foreign & local investment opportunities in south africa offered by the business rescue process
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Foreign & local investment opportunities in South Africa offered by the business rescue processTRANSCRIPT
FOREIGN & LOCAL INVESTMENT OPPORTUNITIES IN SOUTH AFRICA
OFFERED BY THE BUSINESS RESCUE PROCESS
Anastasia Vatalidis, DirectorChris Stevens, Director
Eric Levenstein, DirectorPeter van den Steen, PractitionerWanya du Preez, Senior Manager
7 AUGUST 2014
2
General Overview
> Overview of the South African Business Rescue Regime
> Role of Post-Commencement Finance in Business Rescue
> Utilising Early Distress Signals & Business Rescue to Identify Distressed Assets
> Methodology for Making Acquisitions of Good Value in Business Rescue
> Analysing the Current Macro & Micro Economic Landscape in SA
> Landscape for the Acquisition of Distressed Assets in the Mining Sector
> Interplay between Labour Law and Business Rescue
> Practicalities surrounding the Acquisition of Distressed Assets through Business Rescue
BUSINESS RESCUE LANDSCAPE
4
Business Rescue – A New Mechanism for Restructuring Financially Distressed Companies
> Judicial Management replaced by business rescue
> Mirrors the mechanism for restructuring found in the USA (Chapter 11) and the UK (Administration)
> Brings South Africa into line with international corporate rescue regimes
> A new playing field for venture capitalists, hedge funds, private equity firms and distressed funds
> Opportunity to pick up distressed assets at discounted prices
> China and the UK – private equity see South Africa as an “unsaturated market” for distressed debt investing
5
Definitions> Definitions relevant to the business rescue provisions of the Act
> Affected Person – shareholder, creditor, registered trade union representing employees of the company or if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives
> Business Rescue - proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for –
> temporary supervision of the company, and of the management of its affairs, business and property;
> temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
6
Definitions> development and implementation, if approved, of a plan to
rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that –
> maximizes the likelihood of the company continuing in existence on a solvent basis; or
> results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company
> Business Rescue Practitioner – a person appointed or two or more persons appointed jointly, to oversee a company during business rescue proceedings –
> two or more persons (could also include a junior and an experienced or senior practitioner)
> “person” – contemplates appointment of a company
7
Role Players in Business Rescue
COMPANY
SHAREHOLDERSPOST
COMMENCEMENT FINANCIERS
BUSINESSRESCUE
PRACTITIONER
CREDITORS
SECURITY
HOLDERSTRADE UNION
ATTORNEY
COURT/CIPC
EMPLOYEES
DIRECTORS
8
Test for Business Rescue> Financially Distressed - 6 month forward looking test –
> it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months (commercial insolvency test); or
> it appears to be reasonably likely that the company will become “insolvent within the immediately ensuing six months (factual/balance sheet insolvency).
> Clear distinction between “insolvent” and “financial distress”
> Business rescue test –
> forward looking test
> contemplates impending insolvency (commercial insolvency or factual insolvency)
9
When to Begin Business Rescue
> Welman v Marcelle Props 193 CC & Another (2012) JOL 28714 (GSJ)
“Business rescue proceedings are not for terminally ill close corporations. Nor are they for chronically ill. They are for ailing corporations, which given time will be rescued and become solvent.”
> First signs of financial distress – company must apply for business rescue
> If more than just “financially distressed” the company must consider other options such as a liquidation
10
Duties of Directors Before Business Rescue
> Directors have an obligation to consider the financial state of the company from time to time
> If company is financially distressed, the directors have two choices –
> pass a resolution to commence business rescue; or
> send out what is commonly referred to as a “section 129(7) notice” –
> notify affected persons of the nature of the company’s financial distress (ie impending commercial or balance sheet insolvency); and
> reasons for not adopting a resolution to commence business rescue
> Notice needs to be carefully considered – could constitute an “act of insolvency”, cause suppliers to stop supplying the company or precipitate a compulsory business rescue
> Failure to comply may result in personal liability for directors
11
Director’s Responsibility
> Section 129(7)
“If the board of a company has reasonable grounds to believe that the company is financially distressed, but the board has not adopted a resolution contemplated in this section, the board must deliver a written notice to each affected person, setting out the criteria referred to in section 128(1)(f) that are applicable to the company, and its reasons for not adopting a resolution contemplated in this section.”
> This will focus directors’ minds in any financial distressed company
> Sending out notice must be carefully considered as it can have serious consequences
12
Pre-Assessment> Investigation (at instance of company or creditor/s) into the
business, dealings and affairs of the company, while not regulated by the Act, may be necessary
> Identify the nature of the company’s business – this will be determinative of the suitability of business rescue (ie retail v investment property company)
> Prior to the board or an affected person placing a company into business rescue, consideration should be given to –
> the nature and business of the company;
> extent to which business rescue is the appropriate procedure for that company; and
> extent to which business rescue would be more beneficial for the company than a liquidation
13
Entry into Business RescueVoluntary Business RescueBoard resolution passed by a simple majorityPractitioner is nominated in the resolutionCompany is financially distressed (ie will not be solvent on its balance sheet or will not be able to pay its debts when they fall due within the next six months)Reasonable prospect that the company can be saved.Cannot adopt a resolution is liquidation proceedings have been initiated
Compulsory Business RescueAffected person (shareholder, creditor or employee) makes application to court
Company is financially distressedCompany has failed to pay over any amount in terms of an obligation under or in terms of public regulation, or contract, with respect to employment related mattersJust and equitable to do so for financial reasonsThere is a reasonable prospect of rescuing the company
14
Snap Shot of Process & Time Periods
14
Practitioner Appointed
Delivery up by Directors of All
Books and Records
As Soon as Practicable
5 Days
Directors to Provide
Statement of Affairs
First Meeting of
Creditors/Employees
10 Days from Date of Appointment
Preparation & Publication of
Plan
25 Days from Date of Appointment
Section 152 Meeting to Consider
& Vote on Plan
10
days
Approved & Plan Implemented
If Rejected - Vote on Revised Plan/Apply to
Court to Set Aside Inappropriate Vote/Offer to Purchase Voting Interests
of Dissenting Parties
If Rejected & No Steps Taken – BRP to File
Termination Notice & Place Company in Liquidation
Note: Business Rescue Should Generally End Within 3 Months, or an Extended Time as Granted by Court
on Application by Practitioner
(Days = Business Days)
Section 150(5)
Inform Regulatory
Authorities of Commencement
15
Important Features of Business RescueMoratorium Stay on Legal Proceedings & Enforcement Action Against the
Company and in respect of Property Belonging to the Company or Lawfully in its Possession
Post-Commencement Finance
That which becomes due and owing to employees during business rescue proceedings for rendering services to the company and funding which is provided to a company, during the company’s business rescue, by means unrelated to employment (including the provision of credit or services during business rescue)
Management of Company
Business rescue practitioner has full management control of the company in substitution for the board of directors. The board maintains its powers and duties but all decisions must be taken with the approval of the business rescue practitioner – otherwise all transactions are void!
Contracts Certain provisions/the whole contract may be suspended or cancelled by the business rescue practitioner. Cancellation can only be done following an application by the practitioner to court
16
Important Features of Business RescueEmployees Remain employed unless they are retrenched in accordance with
labour legislation (Section 189 of the Labour Relations Act)Stakeholders Continuously engaged by the business rescue practitioner in the
process. Creditors get a vote on the plan at the value of their claim (unless their claim is subordinated by agreement). Shareholders vote on the plan if their rights are affected by the plan
Voting on Plan Plan will be approved if more than 75% of the creditors, voting at value, vote in favour of the plan and 50% of the independent creditors vote in favour of the plan
Binding Offer A creditor or shareholder may buy the voting interest of another creditor or shareholder who voted against the adoption of a plan if such vote results in the plan not being adopted
Cram Down An adopted business rescue plan is binding on all creditors whether or not they voted in favour of the plan, against the plan, were present at the meeting or proved a claim
Discharge of Debt
Unless a business rescue plan provides otherwise, creditors and/or shareholders whose claims are compromised by the business rescue plan are prohibited from enforcing the balance of their claims after the adoption of the plan (even against sureties) – does not apply to guarantees!
17
Business Rescue Practitioners> Qualifications for business rescue practitioners –
> a member in good standing of a legal, accounting or business management profession accredited by CIPC; and
> be licensed as such by CIPC.
> Regulation 126 suggests that a person who is a member of an accredited profession need not be licensed by CIPC
> CIPC advised that they are not accrediting certain professions for now
> Further, prospective business rescue practitioner –
> must not be subject to an order of probation;
> not be disqualified from acting as a director of a company in terms of section 69(8) of the Companies Act;
18
Business Rescue Practitioners
> must not have any relationship with the company that would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by such relationship; and
> must not be related to a person who has a relationship as contemplated above.
19
Remuneration of Practitioner> Charge for remuneration and expenses
> Tariff –
> R1 250 per hour (max of R15 625 per day) (incl VAT) - small company.
> R1 500 per hour (max of R18 750 per day) (incl VAT) - medium company; or
> R2 000 per hour (max of R25 000 per day) (incl VAT) - large company or state owned company.
> Contingency agreement
> additional remuneration based on agreed incentives
20
Remuneration of Practitioner
> approved by holders of a majority of the creditors’ voting interests and holders of a majority of the voting rights attached to any shares of the company
> Practitioner - reimbursed for actual costs of disbursements incurred by the practitioner, or expenses incurred by practitioner, to extent reasonably necessary to carry out the practitioner’s functions and to facilitate the conduct of the business rescue
POST-COMMENCEMENT FINANCE
22
Post-Commencement Finance & Security
> Concept called Post-Commencement Finance (“PCF”) > Distinguishes between two types of PCF –
> that which becomes due and owing to employees during business rescue proceedings for rendering services to the company
> funding which is provided to a company, during the company’s business rescue, by means unrelated to employment
> PCF may be provided in exchange for security over unencumbered assets of the company
> PCF - financier will generally provide PCF if it will be guaranteed security from a company in business rescue so that it’s claim against the company will rank in priority to the claims of previously unsecured creditors, but behind the claims of the practitioner and the employees for services rendered during business rescue
23
Ranking of Claims> Section 135 - sets out the order in which the claims of
creditors rank during business rescue> Order of preference will remain if the company is placed in
liquidation (section 135(4))> PCF - preferred in the order of preference created by the Act> Section 135(3)(b) -
> does not stipulate whether or not the claims of secured PCF will rank ahead of the claims of unsecured PCF
> merely states that PCF will have preference “in the order in which they were incurred over all unsecured claims” of the company.
> Point of contention - whether or not where creditors, who are secured (as understood in insolvency law) prior to the commencement of business rescue, rank above PCF providers in the business rescue ranking process
Ranking of Claims> Merchant West Working Capital Solutions (Pty) Ltd v
Advanced Technologies & Engineering Company (Pty) Ltd & Gainsford 2013
> Order of preference during business rescue proceedings – > fees and expenses (including legal and other professional fees)
of the business rescue practitioner incurred during business rescue proceedings
> fees of employees which become due and payable after the commencement of business rescue
> secured lenders or creditors for any loan or supply made after the commencement of business rescue (ie secured PCF)
> unsecured lenders or creditors for any loan or supply made after the commencement of business rescue (ie unsecured PCF)
24
Ranking of Claims
> secured lenders or creditors for any loan or supply made before the commencement of business rescue
> claims of employees (for instance for remuneration) which became due and owing prior to the commencement of business rescue
> unsecured lenders or creditors for any loan or supply made before the commencement of business rescue (ie concurrent creditors)
> Controversial - it was an obiter decision (remark made in passing and not an issue before the court)
25
EARLY DISTRESS SIGNALS FOR COMPANIES IN FINANCIAL
DISTRESS
27
Looming Financial Distress
> Dishonesty – fraud at management or employee level; failure to highlight problem areas
> Ineffectual leadership by the board – inability to make decisions; irregular or no contact with executive staff; absence from board meetings; worsening of relationships between directors and management
> Neglect and incompetence of management – negative cash flow/insolvent balance sheet; failure to pay creditors as and when they fall due; lack of financial controls; high staff turnover & poor staff morale; disagreement among management on material issues; delays in settling accounts; failure to independently verify and safeguard the integrity of financial reporting
28
Looming Financial Distress
> Inability to adapt to changing market conditions - growth rate less than inflation rate; inadequate review and analysis of mistakes; significant loss of market share; exchange rate and commodity price fluctuations; risk of adverse market exposure
> Loss of key personnel – losing critical staff can be the downfall of the business
> Deterioration in relationship with financiers - monitor levels of credit and overdraft facilities
> Regulatory and legal compliance - environmental or corporate governance; contingent liabilities; uncertainty created by law suits; change in government policy; opinions of auditors; unforeseen security and national catastrophes
29
Signs of Impending Disaster
> Downward trend in entity’s share price (listed company)> Dishonored cheques> Artificial valuation of assets> An increase in fraud> Cash on delivery terms with suppliers> Receipt of letters of demand and summons> Continued injection by shareholders of working capital
30
Signs of Impending Disaster
> Increased need for long term financing for short terms needs
> Management insisting on the reduced working week> Forcing employees to take unpaid leave> Industrial action> Inability to make important strategic decisions at critical
times
HOW DOES AN INVESTOR ACQUIRE A COMPANY OR ITS ASSETS OUT OF
BUSINESS RESCUE
32
Commencement of Trading
Profitable Business Grows
Flat Trading Years
Approval of Business Rescue
Plan
Trade out on a
Solvent Basis
Identify Opportunity for
Post-Commencement FinanceFINANCIAL
DISTRESS
YEARS OF TRADING
Financial Distress
Distressed Debt Cycle
Acquisition Transaction
Acquire Company
Out of Business
Rescue
Exit With Good Value
33
Method for Acquiring Assets of Good Value
> Investor - needs to develop a strategy and identify contact points (Werksmans) in order to become aware of a distressed debt situation
> The recognition by the investor of underlying value (at an early stage) will be critical in making decisions as to which companies should be propped up with early loan finance and/or suggestions in respect of turnaround strategies
> Once an investor is already working with the directors and creditors and looking at a possible restructuring, such investor will be placed in a very advantageous position to engage with the company, if necessary, all the way into a formal business rescue proceeding and ultimately acquire the company out of business rescue
34
Flow Chart for the Acquisition of a Distressed Company
Identify distressed company and/or good
value assetsNominate Business Rescue Practitioner
Pre-Assessment of the Company – Test for Value
Offer R1 for shares and something for creditors, which would give them a better dividend than in
liquidation (i.e. an acquisition at a
significant discount)
Negotiate transaction with creditors,
employees, shareholders an the Business Rescue
Practitioner
Directors file resolution for business rescue
Consummate acquisition transaction, subject to
conditions precedent and subject to approval of
plan
Vote on plan (75% & 50%) - approve Implement plan
Company exits from business rescue with new
owners (investors)
CURRENT MACRO AND MICRO ECONOMIC LANDSCAPE
Wanya Du Preez, Senior Manager, Deloitte
Senior Manager, Restructuring Services
South AfricaTel: +27 (11) 209 6126
Mobile: +27 (0) 83 272 0892Office: Deloitte, Johannesburg
Email: [email protected]
Wanya du Preez
Introduction
36 SA Investment opportunities using Business Rescue
Career summary:• Wanya completed her articles with Deloitte in Durban where she
qualified as a Chartered Accountant in 2006. She completed a JIT assignment in the USA as well as a secondment to Deloitte Athens on an international assignment.
• Thereafter she worked on an 18 month assignment in Deloitte UK and returned to Johannesburg in 2009.
• Following a period in Deloitte Consulting in 2012, she joined Corporate Finance in February 2014.
• Wanya recently completed her MBA with a specialisation in Business Rescue in South Africa. Her dissertation was entitled: “The status of post-commencement finance for Business Rescue in South Africa.”
• Her current role involves the following:– Independent business reviews, including the preparation and
review of short term cash flow forecasts– Reviews of distressed investments on behalf of debt providers– Turnaround strategy and implementation– Preparation and review of short term cash flow forecasts– Business Rescue focus
• Team of 9 professionals, across all industries:o 2 Directors -1 Associate Directoro 2 Senior Managers - 4 Staff
Key service areas
Detailed analysis and review of
company business plans
Providing options advice
Assisting with turnaround plans
Running a distressed M&A
process
Providing debt advisory and restructuring
services
Reviewing and assisting with
the preparation of short term
cash flow forecasts
BRIEF MACRO ECONOMIC OVERVIEW
Global Prospects are Less Gloomy
> The world economy will grow faster in 2014, spurred by recovery in the United States and most European countries
> In Europe, the debt crisis has been replaced by the risk of deflation, while events in the Ukraine are more likely to cost Russia dear than result in war or impact trade
> Slower growth in China was anticipated but fresh investment on railway construction and social housing could bode well for South Africa.
Not in glowing health, but certainly recovering
Source: Monitor Deloitte analysis; The Economist Intelligence Unit
1.41.1
-0.4
1.51.51.52.63.0
1.9
4.54.03.6
6.97.37.7
2.8
20152014
2.9
2013
2.0 China
WorldSub-Saharan Africa
USJapanEuro area
Real GDP (% change y-o-y)
> Gross Domestic Product (GDP) of the region is expected to grow by 4 - 6% in next few years, based on the rising household spending and expansion in domestic markets.
> Growth is forecasted to vary across subregions and individual states due to the political stability variations across these regions.
Sub-Saharan Africa is Considered an Attractive Investment Region Fuelled by its Economic Growth
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GDP Private ConsumptionGross Fixed Investment Consumer Prices
Real GDP Growth (%, 2010–2018)
Sub-Saharan Africa key metrics % change(%, 2010–2018)
Source: Economic Intelligence Unit
%%
Source: Economic Intelligence Unit
Rising H
ousehold
spen
ding and
Growth in FDI
Growing opportunity
for investments in
Africa’s natural
resources
Growth of dem
and
in the d
omestic
markets
due to ris
e
in the l
ower middle-
class
population.
Gradual
normalization of
activities in
conflict countries
South Africa and Nigeria Account for More than 64% of the GDP of the Region
Nominal GDP (US$B, 2013)
Source: Economic Intelligence Unit
Angola; 14%
Cameroon; 3%Ethiopia; 4%
Ghana; 5%
Kenya; 5%Mozambique;
2%Nigeria; 29%
South Africa; 35%
Tanzania; 3%Nominal GDP % of Total Sub-Saharan Africa (%,
2013)
Source: Economic Intelligence Unit
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US$
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Tanzania• Stringent government
regulations, corruption, and less transparent
policy making are few of the challenges of the
country
Kenya• The economy is well
supported by local financial markets and a relatively efficient labor
market
Ethiopia• It requires significant
improvement in the areas of infrastructure, higher education, and
technological readiness
Cameroon• Political stability, robust
and investment-supportive government
reforms and infrastructure
development is required drive the growth
South Africa• Politically stable
business environment• Biggest opportunity,
size, growth prospect, and growing domestic
demand• Fastest growing
financial market in the region
• County’s strong ties to advanced economies supports the foreign investment scenario
Mozambique• Low macroeconomic
stability, and need of significant change in
reforms and regulations are needed in the
country
Ghana• Infrastructure
development is required to drive growth as compared to other countries in region
• Downward trend of macroeconomic
indicators
Angola• Economy with the fastest growing GDP in past decade within the
region• Strong macroeconomic
fundamentals
Nigeria• Delivery of reforms is
required• Growth prospects in medium-term depends on the political stability
SA Presents Most Attractive Investment Destination to Invest in Distressed Companies
2009 2010 2011 2012 2013 2014 2015 2016 2017 20180
100
200
300
400
500
-2-10123456
Nominal GDP Real GDP
Real GDP growth and nominal GDP (US$, 2009–2018)
Source: Economic Intelligence Unit
Overview• Real GDP growth is expected to decline to 1.7% in 2014,
driven by modest global recovery.• Growth will accelerate in 2015-17, spurred by
consumption and investment, before tailing off in 2018 as their might be global and local interest rates rise. Politically stable environment is driving the country to a consolidated
economic growth.• The current-account deficit (CAD)is forecasted to be
narrow in 2014-15, as export earnings growth quickens although the CAD will widen from 2015 onwards, reaching
6.5% of GDP in 2018, due to rise in imports.
Government policies and recommended outlook
• A new Infrastructure Development Bill proposes several initiatives to speed up major infrastructure projects.
• The government will need to make tough choices in the face of persistent pressure to spend more on
infrastructure, social welfare, and wages.• South Africa’s ruling African National Congress emerged
victorious from elections in 2014, but uncertainty and non-clarity about its economic direction may hamper the
sentiments of investor eyeing the country.
Challenges• The main challenge during the next few years for the
policy makers in the country will be to expedite faster growth by tackling long-standing structural constraints, such as skills shortages, inadequate infrastructure, and
high unemployment.• Sound policies, sluggish consumer demand, and spare
industrial capacity will help to keep tab on inflation, although their might be upward pressure from expected rise in electricity tariffs and wages along with currency
depreciation.• High unemployment, income inequality, and poor service
delivery are likely to pose challenges for the country’s medium- term growth.
Nom
inal
GD
P $b
n
Real G
DP (%
)
Northern Cape
Western Cape
Eastern Cape
Free State
Kwa-zulu Natal
North WestGauteng
Mpumalanga
Northern Province
Painting the South African Economic LandscapeWhy South Africa?
1. Key investment location, both for market opportunities in SA and the rest of Africa, especially through the special International Headquarter Company (IHQ) regime.
2. South Africa was admitted to the BRIC group of countries of Brazil, Russia, India and China (now called BRICS) in 2011.
3. A wealth of natural resources (including coal, platinum, coal, gold, iron ore, manganese nickel, uranium and chromium).
4. World-class infrastructure, exciting innovation, research and development capabilities and an established manufacturing base.
5. Sophisticated financial, legal and telecommunications sectors.
6. Has political and macro-economic stability, an abundant supply of semiskilled and unskilled labour.
SA Investment opportunities using Business Rescue
42 © 2014 Deloitte Touche Tohmatsu Limited
SA Investment opportunities using Business Rescue43
South African Economic OverviewGlobal Competitiveness
44 SA Investment opportunities using Business Rescue
South African Economic Overview Global Competitiveness
South Africa’s high ranking areas• Strength of auditing and reporting standards (1st)
• Efficacy of corporate boards (1st)• Protection of minority shareholders’ interests (1st)
• Regulation of securities exchanges (1st)• Legal rights index, 0–10 (best) (1st)
• Availability of financial services (2nd)• High accountability of its private institutions
(2nd) • Financial market development (3rd)
• Soundness of banks (3rd)• Quality of air transport infrastructure (11th)• Affordability of financial services (13th)
• Extent of staff training (17th)• Intellectual property protection (18th)
• Property rights (20th)• Efficient market for goods and services (28th)
• The quality of its institutions (41st)
Gross fixed investment as a % of GDP (%, 2013)
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2009-20132014-2018
Business environment score (2009-13, 2014-18)
Back Home, the News is Not Entirely GoodExternal factors will have a mixed impact on the South Africa economy in 2014, while domestic drivers will continue to create downward pressure
Source: Monitor Deloitte analysis; IMF World Economic Outlook, April 2014
Exports to China Fed tapering
Industrial action High unemployment Election year causes
uncertainty
Exports to US and Europe
A weaker rand supporting
international competitiveness?
Monetary Variables are Not HelpingThe weak rand, slightly higher inflation and marginally higher interest rates may have been factored in by economists, but possibly not by small businesses
Source: Monitor Deloitte analysis; Business Monitor International
Monetaryvariablesare in a vicious
cycle
Weak rand
Higher inflation
Interest rate increases
0
2
4
6
8
10
12
2008 2010 2012 2014 2016 2018
Lending rates (average, %)
Producer inflation (y-o-y % change, eop)
Consumer inflation (y-o-y % change, average)
%
Outlook for interest rates and inflation
Interest rates indirectly driving inflation
The Impact of a Weaker RandA weaker rand is unlikely to boost competitiveness with respect to exports due to the pattern of trade and is more likely to drive imported inflation
Source: Monitor Deloitte analysis; International Trade Centre, www.intracen.org, accessed 5th May 2014; The Economist Intelligence Unit
-7
-27-15
25 20
712
-6
China
United
States
Western
Europe
Other
SADC
2013 imports (% of total)2013 exports (% of total)
Trade balance with key partners
10.30
13.84
0
2
4
6
8
10
12
14
2008 2010 2012 2014 2016 2018
Prognosis for the rand
R
R :US$
:€
The Credit Market is Over-ExtendedProportionately fewer credit-active consumers are in good standing than during the financial crisis, suggesting little flexibility to cope with higher rates and prices
Source: Monitor Deloitte Analysis; National Credit Regulator, Credit Bureau Monitor – various years
10.710.610.49.99.910.310.7
525354545558
62
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1011
0
10
20
30
40
50
60
70
2013201220112010200920082007
# in good standing% in good standing
millions %
Credit standing of consumers at year-end
SURVEY RESULTSRESTRUCTURING OUTLOOK
2014
The South African Economy and Restructuring Industry72% expect a stagnant economy driven by labour and political unrest, and decreased consumer spending
18.8%
71.9%
9.4%
Outlook for the South African economy over the next 12 months
Recession Stagnant Growth
Recession: Negative growth in the economy for two consecutive quartereStagnant: No growth in economy for two consecutive quartersGrowth: Increased business activity for two consecutive quarters
8.5%
1.9%
1.9%
3.8%
3.8%
5.7%
5.7%
14.2%
15.1%
18.9%
20.8%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Other
The Euro crisis
Commodity prices
Low corporate growth
Growing current account deficit
Reluctance of corporates to reinvest
Availability of corporate funding
Exchange rate –currency depreciation
Consumer spending and credit
Political uncertainty
Labour unrest
Reasons for outlook for the South African economy over the next 12 months
“I believe we are entering a 10 year period of real difficulty in South Africa, a lot of which will depend
on the elections.”– Commercial Bank
“We are still to face challenges in the labour sector as there is always unrest in an election year.”
– Commercial Bank
“Interest rate hikes by the Reserve Bank is indicative of tough trading conditions.”
–Commercial Bank
SA Investment opportunities using Business Rescue
50
The South African Economy & Restructuring IndustrySectors at most risk of distress include manufacturing, retail, construction and energy and resources
“Manufacturing is struggling due to the price crunch and low volumes.
Construction has been affected by labour strikes, delays in government payment
and penalty clauses.” – Commercial Banker
“We are going to struggle, retailers…are taking strain…due to exchange rate
depreciation.” – Business Rescue Practitioner
"In the mining industry, commodity prices are very low, and mining costs
are escalating.”– Development Finance Institution
SA Investment opportunities using Business Rescue
51 © 2014 Deloitte Touche Tohmatsu Limited
M & A MARKET OVERVIEW
Key observations> The deal volume has been gradually increasing over the years after a dip in 2011 primarily due to
the constant increase in the investments returns, stabilizing economy, and boost in 'Middle Class' population.
> From a long-term perspective, the total deal value has increased due to the significant rise in investment from the Asia/Pacific countries as they look to expand into regions with untapped natural resources.
> Inbound deal activity is driven by mineral wealth, strong demographics, low interest rates, low regulatory barriers, and opportunities to acquire undervalued companies.
> The positive outlook provided by International Monetary Fund (IMF) indicates that the African region is forecasted to achieve a GDP growth rate of 6% in 2014, which is likely to boost the deal activity.
M&A Activity has been Increasing Although Average Deal Size Declined Marginally in 2013
2009 2010 2011 2012 20130
200
400
600
800
1,000
1,200
Disclosed Undisclosed
Number of deals — Total(In numbers, 2009–2013)
Deal value — Total and average deal size (In US$M, 2009–2013)
2009 2010 2011 2012 201305,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
0
10
20
30
40
50
60
Deal ValueSource: Capital IQ Source: Capital IQ
South Africa, with Presence of Cash-Rich Corporates, Leads the M&A Deal Activity in the Region
> Key observations> The deal activity in South Africa is expected to rise further
due to the presence of numerous cash-rich corporates in the region and investors looking to invest in a market that is well regulated and provides opportunities to expand operations. > However, due to some government regulations, such
as the new hydrocarbons law granting the state oil company PetroSA a 20% free carry, the deal activity may deter in the future.
> Nigeria is enjoying an increase in the inbound deal activity as the investors are looking to take advantage of the low interest rates in this region.
> The abundance of natural resources in Kenya is driving the M&A deal activity with new oil discoveries happening in the region.
> In Mozambique, the deal value in 2013 has boosted primarily due to three multibillion dollar deals in the oil & gas sector
Angola 6.4%
Cameroon 1.1%
Ethiopia 0.7%
Ghana 1.7%
Kenya 3.2%
Mozambique 3.5%
Nigeria 15.1%
South Africa 66.6%
Tanzania 1.7%
Deal value — By key countries (In %, 2009–2013)
Source: Capital IQ
2009 2010 2011 2012 201305,000
10,00015,00020,00025,00030,000
Angola Cameroon Ethiopia Ghana Kenya Mozambique Nigeria South Africa
Deal value — By key countries (In US$M, 2009–2013)
Number of deals — By key countries (in numbers, 2009–2013)
Source: Capital IQ
Source: Capital IQ
2009 2010 2011 2012 20130
100200300400500600700800
Angola Cameroon Ethiopia Ghana Kenya Mozambique Nigeria South Africa
Investments from Asia-Pacific Countries have Increased as they Look to Achieve Energy Security
> Key observations> Asia Pacific leads the cross-border investments M&A activity
(by deal value) mainly due to the interest from the Chinese investors, as they look to target the region’s untapped natural resources.> Further Chinese companies are investing to set
up new plants and facilities to cater to growing domestic demand
> Indian investments have also surged in the recent years to reap the benefits of untapped natural reserves.
> From Europe, although the total deal value has decreased in the recent times, the volume of the deals has remained stable as these acquisitions in Africa provide a way to generate growth during the sluggish periods
> Inbound deal activity from North America, particularly the U.S., has decreased due to lack of proper infrastructure. However, U.S.’ is focusing on improving ties with the African countries is likely to drive the growth in future investments.
Deal value — By key countries (In %, 2009–2013)
Source: Capital IQ
Deal value — By investor geography(In US$M, 2009–2013)
Number of deals — By investor geography(in numbers, 2009–2013)
Source: Capital IQ
Source: Capital IQ
North America; 5.4%
South America; 0.8%
Africa; 49.8%
Asia-Pacific; 19.7%
Europe; 16.7%
Middle East; 7.5%
2009 2010 2011 2012 20130200400600800
1,0001,200
Africa Asia / Pacific Europe Middle EastNorth America South America
2009 2010 2011 2012 2013010,00020,00030,00040,00050,000
Africa Asia / Pacific EuropeMiddle East North America South America
Key observations> Investment in E&R sector continues to improve significantly, as there are new oil discoveries in
resource-rich countries, such as Kenya, Sierra Leone, and Domestic Republic of Congo.> Financial services industry proved to be an area of growth because of the lack of such services for
the rising middle-class segment. The rise in investments is set to continue in the future, as well.> Private equity investors across the world prefer longer-term investments in sectors, such as
consumer, financial services and pharmaceuticals and medical and biotech over capital intensive sectors, such as energy and mining, as these areas offer high returns and far less capital and political risk than the extractive industries.
> The consumer business segment has grown significantly over the years due to the rise in Africa’s middle-class segment and the increase in household spending in the region.
With New Oil Discoveries in the Region, the Deal Activity in the E&R Sector has Improved Significantly
2009 2010 2011 2012 20130
200
400
600
800
1,000
1,200
CB E&R FSI LSHC Mfg TMTSource: Capital IQ
Number of deals — By sector(In No’s, 2009–2013)
Deal value — By sector(In US$M, 2009–2013)
2009 2010 2011 2012 201305,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
CB E&R FSI LSHC Mfg TMTSource: Capital IQ
M & A Challenges
Generally, there is limited financial disclosure, both
for listed and unlisted companies operating in the region, which means that access to valid, accurate,
complete, and reliable financial information can fall
short of investor expectations. This lack of information makes the due diligence process difficult.
In Sub-Saharan Africa, it is important to maintain awareness of
noteworthy events such as elections and understand their
potential effect on the transaction timetable. Investors are required to
have an understanding of the political association of the major
stakeholders involved in the transaction, both business partners
and regulators that may need to approve the transaction.
Many countries have adopted, or are in the process of adopting
citizen empowerment laws, which typically require a minimum percentage of local
shareholder ownership. The
challenge though is that local shareholders
are often unable to raise required funds especially in capital-intensive projects.
While this is important in most transactions, it is especially critical
when the local partner is relied upon to drive local relationships and
is likely to have a longer-term involvement in the business.
Deficiency of such local partners may act as a obstacle for the
investors.
It is equally important for investors to work with advisors they know
and have trust, have local knowledge and an on-the-ground
presence, which are vital for implementing transactions.
Financial Disclosure
and Due Diligence
Understanding Political
Environment and Stability
Local Ownership
Requirements
Right Partner
IDENTIFYING THE OPPORTUNITIES
Moments that MatterAre companies displaying the following warning signs…
Declining cash flows as a result of deteriorating trading performance and uncertain
market conditions
Underperforming division or subsidiary causing cash pressure for the group
Incoherence amongst and major changes in management team
and / or board and struggling to achieve a succession plan
Current or expected breach of banking facilities and / or covenants and facing a tightening credit market
Lack of timely and insightful financial reporting and Limited
visibility of cash requirements in the business
Deteriorating working capital trends, particularly stretching of
creditor terms
Significant underperformance against budget and performing below stakeholder expectations
Overleveraged balance sheet and major upcoming debt repayments
Company in distress
Deloitte Restructuring Survey59 © 2014 Deloitte Touche Tohmatsu Limited
Deloitte – Financial Support> Investor will work closely with the accountants who understand the
financial aspects of a restructuring and of the business rescue process and who can assist with –
> identifying that the company is in financial distress
> introducing Chinese investors to the company and its management
> appointing a competent and professional business rescue practitioner
> identifying the need for, and amount of, PCF
> reviewing and commenting on the business rescue plan that is voted on by the creditors and shareholders (in some instances)
> ensuring the company comes out of business rescue with the investor having acquired the company at heavily discounted prices – a cheap but valuable acquisition
SA Investment opportunities using Business Rescue
60 © 2014 Deloitte Touche Tohmatsu Limited
Deloitte – Financial Support
SA Investment opportunities using Business Rescue
61 © 2014 Deloitte Touche Tohmatsu Limited
Detailed analysis and review of
company business plans
Reviewing and assisting with the
preparation of short term cash flow
forecasts
Providing options advice
Assisting with turnaround plans
Running a distressed M&A
process & negotiation with
creditors
Providing debt advisory services
and sourcing alternative funding
LANDSCAPE FOR THE ACQUISITION OF DISTRESSED ASSETS IN THE
MINING SECTOR
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Introduction> Studies have shown the level of increased direct foreign
investment into the South African Mining Industry of an extra USD $2 billion in 2013 as opposed to 2012 and South Africa is ranked 8th in the world in 2013 for foreign direct investment into the mining industry.
> Considering the current global economic position and the history of strike action over the last couple years in South Africa opportunities have arisen to acquire assets in distress through the business rescue process.
> A good example of this is the acquisition by Wits Gold of Southgold Exploration Proprietary Limited which will be dealt with in more detail by Peter van der Steen.
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No Restrictions on Foreign Ownership in the Mining Industry> There are no legislative restrictions against foreign
companies holding direct or indirect interests in mining companies holding prospecting rights or mining rights in South Africa.
> The Mineral and Petroleum Resources Development Act 28 of 2002 (“MPRDA”) contains no restriction in respect of foreign ownership and up to 74% of the equity in a mining project could be held by a foreign entity.
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Section 11 of MPRDA> If the acquisition by a foreign company constitutes a disposal
of a controlling interest whether directly or indirectly of a company holding a prospecting right or mining right the consent of the Minister will be required in terms of Section 11 of the MPRDA.
> Minister does not have the discretion to refuse if the criteria are complied with.
> Proposed amendments to the MPRDA will require changes of any shareholding in a company holding a prospecting right or mining right to require the prior written consent of the Minister unless it is a listed entity in which case the restriction is only in respect of a change of control.
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Liquidation of a Mining Company> It is important for the potential acquirer of an asset in
distress to acquire the asset prior to liquidation either in the business rescue process or prior thereto because of the implications of Section 56 of the MPRDA.
> A mining right lapses upon the liquidation of a holder of a mining right which could be regarded as being retrospective back to the date of provisional liquidation and thus the liquidator will not have an asset to dispose of if the company is placed into liquidation.
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BEE Requirements> It must be noted that there are onerous BEE requirements
set out in the MPRDA and the Mining Charter 2010 requiring participation of at least 26% of the equity in the hands of historically disadvantaged South Africans.
> There is no exception for foreign owned or controlled mining companies. Often the acquirer could take over the current HDSA ownership profile.
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Beneficiation> Any acquirer of mining assets in South Africa will have to
take into account the amendments to the MPRDA dealing with beneficiation.
> The MPRDA Amendment Bill contemplates the Minister declaring strategic minerals and in respect of such minerals a percentage of the production must be offered to local beneficiators at an agreed price or mine gate price and only once that obligation has been complied with can a producer then export minerals mined.
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Exchange Control> Any investor into South Africa in the mining industry will
have to comply with the general exchange control provisions depending on how the project is funded whether through capital or loan account and thin capitalisation rules would apply.
> An investor would have its share certificates endorsed non-resident to enable it to be able to repatriate dividends out of South Africa.
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Other Regulatory Requirements> Any investor into mining industry assets would also have to
consider the Competition Act and any approvals that may be necessary from the Competition Commission.
> Any investor would have to comply with the other aspects of the Mining Charter other than HDSA ownership such as procurement, housing and living conditions, socio-economic development and employment targets.
> In order to procure the Section 11 consent the applicant would need to demonstrate technical and financial ability as well as financial ability to honour the work programme and the social and labour plan. Furthermore an acquirer would have to put up sufficient funds to procure the guarantee for ultimate closure.
INTERPLAY BETWEEN LABOUR LAW AND BUSINESS RESCUE
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Effect of Business Rescue on Employees
>Employees continue to be employed on same terms and conditions except – > changes in the ordinary course of attrition> where employees and company jointly agree to
change terms
>Any retrenchment must be in accordance with applicable employment legislation -> section 189 in the case of small scale
retrenchments> Section 189A in the case of large scale
retrenchments
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Effect of Business Rescue on Employees> Retrenchments can only be effected based on the –
> economic> technological> structural> similar requirements of the employer
> During a retrenchment exercise the employer must –> consult with affected employees/trade unions> disclose relevant and prescribed information> endeavour to reach consensus> select employees based on objective and fair criteria> pay severance packages to retrenched employees
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Effect of Business Rescue on Employees
> Large Scale Retrenchments – additional provisions -
> facilitation through the CCMA
> right to strike
> right to approach the Labour Court without recourse to the CCMA
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Effect of Business Rescue on Employees> Should the business rescue practitioner elect to sell the
“business” section 197 of the LRA will apply.
> In terms of section 197 if the whole or part of any business, trade, undertaking or service is transferred then, unless otherwise agreed –
> the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment
> all the rights and obligations between the old employer and an employee continue with the new employer
> anything done before the transfer by the old employer (dismissals, unfair labour practices or acts of unfair discrimination) is considered to have been done by the new employer
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Effect of Business Rescue on Employees
> Employees are entitled to - > notice of each court proceeding, decision, meeting or other
relevant event
> participate in the business rescue and related matters
> form a committee
> be consulted by practitioner (first meeting of employees 10 business days after the practitioner is appointed)
> be present and make submission at the meeting of creditors when the plan is voted on
> vote with creditors to approve the plan, if a creditor
> if the plan is rejected, propose the development of an alternate plan or present an offer to acquire the interests of one or more affected persons
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Effect of Business Rescue on Employees
> Disclosure of information concerning insolvency -> in terms of the LRA an employer facing financial difficulties
that may reasonably result in winding up or sequestration must advise trade unions and employees;
> LRA does not impose adverse consequences on employers failing to disclose their financial difficulties;
> trade unions are however entitled to have access to the company’s financial statements.
> Despite the rights afforded to trade unions, trade unions are not as yet active in business rescue proceedings.
PRACTICALITIES SURROUNDING THE ACQUISITION OF A DISTRESSED
Peter van den Steen, Practitioner
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Opportunities
> Different types of distressed assets
> Pre-business rescue, during business rescue and after business rescue – focus today is on during business rescue
> Many successful business rescues have resulted from some form of investment
> Business rescue is a creditor driven process
> Distressed investment environment in South Africa is young and undeveloped
> Business rescue legal framework offers protection and “space to put together a deal”
> Practitioner (neutral and independent) takes the deal to stakeholders – avoids, or at least mitigates, the dangers of the over or under selling to stakeholders by management or board.
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Challenges> Its not ordinary M&A - very technical from a legal perspective> Can be litigious - militant creditors> Regulatory environment in South Africa is a deterrent> Within business rescue it is emphasised --> clock speed (the
potential discount for an 'intact asset' makes up for the pain)> All stakeholders’ interests need to be balanced to avoid
failure due to litigation and/or unnecessary delays and/or 'no' votes
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Southgold Exploration Pty Ltd
> PCF providers - > Standard Chartered> Credit Suisse> Combined Exposure R2.6b - secured> Why business rescue?> Care and Maintenance costs - approximately R200m for
South Africa only> Other creditors – > Noteholders - R1.0 billion> Trade creditors - R0.3 billion> Inter-company / shareholders loans - R7.0 billion
> Total - R11b
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Southgold Exploration Pty Ltd
> Business rescue practitioner appointed –
> BRP legal team – business rescue legal, M&A legal
> JP Morgan - Transaction advisory
> KPMG - financial modelling, creditor verification, advisory
> Terra consulting - valuations
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Southgold Exploration Pty Ltd> Regulators and government –
> DMR (6 to 7 months)
> Competition com (2 weeks for the Witsgold deal, 3.5 weeks for Sibanye/Witsgold deal)
> DWAF
> NNR
> SARS (more than a year to settle)
> SARB
> Local municipal and community structures
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Southgold Exploration Pty Ltd> Witsgold offer –
> R75m on deal closure
> Fixed repayment schedule to lenders for R600m over current LOM
> R1.2b flex payment schedule to lenders based on FCF
> Further R680m to lenders based on 10% FCF participation over any additional LOM (if any)
> Option to settle without penalty
> 36 month interest moratorium
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Southgold Exploration Pty Ltd> Witsgold bought an asset which swallowed an initial investment of
R11 billion before it went into rescue for approx R1.9 billion (PV) (up from R1 billion)
> Discount - 83%
> Duration - 21 months
> Level of complexity - extremely complex
> Various jurisdictions - Switzerland, English, Canada, United States of America
> Canadian CCMA and Receivership
> USA Chapter 11 proceedings
> Time zones - conference calls with callers on various time zones - (worst was Vancouver, NYC, Toronto, London, JHB, Zurich, Singapore, Beijing) - it’s a killer
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On Digital Media t/a Top Tv> PCF providers –
> shareholders stopped funding - had nothing
> approached creditors
> secured creditor - DBSA consent (DBSA R200mil exposure)
> monthly subscription fees
> business 'as usual' - trading entity
> Other creditors –
> IDC -approx R900 million total exposure
> NEF - R100 million
> trade creditors - R400 million
> Total - approx R1.4 billion
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On Digital Media t/a Top Tv> Business rescue practitioner appointed advisors – > business rescue legal team – business rescue legal, M&A legal
> KPMG – valuation
> ODM CEO - domain expertise
> ODM CFO – finance and modelling
> Regulators and government –
> ICASA
> DOC
> Competition commission (deal did not require approval, investigations into anti-comp behaviour by Multichoice)
> SARB (claims bought by ST)
> Electronic Communications Act (ECA) - limitation on foreign ownership of a broadcast license
> New BEE consortium (still confidential)
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On Digital Media t/a Top Tv
> StarTimes offer –
> R45 million to trade creditors (15c/R)
> R30 million to DBSA
> existing shareholders kept in but severely diluted
> new BEE
> split into 2 companies - broadcast company, services company
> further investment of R1 billion in business plan
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On Digital Media t/a Top Tv> StarTimes have invested in an asset which swallowed an initial investment of
R1.4bil before it went into rescue for approx R106 million
> Discount - 92%
> Duration - 20 months and counting
> Level of complexity – extremely complex (but for other reasons) > politics and agendas
> rogue offer (MSG Africa backed by Multichoice)
> litigation
> regulatory - DOC, ICASA, SARB
> cross-border and cross-cultural issues
> virtually every major supply contract has been re-negotiated
> almost all technical platforms have been migrated (uplink stations, fibre links, play-out facilities, redundancy systems)
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Summary> Business rescue can keep an asset whole as opposed to non-business
rescue solutions
> Big becomes, complex and becomes expensive - underlying value is essential
> Time consuming and resource hungry
> Deep discounts are made possible
> Ultimately builds goodwill with stakeholders
> Young law - experienced advisors and business rescue practitioners are essential and also scarce
> Every business rescue presents its idiosyncrasies - there is no 'cookie cutter' approach
> Regulatory environment and other laws do not speak to BR need to know how to navigate the 'waters‘
> PCF remains a challenge and will do so until distressed investment (debt and equity) market develops
THE ROLE OF WERKSMANS AS LEGAL ADVISOR
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Werksmans – Legal Support> Investor will work closely with the lawyers who understand
the business rescue process and who can assist with – > identifying that the company is in financial distress> introducing investors to the company and its management> appointing a competent and professional business rescue
practitioner > negotiating the terms for the acquisition of the company in
distress with the business rescue practitioner and the company’s stakeholders (creditors, employees and shareholders)
> identifying the need for, and amount of, PCF> drafting and finalising the relevant agreements (ie PCF
agreement and sale agreement)
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Werksmans – Legal Support
> reviewing and commenting on the business rescue plan that is voted on by the creditors and shareholders (in some instances)
> attending meetings of stakeholders and the meeting where a vote is taken on the business rescue plan
> ensuring that the business rescue plan is approved and thereafter implemented in accordance with its terms
> ensuring the company comes out of business rescue with the investor having acquired the company at heavily discounted prices – a cheap but valuable acquisition
WERKSMANS AND LEX AFRICA
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Werksmans and the Lex Africa Network
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Werksmans and the Lex Africa Network
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Werksmans and the Lex Africa Network
> Africa’s first legal network established 1993 – oldest legal African network
> 19 countries – Angola, Botswana, Egypt, Ghana, Kenya, Lesotho, Malawi, Mozambique, Mauritius, Namibia, Nigeria, Senegal, South Africa, Swaziland, Tanzania, Tunisia, Uganda, Zimbabwe and Zambia
> Administered by Werksmans Johannesburg, South Africa
> Independent corporate law firms
> One stop shop for African legal and other advice
> “Living network” – annual general meetings and management committees
> Code of conduct, exchange programmes and practice groups
> www.lexafrica.com and www.lawyersforafricablog.com
TAKE-AWAYS
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Take-Aways
> Business rescue has become a new mechanism for the acquisition of distressed companies
> Fundamental starting point is for the investor to identify the opportunity at an early stage and before it is too late (i.e. when the company is on the verge of insolvency) – need to have a distressed debt strategy
> Need to identify key people who are the “players” in the distressed debt market and who can introduce the opportunity at an early stage in the distressed debt cycle
> Key – identify the warning signals of looming financial distress and act on them immediately
> Identify and work with business rescue practitioners who have a proven track record in the business recue industry
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Take-Aways> PCF is the life blood of a business rescue process
> Business rescue provides the opportunity to unlock value and to allow a company to continue to trade on a solvent basis
> Key – preservation of value and the economic viability of the company
> Must develop a skill set to identify the right opportunities and know how to take advantage of these opportunities (need legal support)
> Understand the business rescue process and how it can be used to unlock value and the “upside” – remember the Top Tv example!
THANK YOU
Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal
advisors for guidance on legislation which may affect their businesses.
© 2014 Werksmans Incorporated trading as Werksmans Attorneys. All rights reserved.