Deloitte plays down positive forecast for SA this year

RESTRUCTURING professionals expect an improvement in the country’s economic environment this year, in line with the wider trend seen across developing economies.

This was according to the fourth annual South African Restructuring Outlook 2017 survey released by Deloitte last week.

Deloitte, however, noted that an important caveat was that this positive sentiment might have weakened in the wake of South Africa’s sovereign debt rating downgrades by S&P Global Ratings and Fitch Ratings, which occurred shortly after the survey was conducted.

“We surveyed a cross-section of restructuring specialists in South Africa to obtain a better understanding of where the industry is now and what their expectations are for the next 12 months,” said Deloitte’s associate director of restructuring services, Daniel Terblanche.

“Respondents represented a selected mix of commercial banks, development finance institutions, lawyers, business rescue practitioners, academia and other key professionals.”

The results highlighted the importance of identifying distress early and the risks of value erosion that business rescue could bring if not managed carefully, such as the discontinuation of supplies into a business or higher employee attrition rates.

Protecting the business was still ranked as the top priority of a restructuring project, with the preservation of employment becoming increasingly prominent.

Early identification of financial distress remained one of the main areas where restructuring professionals believed the local restructuring industry could be improved.

“An increase in volatility can be expected across the South African economy and the ability to identify financial distress early by management and boards of directors, accompanied with the imperative need for restructuring practices, both informal and formal, to develop and become more dynamic, is more critical now than ever before” said Deloitte’s head of restructuring services, Nisha Dharamlall.

Respondents believed that the retail sector was the most at risk of distress in the next 12 months, followed by the agricultural and construction sectors.

The increased focus on the retail sector followed the highly publicised restructuring and the ongoing business rescue of well-known house brands in the local market.

Agriculture was forecast to be the next most-at-risk sector, having been chosen by 53.6percent of respondents, even after the El Niño drought came to an end in the summer rainfall region. While the rains in this region might have helped growing conditions, the appearance of “zombie companies” as conditions improved remained a risk. Forecasters predicted a return of adverse weather patterns in the 2017/18 season, which would cause serious concerns again for this sector.

The construction sector remained one of the sectors most at risk of financial distress in the next year, retaining its topthree position for the fourth consecutive year.

Resources remained a concern for 42.9percent of respondents as a result of market prices remaining relatively low compared with the commodity price boom of 2000 to 2014. The lack of competitiveness in sectors such as steel globally was identified as a concern.

Solvent restructurings were expected to be the most common route to rescuing a company in distress, with the injection of new equity via the sale of the business, a new equity raise or the sale of non-performing assets being the preferred route.

Business rescue was expected to be the next most used mechanism.