(Business Day)Dire choices for ailing SAA
by Carol Paton, 2015-11-24 06:01:00.0
SOUTH African Airways (SAA) must secure an equity injection from the state or apply for business rescue, and to continue trading under current circumstances is "reckless", a memorandum from the executive team to the board warns.
The memorandum also recommends that the board abandon its attempts to renegotiate the Airbus transaction to lease five A330 aircraft and revert to the old deal structure that was negotiated in March.
This would ease some of SAA’s financial distress as the airline is unable to pay both its debts as these come due and the predelivery payments required by Airbus.
Chairwoman Dudu Myeni has pushed for the renegotiation.
SAA is technically insolvent as its liabilities exceed the value of its assets and requires a government guarantee to be declared a going concern. Despite these distressed circumstances, the board recently sought to renegotiate its arrangement with Airbus, triggering substantial financial obligations. It is in response to this transaction that the executive committee decided to draft the memo.
The memorandum, dated November 6 was drafted by the head of legal, risk and compliance Ursula Fikelepi and submitted to the board by former acting CE Thuli Mpshe. Ms Mpshe was removed from the CE position last week and replaced by Musa Zwane.
The memorandum spells out for the first time how precarious SAA’s financial position is. It has a number of debt covenants in its operating leases and funding agreements with lenders that provide for the "acceleration of loans" if the lender or lessor reasonably believes SAA is unable to meet its obligations.
Almost all the finance and leasing agreements are subject to a "cross default clause so that if SAA is in default of one loan document, this will cause a default in all the finance/leasing agreements", it reads.
There is a substantial risk that SAA’s inability to pay the pre-delivery payments required by Airbus could trigger these covenants, the memo warns.
If SAA continues to incur debts in an environment in which creditors cannot reasonably expect payment, "it can be inferred that the business of the company is being carried on recklessly or negligently" under the Companies Act.
Consequently, the board is obliged to pass a resolution for business rescue or secure an equity injection, it concludes.
It is not clear whether Finance Minister Nhlanhla Nene has been made aware of the memo. He did not respond to a request for comment on Monday.
However, MPs who questioned Ms Myeni and other board members at the standing committee on finance meeting last week, say that the board should have made the committee aware of the memo. Not doing so, amounted to misleading Parliament, the Democratic Alliance’s Natasha Mazzone said on Monday. "It is of huge concern that in their presentation, the existence of this memo … and its contents was not disclosed. Rather, Ms Myeni told a completely opposite story — one in which SAA was on sound footing."
Ms Myeni and SAA did not respond to a request for comment.