The rise of the chief restructuring officer in SA
As state-owned enterprises and private sector companies continue to suffer from an ailing economy, there is no doubt that the role of chief restructuring officer (CRO) is catching on.
The appointment of Freeman Nomvalo as Eskom CRO is worth watching. Eskom is looking to bolster its restructuring team by hiring legal, financial and restructuring advisers to assist in its turnaround.
The appointment of these additional advisers would be seen to enhance Nomvalo’s ability to deliver a restructuring package for Eskom, which is currently exposed to R430billion of debt.
A recent advert for the appointment of the SAA CRO stated that the candidate would be expected to “Facilitate and drive the re-engineering and re-structuring of SAA and its subsidiaries for optimal performance and profitability”.
SAA has R5.7bn of debt, and it has been reported that SAA still needs an additional R2bn by December to fund its working capital requirements.
The private sector is facing tough challenges too, and here the CRO is playing an even greater role.
The knee-jerk rush to file for business rescue needs to be carefully considered by the boards of stressed companies.
Proper consideration should first be given to the appointment of a CRO, as opposed to a business rescue practitioner. This allows a CRO to take a fresh look at the business and to offer effective turnaround strategies.
Of course it will always come down to “horses for courses” as financial pressure on the entity might be too great, requiring an urgent filing for business rescue and where the benefit of a moratorium on claims against the company provides the required breathing space needed in the restructuring process.
The stand-out restructuring example has been Edcon. Earlier this year, SA’s largest retail clothing company, employing some 40000 people, faced the threat of possible financial collapse. The company went through a significant restructuring, which included a resizing of its retail store offering and a substantial reduction in its occupied floor space.
Although not appointed as the company’s official CRO, chief executive Grant Pattison led the turnaround exercise.
The outcome has been viewed by the market as a success.
The final turnaround plan included an injection of R2.7bn in new investment with Edcon’s landlords, the UIF, banks, investors and staff holding shares in Edcon.
But it takes a brave director to be able to recognise the decline of a company towards financial disaster. The last thing on the board’s agenda in a cash-strapped entity would be to admit a potential slide towards business failure, hold up their hands and actively look for the outside assistance of a CRO.
Board members sometimes need to take their feet off the accelerator of revenue-generation and recognise their own limited management skills in being able to trade the entity out of its financial distress.
Often the fear of failure and where directors, not used to making unpopular and difficult decisions, place themselves into a proverbial “rabbit in the headlight” scenario, and which makes the need for the appointment of an independent turnaround consultant even more necessary.
The risk of personal liability and opening oneself up to scrutiny by creditors after the company has filed for insolvency should persuade directors to engage a CRO as early as possible.
A CRO would have as an objective the restructuring of the affairs and the business of the company, so as to ensure that the entity can continue to trade into the future on a solvent and effective basis.
To do this, the CRO needs to remain independent, and do his best to make the hard decisions for the commercial benefit of the operation.
A restructuring led by a CRO should deliver an entity back into the market with its debt restructured, prejudicial contracts renegotiated or terminated, and with management and employees realigned to up-scale business profits and upside for shareholders and stakeholders.
The objective must be to maximise the returns for lenders and creditors faced with potential massive debt write-offs in the event that these companies file for liquidation.
This strategy would apply equally to state-owned enterprises such as Eskom and SAA, as it would to ailing listed public companies or small privately owned companies.
Dr Eric Levenstein is head of the firms insolvency, business rescue, and restructuring at Werksmans Attorneys.