Themba September, Corporate Renewal Partners 1 August 2005 Developments in the South African Turnaround Industry Conference: Managing a Turnaround, WBS,

Themba September, Corporate Renewal Partners

1 August 2005

Developments in the South African Turnaround Industry

Conference: Managing a Turnaround, WBS, 1 – 5 August 2005

An industry perspective

Developments in the SA turnaround industry:

Overview Industry structure Industry constraints Industry driving forces The market for turnarounds Industry Task Group ABASA TMA, Southern Africa Chapter

33 The Trails, 127 Linden Rd. Sandown 2196, Sandton

Developments in the SA turnaround industry WBS 2005Cell: 082 853 1414Phone/fax 011 477 4414

www.corprenewal.co.za [email protected]

SA Turnaround Industry

Driving Forces

Developments in the SA turnaround industry cover various areas …

OVERVIEW

Underperforming & distressed

businesses (and their

stakeholders)

Constraints

New management

Industry Players

Financiers

Advisors

Government

Faculty

Industry associations

The formation of industry associations and (2) new business rescue legislation are of major significance.






Industry Players

(providers of capital and services)

Industry Associations

Turnaround Management Association,

Southern Africa Chapter)

ABASA (Association of

Business Administrators of South Africa Management

Organisational Stakeholders

Employees

Shareholders

Capital Market Stakeholders

Banks

Unions Suppliers

Customers Government

Host communities

Product/Market Stakeholders

INDUSTRY STRUCTURE

The most significant structural development has been initiatives to organise the turnaround and business rescue industries

Turnaround practitioners

New Management

Business Administrators (in terms of new business rescue legislation)

Banks, IDC and other providers of loan capital

Financiers

Investors - private equity firms, investment bankers, institutional investors

Turnaround consultants

Advisors

Management consultants

Professional services

Accountants

Lawyers

Credit insurance

Legislators

Government

SARS

Legislation

Faculty/Academic

Research

Under-performing &

distressed businesses

Distressed business and its stakeholders






Constraint Resolvable?

Long lead time before a turnaround is triggered: Boards and management tend to wait until a crisis has

developed

When banks intervene with workout action, it is normally too late too

Turnaround viability is low once a business has reached the Failing Zone in terms of the Z-Score

Education via industry associations and conferences will help

New business rescue legislation may bring heavier penalties for directors trading under insolvent conditions

Lack of turnaround equity finance: No specialist turnaround private equity firm in SA

Those that do finance turnarounds tend to focus on under-performing rather than distressed companies

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

Government-sponsored business rescue fund?

New private sector initiatives to start turnaround private equity?

Timing of turnaround intervention, and lack of finance represent the two biggest constraints to growing the turnaround industry

INDUSTRY CONSTRAINTS





Antiquated insolvency legislation: Judicial management a failure Insolvency regulation scattered across the Companies

Act, the Insolvency Act and the Close Corporations Act

To be addressed through new business rescue legislation

Stringent labour legislation: Recent amendments to the Insolvency Act reiterate

government's commitment to saving jobs and the protection of employees when a company experiences financial difficulties

For instance, if a distressed business is sold, all employees from part of the deal

New business rescue legislation not expected to lead to changes in the LRA

In addition, there is a number of statutory constraints






Attitude of SARS (SA revenue services): Not allowing past and assessed losses Seen as a stumbling block preventing entrepreneurs and

financiers stepping forward to participate in business rescue

May be satisfactorily addressed since SARS has reportedly committed itself to the new business rescue legislation

Lack of organised industry:

No industry voice e.g. with regard to new business rescue legislation

No standards, formally co-ordinated education, training and certification

No co-ordinated marketing and promotion

No admission criteria and disciplinary measures to make formal business rescue work

Turnaround Management Association, Southern Africa Chapter

ABASA (Association of Business Administrators of South Africa)

Lastly, the turnaround industry’s past lack of organisation is self-inflicted through past inaction







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

INDUSTRY DRIVING FORCES

For more information on how new business rescue legislation may impact on turnaround management, please see Jan van der Walt’s presentation

“Contrasting informal turnaround with turnaround during formal insolvency”.

Political driving forces – 1:

New business rescue legislation

Government places a high premium on job preservation and saving businesses

Hence new draft business rescue legislation to replace judicial management

Will allow for turnaround to take place within a legislative framework for the first time

However, timing is unknown and the approach is fragmented:– Draft Insolvency and Business Recovery Bill – approved by cabinet in March 2003– Unified Model – the present Department of Trade and Industry/Professor David Burdette

initiative for business rescue legislation as part of company law reform Business Administration Act – the Department of Justice/Patrick Daly/Banking Council

initiative for new business rescue legislation under the Insolvency Act Expected to be incorporated in the new Companies Act




Transformation of the liquidation industry is expected to have an important bearing on shaping new business rescue legislation



Transformation of the liquidation industry

Government is of the opinion that the liquidation industry:– 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".

Accordingly, government is planning to introduce reform:– Will include “statutory regulation and the appointment of panels of turnaround specialists to try

to save an ailing company rather than liquidate it”.

Ministerial Committee of Enquiry into the Liquidation Industry:– Prompted by corruption, mismanagement and lack of BEE

– Led by advocates Seth Nthai and Lindiwe Nkosi-Thomas

– Outcome unknown

– To be followed by an interdepartmental task team?




Government is already involved with turnarounds via the Department of Labour and the NPI



Social Plan

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

Social Plan's Technical Support Facility functions under the auspices of the National Productivity Institute (NPI)

Private sector turnaround professionals (BEE preferred) are sponsored by NPI to conduct turnaround work

More information: www.socialplan.co.za

http://www.socialplan.co.za/




Industry is organising itself to promote its practice, and to be aligned with new business rescue legislation



Organised industry

Task Group for Organising the Turnaround and Business Rescue Industries:– May – September 2004

– Spawned TMA and ABASA

Turnaround Management Association, Southern Africa Chapter):– To promote turnaround management of underperforming and distressed businesses

– Status: Provisional Chapter status by October 2005

ABASA – Association of Business Administrators of South Africa:– Formed in response to new business rescue legislation initiatives

– Status: Registered, executive elected, awaiting government approval

These industry associations will help shape the future of the turnaround industry in South Africa.

More about TMA (SA Chapter) and ABASA later in the

presentation




The market for turnaround has declined due to improved economic health


Economic driving forces – 1:

Economic indicators – low bankruptcy activity

Compulsory company liquidations represent a lagging indicator of the potential market for turnaround.Voluntarily company liquidations are disregarded as these are not necessarily as a consequence of financial distress.

2004/05 level is about a quarter of the level of 1992 - 1999

August 2003 figures increased as a result of the impact of a strengthening Rand on export companies

Declined thereafter due to decreasing interest rate




Yet, there is still life in the informal turnaround sector


Economic driving forces – 2:

Rising performance standards

Increased incidence of private sector shareholders becoming less tolerant of mediocre performance

This trend extended itself to the state as shareholder:– South African Post Office - successful turnaround by Maanda Manyetse

– Transnet - turnaround launched under Maria Ramos

– SAA – turnaround under Khaya Ngqula

– Denel – turnaround under Victor Moshe, then Shaun Liebenberg

Increasing world-wide acceptance

Increasing acceptance of informal turnaround as a viable alternative to liquidation

“Internationally, there is a substantial growth in the management and funding of turnarounds” – Corporate Turnaround (Stuart Slatter and David Lovett) 1999




Job preservation is an important objective of new business rescue legislation


Social driving forces:

Unemployment

40,5% unemployment rate (expanded definition i.e. including the unemployed not actively looking for work)

26,5% official unemployment rate (only active job seekers)

As a result, a business rescue culture is developing amongst distressed businesses' lenders:

Rescue rather than liquidate Banking Council press releases pledging support

4 out of 10 South Africans are unemployed.




Turnaround funding is being re-examined, and formal turnaround education is strengthening


Technological driving forces – 1:

Turnaround funding

New business rescue legislation has prompted the banking and private equity fraternity to look at strengthening distressed debt transactions and turnaround funding

Turnaround private equity funds to be formed?

Formal turnaround education

Certified Turnaround Professional exam planned (associated with TMA)

ABASA admission exam planned (may be the same as the CTP exam)

Turnaround management course planned at University of Pretoria (Professor David Burdette) to prepare students for CTP exam

Turnaround management taught at Rhodes University as part of Strategic Management course (Professor Neil Harvey)




Industry is more and more networking and educating through conferences, publications and web site technology


Technological driving forces – 2:

Turnaround conferences and publications

This annual 5-day conference on managing a turnaround

Turnaround series in Professional Management Review

Annual TMA convention in USA (900 delegates) on turnaround management

Turnaround industry web site

“Turnaround Industry SA” hosted by Corporate Renewal Partners since April 2004 at www.turnaround-sa.com

Turnaround news, events, opinions, links, references, industry info, industry associations; new business rescue legislation info; liquidation statistics and news






We believe that active industry associations and new business rescue legislation will boost the turnaround market

THE MARKET FOR TURNAROUNDS

Present:

New business rescue legislation

Promotion by industry associations

Increase in interest rates

Future:

Higher private sector level of turnaround activity – 2007 onwards

Transnet SAA Denel

Low interest rates

Low liquidation statistics

Relatively low bank books

Public sector

Private sector






Seated: Stephan Claassen (FNB), Lawrence Ngobeni (University of Pretoria - alternate for Professor David Burdette) (Secretary), Themba September (Corporate Renewal Partners) (Chairman), Mervyn King (Brait), Ricardo Graham (Maximus Turnarounds).

Standing: Inus du Preez (FNB), Sarel Lategan (Standard Bank - alternate for Christo Faul), John Evans (Deloitte), Robin Taggart (Nedbank), Patrick Daly (Daly Incorporated), Kevin Cochrane (Nedbank - alternative for Anna Isaac), Krisjan Barnard (Absa - alternative for Trevor Murgatroyd), Jan van der Walt (Corporate Renewal Partners), Les Matusen (Credit Management Solutions - alternate for Rowan Gordon), Jan Bicker-Caarten (RMB), Martin Leigh (RMB), David Gewer (Werksmans).

Absent: Paul Winer (Werksmans), Michael Vacey-Lyle (FNB).

Work Group of the Industry Task Group(Supported by 80 Advisory Group members):

Grass-roots involvement from 100 participants from all constituencies in the

turnaround and business rescue industries in South Africa

The Task Group for Organising the Turnaround and Business Rescue Industries was active from April – September 2004

INDUSTRY TASK GROUP




The Task Group spawned two industry associations

The timeline of financial distress:

INDUSTRY TASK GROUP






ABASA is an industry-proposed business rescue regulatory body

ABASA mission - to: Regulate activities of Business Administrators (its members) in terms of new

business rescue legislation Administer admission criteria based on:

– Qualifications and experience during an interim period

– Thereafter, exam on turnaround management, law and accounting as per TMA’s Certified Turnaround Professional exam:

• Curriculum customised for South Africa

• Courses offered by tertiary institutions

Ensuring professional conduct and ethical behaviour reinforced by disciplinary measures

Train and educate

Become a (future) member if you wish to take charge of a distressed business as a Business Administrator under future new insolvency laws.

ABASA




Themba September(Chairman)

The Interim Executive was elected on 11th October 2004

ABASA Interim Executive:

David Burdette

Mervyn King(Deputy Chairman

Lawrence Ngobeni(Secretary)

Patrick Daly Martin Leigh Jill Oliphant

Jan van der Walt(Treasurer)

ABASA




ABASA was set up on request from individuals in government (but not by government itself)

It is a registered Section 21 company, and an interim executive is in place ABASA is in the process of requesting regulatory powers through government

legislation:– Either as self-regulatory

– Or regulated by dti or DoJ

Regulation may be influenced by the outcome of the Ministerial Committee of Enquiry into the Liquidations Industry

While awaiting a decision on regulation, ABASA is there to:– Provide advice if advice is asked from government

– To support and lobby for new business rescue legislation

Membership recruitment will commence once clarity have been received from government regarding the way forward

ABASA

ABASA is in the process of requesting regulatory powers through government legislation






The TMA is a voluntarily trade association for service and capital providers to the turnaround industry

TMA mission - to: Serve as a forum for convening turnaround professionals from all disciplines:

– to exchange information, ideas and knowledge on the turnaround business

Promote high standards of practice and improved methodologies in turnaround management

Foster professional development opportunities for turnaround professionals Serve as a clearinghouse of information and research pertinent to the turnaround

business

TMA, SA CHAPTER

“TMA is the premier professional community dedicated to corporate renewal and turnaround management”.




Rather than reinvent the wheel, affiliation allows for:

– Working within proven and well-defined structures

– Sharing in the knowledge and experience of the international turnaround fraternity

TMA, SA Chapter is a 100% SA initiative:– The local chapter is owned and controlled by SA turnaround industry participants

– It's board of directors and office bearers are totally independent of the international organisation it is affiliated to

– TMA International is directive only with regard to:• Good governance principles

• Ensuring that chapters do embark on programs (of the chapter's own choice) that are beneficial to the turnaround industries in local jurisdictions.

Membership growth:

TMA, SA CHAPTER

The Industry Task Group decided on affiliation to the pre-eminent turnaround organisation – the Turnaround Management Association

The SA Chapter is a SA initiative with full independence.




Jan van der Walt(CEO)

The initial Board and Executive was elected on 29th April 2005

TMA initial Board and Executive:

Milton Kahari(Director: Programs)

Ken Chitando(Treasurer)

Colin Batchelor(Director: Membership)

Frans Maritz Vincent Marino

Patrick von Spreckelsen(Secretary)

Robin Taggart(Non-Executive Chairman)

David Gewer

TMA, SA CHAPTER




A full 2005/06 Board and Executive will be elected on 22nd September 2005

Non-executive Chairman CEO Deputy-CEO Treasurer Secretary Director: Membership Director: Programs Director: Public Relations Director: Sponsorship Director: ACTP Relations & Education Director: Pro Bono Activities Director: Newsletter Director: Web site 2x Non-executive Directors

TMA, SA CHAPTER




The TMA will launch a SA customised version of the Certified Turnaround Practitioner programme

The ACTP offers the sole international programme of certification for professionals engaged in the turnaround, crisis management, restructuring and renewal of troubled businesses

To become a Certified Turnaround Professional (CTP), practitioners must meet stringent standards of education, experience and professional conduct

For more info, please refer to Professor David Burdette’s presentation on the ACTP.

TMA, SA CHAPTER




International TMA membership profile:

Service providers: 71% Capital providers: 23% Academic/Government: 5%

TMA, SA CHAPTER

TMA aims to reflect the international membership profile in Southern Africa

The TMA is certainly not an organisation for turnaround practitioners only.




Membership is open to all interested in corporate renewal and turnaround

Regular members *): $275/annum ($150 for remainder of 2005) Government: $115/annum Academic: $115/annum Students: $ 65/annum

*) Regular members are turnaround professionals from all disciplines except for government, academic and students

Members receive:– Monthly copies of the Journal of Corporate Renewal

– Discounts on local and international events

TMA members regard the biggest benefit of membership to be that of networking opportunities, followed by advancement of professional knowledge.

TMA, SA CHAPTER




TMA, SA Chapter is in the process of achieving Provisional Chapter Status

Status: Current status: Chapter-in-formation 2005/06 Board and Executive election: 22 September 2005 Aiming for Provisional Chapter status by October 2005 Aiming for full chapter status: October 2006

Programs planned post September 2005: Establishing the Certified Turnaround Professional programme Support for new business rescue legislation Conferences Breakfast seminars Pro bono activities Golf days Web site and newsletter

TMA, SA CHAPTER




Cell: 082 853 1414

Land line & fax: 011 477 4414

Web site: www.corprenewal.co.za

Web site: www.turnaround-sa.com

Email: [email protected]

Questions?

Corporate Renewal Partners

MD: Corporate Renewal Partners

MD: Turnaround South Africa

Themba September, Corporate Renewal Partners 1 August 2005 Developments in the South African Turnaround Industry Conference: Managing a Turnaround, WBS,

Documents

sa turnaround industry

industry perspective

turnaround viability

sandton developments

stakeholders slide

southern africa chapter

biggest constraints

judicial management