STUART THEOBALD: Hard to tell where SAA’s flight of fancy will land

This column was first published in Business Day. 

How is the sorry saga of SAA going to end? We are stuck in an Alice in Wonderland that company law writers could never have predicted, with a party repeatedly promising cash and failing to deliver, but creditors stuck with nothing to lose in waiting and hoping. Meantime, the business rescue drifts on, burning cash as it goes.

Creditors are meeting again this week to decide what to do after the government missed yet another deadline last week to arrange financing for the airline. A cabinet meeting is also supposedly going to come to final decisions on how to fund the rebirth of the airline. It has already promised R10.3bn to cover liabilities incurred and must inject more to finance its rebirth.

I have tired of asking why the government is so committed to this path. There are things you can never get a straight answer on. The cabinet has made its decision, albeit with many unaware of the consequences of it. It flies in the face of its own 2017 transport policy for one thing, and in the face of the fundamental principle of equity the government proclaims to support, pumping cash into something that will serve the middle class at the expense of social programmes. Ministers this week will have to decide what budget lines to slash to fund the airline.

But it is the practicalities of what it wants to do that is imponderable. First, it has to find cash to fund the airline while it works on its longer-term solution. It is running out of cash and will probably be dry come month end. On Friday, the department of public enterprises said it is expecting banks to provide bridging finance for the airline. Banks effectively tipped the airline into business rescue in the first place by not rolling loans. Since then, the government has lost its credit grade and the appetite for more exposure, even if guaranteed by the government, is not what it once was.

Public enterprises minister Pravin Gordhan may think he can lean on banks, but he should be cautious. Banks said “no” when all kinds of political hellfire was thrown their way to fund the Guptas’ acquisition of Optimum Coal or Iqbal Surve’s acquisition of Independent Media and they aren’t about to start buckling now just because we have a different president.

Banks are carefully structured to be impervious to political pressure — large exposure committees are subcommittees of the board with a set of clear directives in bank regulations and in terms of the Banks Act. One regulation is that all credit decisions are made on an “arm’s length” basis — that means threatening a bank with consequences such as the loss of current accounts cannot sway the committee. And if it were swayed by such threats, it would be breaking the law.

Of course, if the cabinet is able to reallocate money out of other budget lines and needs bridging until it can make it official in the medium-term budget policy statement or through an appropriations act, then banks will play a role as they would with any client needing bridging finance for the short term. It would have to be guaranteed by the Treasury. It can be done, but whether that would be politically wise for the cabinet is a different matter.

As is the economics of it. The government is still committed to a vision of a strategic equity partner buying into the airline, bringing management expertise and cash in return for a minority stake. Of course, any deal can be done at the right price. And the price in this case would be that the government hands over full management control of the airline to the partner and absolves it from any financial risk. There are ways of doing that — an ironclad shareholders agreement plus some form of put option such that the partner can sell back any stake it takes to recover its money if things go wrong.

The department of public enterprises has said it has had 20 “unsolicited” offers. I am reminded, though, that anyone with a pen and paper napkin can make an unsolicited offer. We have no idea how credible any of them are. But it has been reported that Ethiopian Airlines is one that is interested. The department might be able to make a deal attractive enough for Ethiopian, but will the cabinet go along with a scenario in which the government has no control while assuming all financial risk?

It would be wise to think through the economics of that — you’d have someone incentivised to take big risks with the airline in the hope of scoring from upside, knowing they face no downside. Sounds remarkably like the Coleman Andrews structure that saw him march away from the airline having banked incentives in the hundreds of millions.

The other possibility, which has a non-zero probability, is that creditors vote in their meeting this week to put the airline into liquidation. The business rescue plan envisages them receiving 7c/rand of their exposure. If it went into liquidation, they would get zero. But creditors have been messed about in an almost incomprehensible way. I would not blame them if they decided holding out for a possible 7c is not worth the pain of interminable deadline missing by the government and vote to teach it a lesson. That would at least bring finality to the mess.

There is, however, low chances of that, so I think we’re going to watch as banks are cajoled into keeping the airline’s lights on while the cabinet continues to pursue a deal no-one wants without terms it cannot accept. Oh, what a mess.

  • Theobald is chair at Intellidex.