Business rescue to the rescue

Business clients are encouraged to call their bankers for help – the earlier, the better.
Image: Bloomberg

When the Covid-19 pandemic hit the South African economy last year, the country was already in a technical recession where, for two quarters, back-to-back, the gross domestic product (GDP) declined. At the time, the last recorded unemployment numbers (third quarter of 2019) stood at 29.1%.

For the full year of 2019, real GDP growth was a mere 0.2% ̶  not necessarily an environment that could withstand the grinding halt that hit the economy when the government, in line with practice around the globe, started implementing rolling lockdowns to limit the impact of the then-novel coronavirus. As a result, real GDP contracted by 8.2% in 2020.

In this incredibly difficult environment, South African companies have struggled to stay open and afloat. A study by financial services company FinFind, conducted in collaboration with the Department of Small Business Development and based on a survey of 1 489 businesses, showed that the events of last year forced the closure of 42.7% of small businesses.

Tabisa Nkohla, head of Business Support at Absa, says her department immediately saw an uptick in new client cases being transferred to her team’s environment for assistance and management.

“As the immediate shutdown took its toll on business operations in March 2020, lower revenue resulted in an inability of most clients to meet their daily, weekly or monthly obligations and we saw an increase in client cases being referred to our division,” she says.

Business Support is part of the Relationship Banking Risk Division at Absa and while the frontline team, being the relationship bankers, credit analysts and credit managers, can assist temporarily when business clients experience financial distress (whether to allow a temporary overdraft or increasing credit facilities), Nkohla’s team is called in when the solution needs to be medium- or long-term.

“It has become very clear that we will inevitably see these dips, sometimes unforeseen. The bank cannot escape this reality and has to stand by its business clients,” she says.

The process is less aggressive or invasive than it was three decades ago, where a business client would immediately be transferred to a bank’s Collection environment once payment obligations were not honoured and, following the failure of that, into a recovery process for the bank to see how it could minimise its own risk.

The stigma still clings

Even with the transformation in how the situation is now handled, clients are still reluctant to be open and honest with their bankers very early in the process. Nkohla believes it would be very helpful if there was more trust in business support structures, as it could very well be to the benefit of a distressed business client if the challenge is addressed early on.

Nkohla jokes that her department is not the most popular.

“When it comes to business rescue proceedings, for example, quickly identifying that the business needs support or is approaching distress, is key. We usually use the analogy of sick patients; the prognosis is significantly higher if they are diagnosed early,” she says.

If a customer advises their banker early on, the bank can then look at alternatives, and support the official process of business rescue to halt any legal business proceedings that could be instigated by creditors or suppliers, as this would often further impede the business’s ability to pull through.

Last year has put the process of business rescue in the spotlight, with major companies such as South African Airways, SA Express, Edcon and Busby all filing for the formal business rescue procedure stipulated as an option under Chapter 6 of the Companies Act of 2008.

“The procedure provides the business client with breathing space, while the management team as well as the business rescue practitioner looks at possibilities of assisting the business,” says Nkohla. “It also helps to get all interested stakeholders around the table with the aim of achieving a common goal to see how the business can be assisted to weather the storm.”

Nkohla further notes that “if the informal rescue process is undertaken by individual stakeholders, it tends to be focused on salvaging the interest of certain stakeholders over others, which could result in legal actions being taken against the business by those stakeholders who believe their interests have been overlooked”.

Still some kinks to iron out

If business rescue is not used timeously and effectively for the purpose for which it was designed – being triggered when there is still hope for the patient (to use the analogy Nkohla proposes) – it does not always work.

“If our patient is already in ICU, there is very little chance of anyone being willing to provide post-commencement finance to assist in the recovery of the business,” she explains.

“The negatives about the proceedings have unfortunately been more publicised than the positives.

“Although several efforts from industry players have been made to improve some of the weaknesses of the business rescue proceeding, a lot still needs to be done. The act itself was very ambiguous, which required several court cases to set clarity and precedent in terms of various clauses. This created a field day for insolvency law attorneys, to a point that the entire proceeding has now become very legalistic instead of being commercially sensitive and flexible.”

Another negative aspect is that credibility of the proceeding has been called into question over time, with various individuals claiming to have the skill set to rescue companies.

“We have former and current liquidators, insolvency lawyers, auctioneers, accountants, former bankers … Most of these individuals were defaulting to what they knew, and it has led to business rescue incorrectly being referred to as another form of liquidation or delayed liquidation versus its original intent to actually rescue the business,” Nkohla says.

What is clear is that early identification of a potential risk is key to a successful rescue, and Nkohla encourages businesses to constantly evaluate their business needs and operating environment and then take the necessary steps if distress appears on the horizon.

“As an entrepreneur, you understand your business better than anyone in our team does. You need to make sure that the first point of contact is your banker and advise them of the situation. The bank subscribes holistically to treating its customers fairly and is very understanding of the current circumstances, every case is treated on its own merit,” she says.

Brought to you by Absa Retail and Business Banking.

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