible improvements to the business rescue provisions in the Companies Act. This is part of an attempt at their review in order to take into account the commercial realities of companies in business rescue. Formal proposed revisions to the Companies Act are yet to be made. In addition, talk for several years of an overhaul of the South African Insolvency Act appears to have subsided.
9. If it was up to you, what changes would you make?
There are a few changes that I would like to see to improve the restructuring regime: