Political uncertainty and corruption are key drivers of financial distress

According to Deloitte’s South African Restructuring Outlook Survey 2016, close to 39,4% of business restructuring experts expect a recessionary economy driven mainly by political uncertainty and corruption, concerns around global economic health and poor commodity prices.

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Despite these expectations, the same number of respondents believe that the extent of distressed funding available will be advanced. This highlights how few South African businesses are able to use this tool to manage financial stress.

Understanding SA’s restructuring market

“Restructuring refers to any formal or informal process involving a financial and operational restructuring of a company’s affairs as a result of financial stress,” explains Nisha Dharamlall, restructuring services leader at Deloitte South Africa.

To better understand the challenges and expectations of South Africa’s restructuring market in 2016, Deloitte surveyed over 30 key restructuring professionals in the country. The survey started in 2014 and is in its third year. Respondents included a selected mix of commercial banks (40%), development finance institutions (21%), lawyers (16%), business rescue practitioners (10%) as well as academics and other key restructuring professionals (13%).

Key themes that emerged from the survey

• Resources including mining, agriculture and construction are most at risk of being in distress in the next year.

• 80,6% of restructuring teams expect an increase in activity in the next 12 months.

• Protecting the business still ranks as the top priority of restructuring projects.

• Early identification of financial distress remains one of the main areas where restructuring professionals believe the local restructuring industry could be improved.

• 15,7% of respondents report that “amend and extend the debt” is the most frequently used form of restructuring. This is followed closely by “exit via sale of business” and “business rescue”.

• Only 1,9% of respondents highlighted the use of distressed funding as a feasible restructuring option, highlighting the continued infancy of the development of this critical industry.

• Existing banks are still the preferred source of distressed funding for the majority of respondents (21,7%) but existing shareholders are listed as the second most preferred option (16,9%).

• 6% of respondents have had a less than 25% success rate in business rescue, 38,7% of business rescues have a success rate over 75% and informal restructurings overall have a higher success rate than business rescue.

• Success in business rescue is cited as a better return for creditors – along with the business continuing on a solvent and liquid basis.

• 54,8% of respondents believe that business rescue practitioners are not adequately skilled or qualified, mainly as a result of their lack of experience or type of qualifications.

• The board of directors are the most likely to place a company in business rescue, and commercial banks (secured creditors) are most likely to oppose a business rescue.

• Commercial banks have the highest level of awareness and understanding of business rescue, and (unsecured) creditors have the lowest.

• Overall, over 64% of respondents still believe that business rescue is currently effective.

Daniel Terblanche, restructuring services leader at Deloitte believes that: “Despite restructuring being in its infancy in South Africa, results are encouraging in that the industry understands that it requires more support in financial restructuring. This is a significant trend at a time when increasingly more businesses in South Africa will need to become literate in managing financial stress professionally.”