Themba September, Corporate Renewal Partners 18 October 2004 Developments In The South African Turnaround Industry Conference: Managing A Turnaround, Wits.

Themba September, Corporate Renewal Partners

18 October 2004

Developments In The South African Turnaround Industry

Conference: Managing A Turnaround, Wits Business School, 18 – 22 October 2004

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

Developments in the SA turnaround industry Conference: Managing a turnaround Wits Business School 18 – 22 October 2004

Cell: 083 325 9575 www.corprenewal.co.za

SA Turnaround Industry

Driving Forces

Developments in the SA turnaround industry cover various areas …

OVERVIEW

Underperforming & distressed

businessesConstraints

New management

Industry Players

Financiers

Advisors

Government

Faculty

Industry associations

… with (1) the formation of industry associations and (2) new business rescue legislation of major significance.

http://www.corprenewal.co.za/

Developments In The SA Turnaround Industry:

Overview

Industry Structure

Industry Constraints

Industry Driving Forces

The Market For Turnarounds

Industry Task Group

ABASA

TMA (South Africa Chapter)




Industry Associations


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 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

Industry Players

Distressed Business And Its Stakeholders



Overview

Industry Structure




Industry Task Group

ABASA





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 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

As part of new business rescue legislation, government announced the possibility of a R2bn 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: In view of the high unemployment rate government understandably does not

support retrenchment as mechanism to reduce costs Hence the stringent labour legislation that apply by virtue of the Labour

Relations Act (LRA) 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

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

In addition, there is a number of statutory constraints







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 rules of engagement regarding conducting workouts between turnaround practitioners and banks

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

Adverse publicity in cases where turnaround practitioners are seen to “make hay while the sun shines”

Mixed feelings of SA business towards turnaround practitioners

To be addressed through the formation of:

Turnaround Management Association (South Africa Chapter)

ABASA (Association of Business Administrators of South Africa)

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




Overview

Industry Structure




Industry Task Group

ABASA





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

INDUSTRY DRIVING FORCES

For more information on the nature of new business rescue legislation, please see Jan van der Walt’s presentation “Contrasting Informal Turnaround With

Turnaround During Formal Insolvency”.

1. Political Driving Forces:

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 – as above - 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 present Department of Justice/Patrick Daly/Banking Council

initiative for new business rescue legislation under the Insolvency Act Nedlac initiative – business rescue conference arranged but cancelled





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


1. Political Driving Forces (2):

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”.

Present 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





In a way, 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 – August 2004

– Spawned TMA and ABASA

Turnaround Management Association (South Africa Chapter):– To promote the profession of turnaround management of underperforming and distressed

businesses

– Status: in formation

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

– Status: Registered, executive elected

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


2. Economic Driving Forces:

Economic Indicators

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 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 rates





Yet, there is still life in the informal turnaround sector


2. 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

– Denel

Increasing 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


3. Social Driving Forces:

Unemployment

41,2% unemployment rate (expanded definition i.e. including the unemployed not actively looking for work)

27,8% 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


4. Technological Driving Forces:

Turnaround Funding

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

Government’s R2bn turnaround private equity fund?

Formal Turnaround Education

Turnaround management course planned at UP in 2005 (Professor David Burdette)

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

Certified Turnaround Professional exam planned (associated with TMA)

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





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


4. Technological Driving Forces (2):

Turnaround Conferences And Workshops

Events In October 2004 Alone: This 5-day conference on managing a turnaround

Vincent Marino’s 4-day workshop on turnaround strategies for the struggling business

4-day TMA 2004 annual convention in New York (900 delegates) on the evolving role of turnaround management

Turnaround Industry Web Site

Turnaround Management SA hosted by Corporate Renewal Partners since April 2004 www.corprenewal.co.za

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




Overview

Industry Structure




Industry Task Group

ABASA





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

THE MARKET FOR TURNAROUNDS

Present

Low interest rates

Low liquidation statistics

Relatively low bank books

Low level of turnaround activity

New business rescue legislation

Promotion by industry associations

Increase in interest rates

Future

Higher level of turnaround activity



Overview

Industry Structure




Industry Task Group

ABASA





The Task Group for Organising the Turnaround and Business Rescue Industries represented most stakeholder groups

INDUSTRY TASK GROUP

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):





The Task Group (May – September 2004) spawned two industry associations

INDUSTRY TASK GROUP

For a thorough discussion of the timeline of financial distress – please see Jan van der Walt’s presentation “Contrasting Informal Turnaround With

Turnaround During Formal Insolvency”.

Management-led

Correction

Informal Creditor Workout

Business Rescue Liquidation

Failure

Troubled Company

Timeline Of Financial Distress

Turned Around/Restructured/Sold

Highest Success

High Success

Low Success

Minimal Success

Failure

Failure Failure

Time

X

Informal Processes Formal Processes

TMA (Turnaround Management Association)

ABASA (Business Rescue Regulatory Association)

ABASA

Association of Business Administrators of South Africa

A regulatory body for formal business rescue within the legislative framework as envisaged by new business rescue legislation.

TMA (SA Chapter)

A voluntarily association to: Promote the turnaround

industry For purposes of information

exchange, networking, education and raising the standards of turnaround across both the informal and formal sectors



Overview

Industry Structure




Industry Task Group

ABASA





ABASA will regulate formal business rescue through admission criteria and disciplinary powers

Memorandum, Articles of Association and Rules are registered

Introductory letters to Departments of Justice, and Trade & Industry drafted

Been introduced to the Ministerial Committee of Inquiry into the Liquidation Industry

Interim Executive was elected on 11th October 2004 – its first meeting will be on Monday 8th November 2004

Interim Executive will progress contact with government, drafting of a Draft Business Administration Regulatory Bill, and membership recruitment

Status

ABASA

During the interim period: Attorneys and chartered accountants -

3 years experience and members of their associations

Liquidators on Master’s Panel for at least 8 years

Individuals with degrees in law, commerce, or management:

Bachelors degree plus 8 years Honours degree plus 5 years Masters degree plus 3 years

After the interim period:The above replaced by passing an exam.

*) Other membership categories include honorary, practicing corporate and non-practicing corporate membership

Interim period: 1st December after expiry of 24 months since Business Rescue Act promulgation

Admission Criteria For Practicing Members *)

The master of the high court will appoint a Business Administrator …

… on order of the court…

… after nomination of a turnaround expert from the Turnaround Panel by the party bringing the application…

…but creditors have 7 days to replace this person with their own appointment from the Turnaround Panel if they wish to do so

Membership of ABASA will be required to serve on the Turnaround Panel

How it could work (DoJ/ Daly/Banking Council model):

Business Administrators





The Interim Executive was elected a week ago on 11th October 2004

ABASA

ABASA Interim Executive

David Burdette Mervyn King Lawrence Ngobeni Themba September

Patrick Daly Martin Leigh

Jill Oliphant

Jan van der Walt



Overview

Industry Structure




Industry Task Group

ABASA





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

TMA (SOUTH AFRICA CHAPTER)

International headquarters in Chicago

TMA's 6,500 members in 32 regional chapters comprise a professional community of turnaround practitioners, attorneys, accountants, investors, lenders, venture capitalists, accountants, appraisers, liquidators, executive recruiters and consultants

Members adhere to a Code of Ethics specifying high standards of professionalism, integrity and competence

Its Certified Turnaround Professional (CTP) program recognizes professional excellence and provides an objective measure of expertise related to workouts, restructurings and corporate renewal

www.turnaround.org

TMA handout material is available for all delegates.




How to participate in the formation of the South African Chapter of the Turnaround Management Association

TMA (SOUTH AFRICA CHAPTER)

You

Chapter-In-Formation Status

Submit basic information: done Submit list of prospective

members to TMA by November 2004

Membership pledge (intention to become a member in January 2005)

Submit

Formation Steering GroupJoin if

interested

8 executive and 8 non-executive members on the Board

Arrange election

Elect only if you have

pledged

Register as member January 2005: Member: $275 Government/Academic: $115 Full-time student: $65

Register

Provisional Chapter Status

Elected board and executive in place (November 2004)

Written legal opinion (Nov 2004) Registered section 21 company

incorporating the TMA’s by-laws (January 2005)

Please email your pledge to become a TMA (SA Chapter) member in Jan 2005 to [email protected] with name, cell & landline numbers, and industry before 31 October

2004.

SA Chapter Formation Process(For more information please see www.corprenewal.co.za, section Turnaround Management SA, subsection TMA (SA Chapter):




Themba September

Managing Director: Corporate Renewal Partners

Cell: 083 325 9575

Land line & fax: 011 477 4414

Web site: www.corprenewal.co.za

Email: [email protected]

Questions?

Themba September, Corporate Renewal Partners 18 October 2004 Developments In The South African Turnaround Industry Conference: Managing A Turnaround, Wits.

Documents

turnaround viability

sandton developments

stakeholders slide

insolvency act

biggest constraints

judicial management

companies act

distressed companies