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A debt-equity swap will save SAA

It is unconscionable that SAA is soaking up billions in the bid to rescue it when other sectors are struggling because of limited government funding. 

The business rescue practitioners trying to save the airline don’t seem to have any idea of how to get there, so here’s one.

SAA is the one state-owned entity for which there is the least case for public ownership. Although there is an aspect of airfreight that has wide benefits, air travel is an upmarket option and state funds would be far better spent rehabilitating rail. Rail can reach poor people in areas that taxi services cannot profitably serve, reduce traffic congestion in cities and take heavy trucks off the road, where they cause disproportionate wear.

On the other hand, shutting SAA down would cause major knock-on effects in loss of jobs not only in SAA but in related businesses, so it is worth trying to find a way to rescue it.

The worst way to rescue a struggling business is to dispose of the assets it needs to restart. Most airlines lease planes. The business rescue operators have been terminating leases, except on the least efficient planes, which is perverse because, should SAA restart, it will be at a cost disadvantage. The only other assets reasonably easily sold are spare parts caches, routes and terminal gates. All of these are needed to reopen.

So selling assets is only a sensible option if the business is terminal (in the non-airline sense). And creditors will get badly burned because the value of the assets will be low until travel recovers from the Covid-19 pandemic.

A solution that does not appear to have been considered is a debt-equity swap.

The way this works is creditors are offered a share in a company in exchange for cancelling debt.

This would be particularly suitable for SAA because it is 100% government owned, so the entire value of the company is available to parlay against debt. This could make it feasible to exchange all debt for equity, a step towards privatisation. All debt could include everything the airline owes, not only for equipment and services, but unused air tickets, frequent flier miles and unpaid salaries.

Where there are existing shareholders to consider, exchanging debt for equity may run into resistance because it could dilute their holdings. But, in the case of the South African government, it should be attractive because the other alternatives involve throwing more money down the same rathole or allowing the airline to close, with big downstream implications to the economy.

The benefit of such a swap is SAA can start trading with a clean balance sheet. The benefit to creditors is it gives them flexibility: they can cash in their equity immediately if they are desperate for cash flow or wait until the airline is trading again and cash in at a higher value. For the government, it reduces the amount needed to bail the airline out and jump-starts privatisation, which would be difficult if the airline is still bleeding money and not trading.

The tricky part of this is valuing a company that is in a seriously failed state and persuading creditors to accept that valuation. It may be necessary that some classes of creditor such as unpaid salary earners be given additional compensation because they need the cash flow at full value and can’t afford to wait out the rise in the share price. 

But for creditors who would be at the end of the queue in a bankruptcy, this is an attractive option. Bankruptcy will offer them a fixed ratio of cents in the rand with no option to wait things out for a more attractive outcome. Also, for all those relying on SAA for income, whether employees or suppliers, a strategy that restores it to viability is far more attractive than one that shuts it down.

The views expressed are those of the author and do not reflect the official policy or position of the Mail & Guardian.

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Philip Machanick
Philip Machanick is an associate professor of computer science at Rhodes University

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