turnaround industry south africa

Jan van der Walt (Director: Certification)March 2010

The Turnaround Industry in South Africa and the Need for Certification

Industry Structure, Driving Forces and Constraints

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TMA-SA Presentations on Turnaround Certification

The Turnaround Industry in South Africa:

Turnaround industry structure Driving forces Constraints The need for certification

The turnaround industry in South Africa and the Need for Certification – March 2010 4

SA Turnaround Industry

Industry driving forces

Developments in the SA turnaround industry cover a number of areas

Underperforming & distressed

businesses and government structures

Industry constraints

The market for

turnaround

TURNAROUND INDUSTRY STRUCTURE

Industry participants


Management

Organisational Stakeholders

Employees

Shareholders

Capital Market Stakeholders

Banks

Unions Suppliers

Customers Government

Host communities

Product/Market Stakeholders

The turnaround industry consists of turnaround professionals of various disciplines

Under-performing &

distressed businesses

and government structures

Stakeholders:

Industry participants formed TMA - Southern Africa in 2005.

TURNAROUND INDUSTRY STRUCTURE

Industry Association

Turnaround Management Association –

Southern Africa

Industry Participants

Lenders - Banks, Development Fund Institutions (IDC, DBSA)

Financiers

Investors - institutional investors, DFIs, private equity, venture capital

Turnaround practitioners

Service providers

Turnaround consultants

Accountants

Attorneys

Legislators

GovernmentSARS

Legislation

Faculty/AcademicResearch

Financial advisors

dti

The Turnaround Industry in South Africa:

Turnaround industry structure Driving forces Constraints The need for certification


Government has gazetted new business rescue legislation to save jobs, and industry organised itself

Political driving forces: Transformation of the liquidations industry:

– Government of the opinion that the liquidation industry (2005):• Should give way to the national interests of job preservation and business rescue• “And not merely to those of liquidators, secured creditors and their lawyers“ (Enver Daniels – DoJ”

– Chapter 6 of (Business Rescue) the Companies Act No. 71 of 2008 to to save companies and jobs

Organised turnaround industry:– Task Group for Organising the Turnaround and Business Rescue Industries:

• Active May – September 2004; spawned ABASA and TMA-SA (see below)

– ABASA (Association of Business Administrators of South Africa):• Formed in 2004 on request of DoJ to be the regulator of business rescue practitioners• In 2009 merged into the Turnaround Certification Governance Board of TMA-SA

– Turnaround Management Association - Southern Africa:• Sent dti letter of intent to apply for its Certification Governance Board to be recognised as the

regulatory authority of business rescue practitioners

DRIVING FORCES - POLITICAL


Government has gazetted new business rescue legislation to save jobs, and industry organised itself - 2

Political driving forces (continued): Organised turnaround industry (continued):

– Productivity SA: The Department of Labour’s Social Plan allows for employers and workers to request assistance to prevent or minimise job losses when large-scale retrenchments are in the offing

DRIVING FORCES - POLITICAL


South Africa has to fight poor business results as a result of the recession

Economic driving forces: Rising performance standards:

– Increased incidence of shareholder activism and private sector shareholders becoming less tolerant of mediocre performance

– This trend extended itself to the public sector, where many turnaround programmes have been launched or are needed:

• Municipalities in dire need of turnaround• SAA, SARS, Transnet, Denel, SABC, Land Bank, Dept. of Home Affairs

Global economic slowdown and credit crunch:– World-wide recession:– SA in recession too:

• Economy contracted by 1,8% in 4th quarter 2008, and by 6,4% in 1st quarter 2009• SACCI and RMB/BRI Business Confidence Indices dropping (see next pages)

– Government rescue plan for the SA vehicle industry and a textile firm

DRIVING FORCES - ECONOMIC

The need for turnaround is great!


Business confidence is decreasing (1)



Business confidence is decreasing (2)



Interest rates increased to curb inflation, but recently decreased to stimulate the economy


5% -4,5%


Monthly and annual liquidations, however, are on the rise



Job preservation is an important objective of new business rescue legislation

Social driving forces: 23,5% official unemployment rate (only active job seekers) 4 out of 10 South Africans are unemployed (expanded definition i.e. including the

unemployed not actively looking for work) As a result, government drafted employee-friendly business legislation has been

drafted:– Business rescue will save some companies from being liquidated– The ranking of employee claims are higher for companies that are liquidated following failed

business rescue, than liquidation without being preceded by business rescue

DRIVING FORCES - SOCIAL

Unemployment is set to rise as a result of the global economic slowdown.


The turnaround industry’s education efforts are young – 5 years old

Technological driving forces Turnaround education, conferences and publications:

– Annual 5-day programme on managing a turnaround at Wits Business School– Monthly turnaround management lecture series presented by TMA-SA– Professor Neil Harvey’s book on turnaround management to be published– Turnaround web sites appearing

TMA-SA’s future turnaround certification programme:– Turnaround certification:

• Body of knowledge, and exams in turnaround management, law (including Chapter 6), and turnaround-related accounting and finance

• Experience requirements

– Turnaround Certification Governance Board:• Standards Subcommittee, Academic Subcommittee

DRIVING FORCES - TECHNOLOGICAL

The turnaround industry is in dire need of education and training!


New business rescue legislation is expected to become the most important future driving force of the industry

Legal driving forces: Judicial management a failure - hence new business rescue legislation to replace

judicial management as contained in Chapter 6 of the Companies Act No. 71 of 2008

Business rescue = Chapter 6 turnaround as opposed to informal sector turnaround

Business rescue is a substantively non-judicial, commercial process similar to informal creditor workout (Riza Moosa, Deneys Reitz):

– Yes, the process is formalised following the filing of a board resolution (or application to court to commence the proceedings) and each significant step in the process may allow intervention of affected parties by application to the court.

– Yet this remains an engagement amongst the business rescue practitioner, affected persons (being shareholders, creditors and employees (individually or through their representative trade unions) of the company in devising a business rescue plan to rescue the company

Business rescue is a consultative and inclusive process involving all affected persons, in which each of these stakeholders is afforded an opportunity to participate and be consulted throughout the process

DRIVING FORCES - LEGAL


New business rescue legislation is expected to become the most important future driving force of the industry

Legal driving forces (continued): Section 128(1)(b) ‘‘business rescue’’ means proceedings to facilitate the

rehabilitation of a company that is financially distressed by providing for -– (i) the temporary supervision of the company, and of the management of its affairs, business

and property;– (ii) a temporary moratorium on the rights of claimants against the company or in respect of

property in its possession; and– (iii) the 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 maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders

The major benefits are:– Breathing space provided by moratorium, and right to cancel or suspend contracts– Cram-down of dissenting creditors, binding holdout

Chapter 6’s expected implementation date is 3rd quarter 2010


Business Rescue Process and Resolution:


A business rescue practitioner is a Chapter 6 turnaround practitioner operating in term of the Companies Act

Turnaround Practitioner

Stabilisation Funding/Financial restructuring Fixing in terms of:

– Strategy– Structure/Organisation– Operations

Leadership Stakeholder management Project management

Chapter 6 Turnaround Practitioner (Business Rescue Practitioner)

As for a Turnaround Practitioner, plus: Has full management control of the

company in substitution for its board and pre-existing management - section 140(1)(a)

Has the responsibilities, duties and liabilities of a director of the company, as set out in sections 75 to 77 - section 140(3)(b)

If Chapter 6 business rescue practitioners are regulated, minimum qualifications for admission will be required – Section 138(3)(b)(i)

For underperforming and distressed businesses, planning and implementation of:

This means that a Business Rescue Practitioner should preferably have top management and director experience.



There are further requirements to be appointed as a business rescue practitioner

Legal driving forces (continued): Section 138(1): A person may be appointed as the practitioner of a company only

if the person -– (a) is a member in good standing of a profession subject to regulation by a regulatory

authority prescribed by the Minister in terms of subsection (2);– (b) is not subject to an order of probation in terms of section 162(7);– (c) would not be disqualified from acting as a director of the company in terms of section

69(8);– (d) does not have any other relationship with the company such as would lead a reasonable

and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship; and

– (e) is not related to a person who has a relationship contemplated in paragraph (d)


The Certification Governance Board will apply to the Minister to be recognised as the regulatory authority of business rescue practitioners.

The Need for Turnaround and Certification of Turnaround Professionals: Turnaround industry structure Driving forces Constraints The need for certification


The industry is hampered by lack of education, experience and certification

Lack of education, experience and certification: Little formal turnaround education available Not many experienced turnaround practitioners Yet everybody can claim to be a turnaround practitioner:

– Urgent need for certification If Chapter 6 business rescue practitioners are regulated, minimum qualifications

for admission will be required – Section 138(3)(b)(i)

CONSTRAINTS

The turnaround industry is in dire need of education and training!


Lack of finance represents a major constraints to growing the turnaround industry

Lack of turnaround private equity finance: Distressed firms that exceed their borrowing capacity need equity investment No specialist turnaround private equity firms in SA Those that do finance turnarounds tend to focus on underperforming rather than

distressed companies Institutions in SA do not include distressed situation investing in their private

equity portfolios Lead-time for due diligences tends to be too long for a company requiring urgent

refinancing:– The Chapter 6 business rescue practitioner will have 25 days to prepare the turnaround plan

CONSTRAINTS

Lack of turnaround private equity funding will effect Chapter 6 adversely.


Lastly, compared to overseas, the industry suffers from a number of legal constraints

Legal constraints: No effective business rescue legislation until Chapter 6 is implemented Any retrenchment of any such employees contemplated in the company’s

Chapter 6 business rescue plan is subject to section 189 and 189A of the Labour Relations Act, 1995 (Act No. 66 of 1995), and other applicable employment-related legislation:

– For instance, if a distressed business is sold, all employees from part of the deal – which cause deals to flounder

– No retrenchment until a business rescue plan has been approved, which can take 40 days– Temporarily good for unemployment, bad for business rescue compared to Chapter 11 in the

USA for instance Policy of SARS (SA Revenue Services):

– Not allowing past and assessed losses as overseas– Seen as a stumbling block preventing entrepreneurs and financiers stepping forward to

participate in business rescue

CONSTRAINTS

The Need for Turnaround and Certification of Turnaround Professionals: Turnaround industry structure Driving forces Constraints The need for certification


There is a dire need for qualified turnaround professionals

A growing turnaround market in SA, fuelled by the global economic slowdown:– Recession; decreasing business confidence– Liquidations on the rise– Increased unemployment

The industry is hampered by lack of education and experience Lack of certification makes it difficult to determine who are qualified Chapter 6 requires business rescue practitioners, that may be regulatedBenefits of certification: Provides evidence of an individual’s commitment to the turnaround industry Attests to a level of expertise that non-certified professionals may find difficult to

prove Attests to verified qualifications and experience, and where applicable, that the

Certification Governance Board's three exams in turnaround management, law (including Chapter 6) and turnaround-related finance/accounting have been passed

THE NEED FOR CERTICATION

The turnaround industry in South Africa and the Need for Certification – March 2010

Questions?

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Contact details for Susanne Braatvedt (Administrator):

Tel.: 082 950 2624 Fax: 086 592 3619 Web site: www.tma-sa.com Email: [email protected]

Turnaround Management Association – Southern AfricaDirector Certification: Jan van der

Walt