Allie Ebrahim, Senior Manager at Ernst and Young explains that there are a number of risks facing BEE/Empowered companies, third party funders (banks) and to a lesser extent, BEE partners.

“For empowered companies, there is the potential loss or dilution of its BEE status, obligations to honour guarantees or put options in favour of the banks and changes in shareholders”, he says. “Banks funders on the other hand, are concerned with higher levels of corporate debt defaults, loan impairments, equity exposure and loss of interest income stream.” “For the BEE partner,” he says, “there is the risk of debt default, the erosion of value of its investment, the potential dilution of investment and a loss of credibility.”

He points out, however, that just because a leveraged BEE deal is ‘under water’ does not mean that the deal has failed. “Most BEE partners have (or should have) a long-term investment horizon (at least ten years) and the current market turmoil (although abnormal in terms of its extent) is part of the bull and bear cycle that any long-term investor has to endure.

So, the more immediate concern for BEE companies is how to survive the current economic downturn and generate enough cash to continue paying much needed dividends on which the leveraged BEE deals depend. This is a significant challenge, given that blue chip companies such as Anglo American has recently made unprecedented announcements that it will not be paying a dividend for the current year.

There are a number of options available to companies with leveraged BEE deals. In fact, all companies will have to look at a combination of these interventions if they are to survive or manage the current economic storm and position themselves for a market recovery in the future.

Surviving the present crisis

“In order to survive the current crisis companies need to look more closely at the issues around cash management and more specifically debt refinancing and working capital management, restructuring and alternative funding options.

Debt refinancing is an importance consideration for BEE partners who have assumed a substantial amount of debt in order to acquire the BEE stake,” he says. “The BEE company, together with its BEE partner, should be looking to negotiate funding terms with the banks to either extend the term of the debt, defer the capital repayments, negotiate reduced interest rates in the short term or a combination of these options.” This won’t be easy, as the key concern for the funders will be to limit its exposure to bad debt, obtaining a reasonable market-related return on loan advances, which will now be subject to tighter credit policies and higher levels of security.

BEE companies and their BEE partners could explore alternative sources of funding which offer more flexibility than those typically offered by commercial banks in SA. .

Cash management strategies include: renegotiating terms with suppliers and debtors. This may be easier said than done, as both suppliers and customers will be facing the same pressure to improve their cash management as the BEE company.

Management may also explore asset-based lending opportunities to secure short-term funding for the business. However, this is more suited to companies that have significant assets on its balance sheet, such as accounts receivable, inventory and property plant and equipment, as opposed to those companies with significant intangible assets. Again banks will be cautious to lend against moveable property and will require higher returns and increased security.

For those BEE companies that own and occupy commercial and/or industrial property, a sale and lease back transaction is another option for injecting much needed cash into the business. Companies that have owned these properties for a long period of time, can realise a significant capital gain on sale net of capital gains tax.

Performance improvement initiatives offer BEE companies and their BEE partners further cash management opportunities. Ebrahim suggests using IT to deliver greater efficiency, considering outsourcing options and consolidating shared services components, optimising planning, procurement and operational processes in the supply chain and enhancing revenue by focusing on high value customers and managing or reducing exposure to higher risk customers, improving billing and collections processes.

Selling non-core or underperforming parts of the business, will result in cash inflow or stem further cash burn. Even though the timing of a disposal during a downturn is not ideal, such a disposal may provide a short-term solution for a distressed company. It is advisable to appoint suitably experienced and trusted transaction advisors to reduce management’s time in the disposal process and to minimise value leakage.

A joint venture (JV) between two or more parties is another option to save costs through the sharing of operating expenditure and capital expenditure. This may be done on a project or continuing basis. While a JV may be an option for some, it should be carefully considered, as these arrangements, as with marriages, are not always made in heaven.