A last-minute intervention by Public Enterprises Minister Pravin Gordhan — just hours before the airline’s board told its staff of a resolution to shut down operations and begin a process of voluntary liquidation last Friday — halted a situation he thought threatened cross defaults.
Had the airline told workers that it was closing, without first settling the R15.5-billion government-guaranteed debt that SAA owes its lenders, the government would have been led to a situation where it would have to pay the entire amount or face other lenders calling in up to R579-billion of state-guaranteed debt owed by other entities, including power utility Eskom.
According to the 2019 budget, Eskom, whose overall debt sits at more than R400-billion, is responsible for 55.7 % of all the state-guaranteed debt.
The Mail & Guardian understands that though technically there was no reason to fear cross defaults, there is a real fear though that liquidation might affect confidence in the country’s SOEs and could spark a run on debt.
Three accounts from three different sources — two of whom are at the ailing airline — with intimate knowledge of the events paint a picture of just how advanced plans were to announce the airline’s grounding.
These included an urgent notice, at 2.30pm last Friday, through an email on SAA’s internal communications system to crew all over the world to tune into a live crossing for an important announcement from the board at 4pm.
Staff in the commercial department had already been instructed on Wednesday by SAA’s new chief commercial officer, Philip Saunders, to abandon a Black Friday ticket sale that had been prepared.
Another insider in that division said last Friday’s instruction was more clear: “We were basically told not to market tickets for the next 365 days.”
“Initially, I thought it [the live announcement] was about the board possibly avoiding a delinquent director application because everyone was talking about that. It only became clear after Pravin’s arrival in the afternoon [and his subsequent stopping of SAA’s plan to close],” said the insider.
SAA did not respond to questions about Gordhan’s visit, the alleged resolution, or the instruction to not sell tickets.
The notice had put SAA workers across the globe in a panic; news of impending bad tidings spread like wildfire.
No indication of what would be announced was provided, but given that the airline had just come out of a crippling strike the previous week and talks of retrenchments still lingered, workers were left wondering whether or not their future at SAA would still be secure.
Much to the relief of the more than 5 000 workers at the airline, 4pm last Friday arrived with no announcement of retrenchments, but rather a “thank you” email from SAA executive chairman Thandeka Mgoduso for sticking with the airline through trying times.
An hour-and-a-half after the scheduled announcement time, however, Mgoduso revealed in a letter sent to staff that the board had been locked in intense discussions with the shareholder to discuss the “challenging times” faced by SAA.
Unions were told to expect news over the weekend. On Sunday, Gordhan revealed in a statement that SAA would undergo “radical restructuring” in order to secure its financial and operational sustainability.
Gordhan has largely been seen as resistant to calls — from both the public and Cabinet colleagues such as Finance Minister Tito Mboweni — for SAA to be shut down and has been criticised for apparent inaction over the state of the airline.
His concern with the way the board wanted to shut down the airline, the Mail & Guardian was told, came from a fear that a sudden voluntary liquidation increased the risk of lenders to SAA, who would suddenly find themselves standing in line to get back a percentage of what they are owed.
A source told the M&G this would allow the lenders to go and ask for their money from other government entities — such as Eskom — to which they also had given loans.
SAA’s government-guaranteed debt currently stands at R15.5-billion and will increase as soon as the R2-billion announced by government is paid over to the airline.
“What people did not understand is that the minister has always been keen on action on SAA, but it needs to be managed so as not to spook lenders and markets. Business rescue allows for that,” the source added.
What is business rescue?
According to the Companies Act, companies that are financially distressed have the opportunity to restructure and reorganise through business rescue.
The Companies and Intellectual Properties Commission (CIPC), says this provides for the efficient rescue and recovery of companies, “in a manner that balances the rights and interests of all relevant stakeholders”.
It says that during the procedure, a business rescue practitioner is appointed to temporarily oversee the business and to devise and implement a business rescue plan.
This gives the beleaguered company a breather and stops them having to close their doors immediately. The process has a far-reaching effect on the key stakeholders, including creditors, shareholders and employees.
The Act also stipulates that once the practitioner believes that there is a reasonable possibility of saving a business, they should publish the plan after consulting with the company’s creditors and others.
A plan for SAA is expected to come in three months.
Public Enterprises Minister Pravin Gordhan. (Jairus Mmutle/GCIS)
Hlulani Mokwena, a transport economist at North-West University, however, said the disclosure of SAA’s confidential information — which would ordinarily not be available to the company’s entire value chain — might be good for transparency and accountability, but could pose risks to the country’s sovereignty because SAA is the national carrier.
“Business rescue exposes the airline to vested and non-vested interests because as much as the analysis takes place in a confidential manner there is always a probability that some stakeholders might want to disclose some of the confidential information,” he said.“They might not want to disclose it to the media but to market participants that have never had access to that information,” Mokwena explained.
SAA’s finances have been in the red since 2011, which was the last time the airline declared a profit. The national carrier has also failed to produce its financial results since 2017 and also failed to implement several turnaround plans.
Additionally, the four-day strike by the National Union of Metalworkers of South Africa (Numsa) and the South African Cabin Crew Association is estimated to have added an additional R400-million to SAA’s funding requirements.
Soon after the industrial action, where parties eventually agreed to a 5.9% wage increase, short-term insurance company Santam said that it would stop selling cover for SAA tickets. This was followed by travel company Flight Centre’s management withdrawing the sale of the airline’s tickets on its platforms.
Insurance group Hollard also withdrew its insolvency cover benefit for SAA tickets and earlier this week, mining giant Anglo American advised its 61 000 employees in the country not to make any bookings on SAA for the time being.
In a statement on Thursday, SAA confirmed that the decision to put the airline into voluntary business rescue was taken “in order to create a better return for the company’s creditors and shareholders, than would result from any other available solution”.
This was preceded by a statement from the public enterprises department, which said the government would extended an additional R2-billion in funding. This will be augmented by another R2-billion from existing SAA lenders.
The funding will allow for the business to operate while the business rescue process commences.
Chapter six of the Companies Act gives the business practitioner appointed by the company wide-ranging powers. These include the responsibility to restructure the organisation including its debt, liabilities, equity and property.
The practitioner assumes full management of the company, a role usually held by the company’s board.
Commenting on the situation, Peter Attard Montalto, economist at Intellidex, said that despite the business rescue process, liquidation of the airline was still possible. “However, the terms of the provision of an additional R4-billion of state and bank money may provide an additional bridge over the December month end at least,” he said.
No cadre practitioner allowed
Montalto added that the announcement by the public enterprises department [DPE] seems to impose a way forward for the business rescue practitioner — something which can only be done by a court.
“Legally, a practitioner cannot be dictated to by a shareholder or creditor or government. As such DPE seems to be stepping over the line. The practitioner is answerable to the court only and must independently make the determination to the court if the firm must be liquidated,” he said.
This point was stressed by Alf Lees, the Democratic Alliance member of the standing committee on public accounts. Although the DA has welcomed the business rescue process, Lees said that possible interference from the airline’s shareholder in the process may be in breach of the law.
“[Currently] we don’t know who the board recommended to be the business practitioner. We are going to assess very carefully whether this is a cadre deployment in a sense of it being someone that can be controlled,” he said.
Solidarity, which had filed an application last month to have the airline placed on business rescue, met with SAA and government ministers on Thursday morning to chart a way forward. The organisation’s chief executive officer, Dirk Hermann, said all parties agreed to the business rescue.
Although SAA has assured its employees that it would use “targeted communication” to its staff throughout the process, Hermann said that Solidarity, Numsa and other trade unions would be meeting to devise a plan that would represent the views of all workers at the airline.
Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian