Chinese investors show interest in business rescue transactions

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However, we have not seen distressed asset funds being set up in South Africa to take advantage of discounted assets as they have been in other countries.

Despite an enhanced and buoyant business rescue market it has not yet attracted the levels and extent of distressed debt funds that we have seen in developed markets like the United States and the United Kingdom.

Capital raised by distressed and restructuring funds in the United States rose to $36,64bn for 2013, a nearly 35% increase over the year earlier total. In the United States, robust private equity markets and the abundance of available distressed debt have resulted in private equity, venture capital and hedge funds targeting distressed companies in an effort to secure investments with significant upside. Furthermore, little interest has been displayed by local private equity and venture capital funds.

Good assets available

However Chinese interest in the distressed market is starting to take traction. Recently I met Chinese venture capital players in Hong Kong who are interested in considering assets that might be up for sale as a result of a distressed financial position and which finds its way into the business rescue process.

Of particular interest to Chinese investors are the mining and natural resources, renewable energy, property, real estate and construction and engineering sectors.

It is a matter of time before we will see significant investments by Chinese investors in the distressed debt space and where good assets are going to be acquired at a significant discount. Last year, Chinese firm StarSat acquired a stake in Top TV (ODM), which transaction is in the process of being concluded. There is no doubt that more of these transactions will come to the fore in the coming months, where we see Chinese investors taking up positions in the business rescue space.

Recent reports indicate that South Africa might be heading into a recession. Pressure in the mining sector might have a knock on effect on the South African economy with an uptick in the number of firms filing for business rescue.

Early warning signals

Key for the prospective investor is to identify the early warning signals of looming financial distress, identify the relevant company and act on such warning signals immediately, preferably in conjunction with the board of directors and the business rescue practitioner.

In South Africa, the life blood of any successful business rescue process is the provision of post commencement finance (PCF) in the early stages of business rescue.

Once a company is placed into business rescue, it is necessary for the practitioner to secure a funding line for ongoing payments of expenses, disbursements and other contractual obligations of the company in order to keep the company going whilst it is being restructured. Without it, any successful restructuring of a company would be stillborn.

However, the quest for PCF is elusive. Currently, the banks and existing financial institutions are loath to provide further finance to a company already in distress. It is therefore up to the existing shareholders, prospective offerors and possibly distressed funds to place loan funding into the company on a PCF basis.

In terms of process, it is fundamental for all stakeholders will be to work with a business rescue practitioner who has a proven track record in the business rescue industry and who can effectively take advantage and add value to the process.

The aim is to allow an offeror to acquire a company out of business rescue and exit the process by unlocking value and with a company free of debt, which can continue to trade on a solvent basis into the future.