Business Maverick

R4bn and business rescue to put wind beneath SAA’s wings

By Marianne Merten 5 December 2019
Caption
Three South African Airways (SAA) planes parked among other airlines at OR Tambo, Johannesburg’s international airport, South Africa, 05 July 2013. EPA/UDO WEITZ

SAA is in business rescue as of right now – with a price tag totalling R4-billion in cash and government guarantees, even if some of the T&Cs remain outstanding. 

“The board of SAA has adopted a resolution to place the company into business rescue. This decision is supported by government,” Public Enterprises Minister Pravin Gordhan said in an official statement in the early hours of Thursday morning.

“This is the optimal mechanism to restore confidence in SAA and to safeguard the good assets of SAA and help to restructure and reposition the entity into one that is stronger, more sustainable and able to grow and attract an equity partner.

“Our desire is that the restructured airline will mark the beginning of a new era in South African aviation and must be able to bring in millions more tourists into SA, help create more jobs in tourism and related sectors of the economy and work with other African airlines to underpin and service the integration of African markets and improve dramatically intra-African trade and travel.”

That’s the spin.

The business rescue practitioner must still be appointed, but the money has been put in place – and at a total or R4-billion in cash and guarantees it doesn’t come cheap.

Government pledged R2-billion in what’s described as “post commencement finance” directly from the national purse in “a fiscally neutral manner”, according to Gordhan’s statement. In addition, a government guarantee to lenders for another R2-billion to SAA “repayable out of future Budget appropriations in order for the business rescue process to commence and to enable SAA to continue to operate”.

That government guarantee for R2-billion was what lenders had been looking for in the recent negotiations with SAA for this loan to keep the national carrier in the air. Government’s decision to advance would have clinched the loans – and the means to pay salaries and operations.

“It must be clear that this is not a bailout. This is the provision of financial assistance in order to facilitate a radical restructure of the airline,” said Gordhan.

“For these reasons, the business rescue process will commence as of 5 December 2019. A business rescue practitioner will be chosen to take charge of the business and perform the function of operating the airline with the assistance of management…”

SAA has been in financial and governance turmoil for years with critics of a series of government support efforts describing the national airliner as a vanity project. Amid a revolving door of executives and board directors, the airline since 2017 also received over R15-billion in bailouts, and a government pledge to pay another R9.2-billion in maturing loans over the next three years.

SAA has failed – for two consecutive years – to submit its audited financial statements to Parliament as required by the Public Finance Management Act. SAA board members and Parliament’s public spending watchdog, the Standing Committee on Public Accounts (Scopa) clashed over the airline’s compliance and accountability levels.

These interactions came on the back of increasing reluctance to allow billions of rands in further bailouts amid a turn in public sentiment amid an outcry over the financial support to ailing State-owned Entities (SOEs) like SAA, or Eskom and others. And such sentiment would have helped clinch putting SAA into business rescue.

But the decision to put SAA into business rescue came – officially – at around 2am after an evening of twists and turns. What started off the speculation, was a leaked letter from Presidency Director-General Cassius Lubisi, dated 4 December 2019, in which he wrote:

“His Excellency President Cyril Ramaphosa has directed me to inform all members of the Executive of the urgent need to change the approach adopted by the Cabinet in regard to addressing the dire situation in which South African Airways (SAA) finds itself.

“Cabinet adopted an approach that entailed the restructuring of SAA. However, after discussions with various key stake holders including potential lenders, developments have now necessitated a change of approach to the SAA conundrum…”

On Sunday, Gordhan had announced the “radical restructuring” of SAA ahead of discussions on scheduled for Tuesday’s Cabinet discussions in an environment where action on SAA was a moving target.

Then came Wednesday’s change of course as outlined in the letter to ministers and deputy ministers written by Lubisi in his capacity as Secretary to Cabinet.

It’s understood the SAA board met on Wednesday evening. Just days earlier the airliner had decided to oppose the business rescue application to the courts brought by trade union Solidarity in late November – because of the precarious state of the airline.

Against the backdrop of Wednesday evening’s twists and turns, Scopa Chairperson Mkhuleko Hlengwa said the committee had postponed its scheduled Thursday visit to SAA.

The spin is for government action in support of financial prudence and jobs. But the bottom line is despite much talk of a strategic equity partner for the flailing national airline – Finance Minister Tito Mboweni publicly said discussions were underway when delivering October’s Medium-Term Budget Policy Statement (MTBPS) – few if anyone would have been prepared to step up and invest.

This reality emerged also from Gordhan’s early Thursday’s statement.

“The creation of a sustainable, competitive and efficient airline with a strategic equity partner remains the objective of government through this exercise,” said the minister after earlier stating:

“This initiative demonstrates that government will undertake the necessary bold steps in order to reposition its assets in such a way that they do not continue to depend on the fiscus and thereby burden taxpayers”.

Intellidex analyst Peter Attard Montalto described the statement’s couching business rescue in terms of support for tourism a “window dressing and an attempt to provide political cover”.

“Overall the clear aim, rightly, is to retain as many sustainable jobs as possible. The statement also highlights that an investment partner is key. The statement, however, falls short in that it seems to impose a way forward on the business rescue practitioner. Our understanding is that legally a practitioner cannot be dictated to by a shareholder or creditor or government…”

The opposition DA and IFP indicated their approval of business rescue in the wake of Lubisi’s leaked letter, but ahead of the official confirmation by Gordhan.

Said Inkosi Mzamo Buthelezi in a statement:

We are pleased with this decision in regards to avoiding any further cash cows and we call on the shareholder to work very closely with the business rescue practitioner in ensuring that when the airline undergoes ‘radical’ restructuring jobs are cut from the top… The IFP hopes that SAA will be meticulous in the implementation of this voluntary business process in the collective interests of the airline, fiscus and workers.”

And DA MP Alf Lees in a statement welcomed the decision of putting SAA into business rescue.

The DA has long held that business rescue was the only viable option to prevent SAA from placing any further burden on our ailing economy and the taxpayer…. The business rescue practitioner who is appointed must take robust action to immediately cut costs at SAA without any interference from the ANC. The DA will monitor this very closely in order to ensure that the ANC keeps its distance.”

The turmoil at SAA may not quite yet be done. DM

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