Business rescue does work
Business rescue sometimes gets a bad rap. A look at statistics may suggest that the success rate in business rescue is low. This article explains why this is lies, damn lies and inappropriate statistics.
When used for the right reasons, and when properly executed, business rescue achieves great results for those involved – creditors, employees, shareholders or us, the taxpayers.
The magic is in the words ‘the right reasons’ and ‘properly executed’. Companies using business rescue for the wrong reasons – and there are many – are doomed to fail. Business rescue, as high court Judge Tsoka elegantly stated, is not for terminally ill companies – it is for ailing corporations which can become solvent again.
Proper execution is about rolling up your sleeves as a practitioner and effectively restructuring the business. This is not just a legal process; it is a complex matter of analysing and changing strategies, operations, balance sheets and sometimes management and seeking change through negotiation, concession and compromise.
The Mintails gold mining group is a classic example. Mintails started producing gold from tailings (old waste dumps) in 2006. Over time it developed into a group which mined (underground and open cast), processed and toll-treated both virgin ores and tailings. Sadly since its inception there has been more bad news than good for Mintails. Poor strategy decisions were followed by indications of financial misappropriation. The closure of its largest processing plant (70% of its capacity) meant that Mintails’ overhead structure became too costly for its remaining operations. The group suffered an extended suspension of mining and production due to local unrest. It entered into unprofitable tolling agreements and unanticipated mining complications added to its financial woes. All of this culminated in disunity at shareholder, board and management levels.
The peak of Mintails’ financial distress came by way of a R20 million demand from Eskom in late 2016: ‘Pay in full immediately or we switch off the power’. A closedown of operations would certainly have led to the liquidation of Mintails – with the loss of over 800 jobs, creditors recovering only a few cents in the rand and Mintails’ environmental liability reverting to the State.
The financial obligations of Mintails had piled up and by late 2016 included a R530 million loan from its controlling shareholder, arrears of R30 million with toll clients, R60 million of trade creditors and a R20 million South African Revenue Service (Sars) liability. Added to this was an unfunded R300 million rehabilitation liability in respect of which the Department of Mineral Resources (DMR) was demanding a cash deposit as security. To make matters worse, Mintails already had a subsidiary, CMD, in business rescue, and CMD owed its creditors R130 million. That’s over R1 billion of obligations to juggle! And as things stood, the trading value of Mintails was not worth anything near R1 billion.
So Mintails elected to go into business rescue. “Was this business rescue for the right reasons?” I hear you ask. In this case, yes. The board was satisfied that it could see a way back to solvent trading. Mintails was sick – but it wasn’t terminal. It had the resources, market position and infrastructure to underpin a profitable business. What was needed was a new strategy, a coherent business plan, a way to deal with the crippling debt, some fresh cash and a management team to drive the restructured business.
So how did I go about it?
A priority was to negotiate with Eskom to avoid the termination of power supply. After some tough negotiations, a structured agreement was secured which protected Eskom’s interests without prejudice to other creditors – and kept the lights on. Other suppliers were engaged to reassure them that a rescue was realistic and to secure payment terms for continued supplies. Toll customers agreed on new payment terms for future gold ore supplies, with contract prices being increased to provide for higher revenues.
Operationally, within six months output was improved by about 25% from pre-business rescue levels – and the rising gold price delightfully helped our cause. My initial goal – to secure operational and financial stability during business rescue proceedings – was achieved.
Mintails’ strategy was reviewed and a credible ten-year business plan was developed. At the heart of this was the recommissioning and reintroduction of the large tailings processing plant – back to basics. Various initiatives were commenced to dispose of non-core assets. Appropriate funding models were designed – and balance sheet restructurings designed to fit these models. The management team was refreshed and agreement reached for the board of Mintails to be reformed. Several investment offers from outside Mintails were secured and negotiated. It was ultimately agreed, however, that the controlling shareholder (already the major lender) would be the provider of around R100 million of new funding into the business rescue plan. This was critical – as it meant that the loan owing to the shareholder would not require immediate repayment or short-term servicing. R100 million of cash in plus the R530 million claim resolved – a big win!
The DMR was supportive of the opportunity to save the 800+ jobs involved and to avert the possibility of the R300 million rehabilitation liability becoming a burden on taxpayers. In collaboration, we therefore structured and agreed upon a ground-breaking and pragmatic approach for Mintails to practically effect rehabilitation activities monthly over the life of mine. No cash deposit was required and another R300 million was resolved.
Trade and toll creditors agreed to accept 70% of their claim value, to be repaid over a period of three years. CMD settled its claims, also discounted and paid over an extended period. All outside creditors would thus take a haircut, and be paid over time, but still receive far in excess of what they would have in liquidation. More balance sheet and cash flow relief.
So – with new funding, a balance sheet restructuring, management changes, a clear ten-year business plan, the recommissioning of the gold plant, the DMR’s support, a funding plan and supplier/creditor support – the business rescue plan has now been approved and is on track to return Mintails to operational solvency and profitability.
No employees were retrenched during the business rescue proceedings. In fact the number of jobs have increased from 816 to 843 – and are likely to grow by a further +/- 100 when the recommissioned plant comes on stream. Not bad in a country struggling under the scourge of unemployment. The creditors did well and taxpayers were not stuck with the bill for rehabilitation.
Does business rescue deserve the bad rap it sometimes gets? I think not, provided that it is used for the right reasons and is properly executed.
Dave Lake is a business rescue practitioner with Metis Strategic Advisors