As South Africa’s state-owned enterprises and private sector companies continue to battle in an ailing economy, there is no doubt that the role of chief restructuring officer (CRO) is catching on.
The appointment of Freeman Nomvalo as CRO for Eskom one development that’s worth watching. Eskom is looking to bolster its restructuring team by hiring legal, financial and restructuring advisors to assist in its turnaround. These appointments should enhance Nomvalo’s ability to deliver a restructuring package for Eskom, which is currently exposed to R430 billion of debt.
A recent advert for the appointment of a CRO for SAA stated that the incumbent would be expected to “facilitate and drive the re-engineering and restructuring of SAA and its subsidiaries for optimal performance and profitability”. The airline currently has has R5.7 billion of debt and reportedly needs an additional R2 billion by December to fund its working capital requirements.
The private sector is facing tough challenges too and here the CRO is playing an even greater role.
The knee-jerk rush to file for a formal business rescue process needs to be carefully considered by the boards of stressed companies.
Proper consideration should first be given to the appointment of a CRO, as opposed to a business rescue practitioner. A CRO will be able to take a fresh look at the business and offer turnaround strategy recommendations.
Of course it will always come down to ‘horses for courses’ as financial pressure on the entity might be too great, requiring an urgent filing for business rescue where the benefit of a moratorium on claims against the company will provide the breathing space needed in the restructuring process.
The standout restructuring example has been Edcon.
Earlier this year, SA’s largest retail clothing company, employing some 40 000 people, faced the threat of a possible financial collapse. The company went through a significant restructuring, including a resizing of its retail store offering and a substantial reduction in its occupied floor space.
CEO Grant Pattison, although not appointed as the company’s official CRO, led the turnaround exercise. The outcome has been viewed by the market as a success.
The final turnaround plan included an injection of R2.7 billion in new investment, with Edcon’s landlords, the UIF, banks, investors and staff holding shares in Edcon.
But it takes a brave director to be able to recognise the spiralling of a company towards financial disaster.
The last thing on the board’s agenda in a cash-strapped entity would be to admit a potential slide towards business failure, hold up their hands and actively look for the outside assistance of a CRO.
Board members sometimes need to take their feet off the accelerator of revenue generation and recognise their own limited skills in being able to trade the entity out of its financial distress.
Fearing failure, and not used to making unpopular and difficult decisions, directors place themselves in a ‘rabbit caught in the headlights’ scenario, which makes the need for the appointment of an independent turnaround consultant even more necessary.
The risk of personal liability and opening oneself up to scrutiny by creditors after a company has filed for insolvency should persuade directors to engage a CRO as early as possible.
A CRO’s objective would be to restructure the affairs and business of the company so as to ensure that it can continue to trade on a solvent and effective basis.
CROs need to remain independent and do their best to make the hard decisions for the commercial benefit of the operation.
A CRO-led restructuring should deliver an entity back to the market with its debt restructured, prejudicial contracts renegotiated or terminated, and with management and employees realigned to upscale business profits and upside for shareholders and stakeholders.
The objective must be to maximise the returns for lenders and creditors faced with potential massive debt write-offs in the event that these companies file for liquidation.
This strategy applies across the board – from state-owned entities to listed companies and even small privately owned firms.
Dr Eric Levenstein is head of insolvency, business rescue and restructuring at Werksmans Attorneys.
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