Business rescue in South Africa is experiencing a crisis of trust, mainly due to the low success rate experienced by lenders as well as the unsuitability of business rescue practitioners (BRPs). This is one of the key findings of the 2022 Deloitte Africa Restructuring Survey, which was launched in Johannesburg today.
The survey was conducted between January and February this year among 111 C-suite executives and restructuring professionals including lawyers, lenders, advisors and business rescue practitioners in South Africa, Kenya and Nigeria.
The survey also predicts an increase in distressed Mergers & Acquisitions (M&A), or companies selling to get out of trouble, with 60% of South African respondents expecting at least a quarter of their portfolio to require distressed M&A in the year ahead.
“The key message from the survey is the widening trust gap that is developing between financial stakeholders and business rescue practitioners,” said Deloitte Africa’s Turnaround & Restructuring Leader, Jo Mitchell-Marais. “Swift action is required to restore trust in the process, otherwise we risk irreparable reputational damage to a process that is critical for job preservation, foreign direct investment and facilitating a ‘second chance’ economy.”
Business rescue was introduced into the South African law through the Companies Act in 2008 and was amended last year. The business rescue process provides for the efficient rescue and recovery of financially distressed companies to keep them operational and avoid liquidation.
Despite there being 393 registered BRPs on the Companies and Intellectual Property Commission (CIPC) database at the end of January this year, the report notes that 77% of respondents believe that there are less than 30 BRPs who are adequately skilled and qualified to perform their duties. “What speaks directly to the trust gap is that ethics and integrity, together with consequences for poor performance, are cited as the main areas which should improve this skills and qualification gap,” the report noted.
Deloitte has called for improved regulation of the business rescue industry, a task that currently falls under the CIPC. Mitchell-Marais says courts are currently playing an important role, but regulation needs to be strengthened, with the CIPC supported by industry bodies.
Despite the trust gap identified, the survey indicated that 60% of respondents expect the level of business rescue in their portfolios to increase.
The survey also found that in-house corrective actions are the most preferred course of action above seeking professional help when financial distress hits companies. “…when in our survey the C-suite says that seeking external support is of lesser importance, this should set alarm bells ringing that management teams and their key stakeholders are working at cross-purposes, which inevitably causes more delays,” said Mitchell-Marais.
Increased growth in restructuring activity is anticipated in the year ahead. According to the survey responses, 84% of restructuring lawyers, lenders and practitioners expressed optimism about the industry over the next 12 months.
Further to that, 62% of respondents were convinced that business rescue can be improved by providing BRPs with additional time to evaluate rescue options available before or during the business rescue process.
The difficulties in business rescue have somewhat turned the spotlight on distressed M&A. The survey report findings highlight that the rise of distressed M&A has been evident, especially when used as an exit strategy from business rescue. In the survey responses, BRPs indicated that distressed M&A played a greater part in their portfolios compared to any other stakeholder.
The report further states that commercial banks also expect greater distressed M&A activity in their portfolios – 31% of commercial banks indicated that over 25% of their portfolios took over distressed M&A in the past year. This is expected to rise to 38% over the next year.
“It appears that business rescue has lost its shine and distressed M&A is rapidly gaining pace in being the preferred exit route from distress,” noted Mitchell-Marais.
Additional key findings in the report cover the respondents’ expectations of South Africa’s economic outlook, considering the rising inflation rates and increased pressure on consumers. 63% of South African respondents said they are pessimistic about growth prospects over the next 12 months, with levels of pessimism higher among lenders, at 68%, compared to C-suite executives, at 40%.
The survey then highlights what it calls the ‘crash of grey rhinos’ – a term used for a group of high impact risks that businesses should see coming but invariably ignore until it is too late, and how companies need to respond to these.
The survey finds that a high impact risk that businesses are least prepared for is the emigration of talent, with 85% of respondents admitting to being unprepared for it. Other risks include political uncertainty and geo-political tension, currency risk, and climate change.
A high-risk event that respondents seem prepared for is a health crisis, with 63% of respondents saying they are prepared, probably leveraging off of the experience gained over the past two years responding to Covid-19.
