Saving SAA through a debt-equity swap
‘SAA is the one state-owned entity for which there is the least case for public ownership. Although there is an aspect of airfreight that has wide benefits, air travel is an upmarket option and state funds would be far better spent rehabilitating rail.’
However, Rhodes University Associate Professor Philip Machanick warns that as shutting SAA down would cause major knock-on effects in loss of jobs not only in SAA but in related businesses, a solution needs to be found to rescue it.
In his analysis in the Mail & Guardian, he suggests a debt-equity swap, whereby creditors are offered a share in a company in exchange for cancelling debt.
‘This would be particularly suitable for SAA because it is 100% government owned, so the entire value of the company is available to parlay against debt. This could make it feasible to exchange all debt for equity, a step towards privatisation. All debt could include everything the airline owes, not only for equipment and services, but unused air tickets, frequent flier miles and unpaid salaries.’
He says such a swap may run into resistance because it could dilute existing shareholders' holdings.
‘But, in the case of the SA Government, it should be attractive because the other alternatives involve throwing more money down the same rat-hole or allowing the airline to close, with big downstream implications to the economy.’
SAA can start trading with a clean balance sheet; creditors can cash in their equity immediately or wait until the airline is trading again and cash in at a higher value; and the amount needed by government to bail the airline out and jump-start privatisation will be reduced.
Machanick adds it may be necessary that unpaid salary earners be given additional compensation because they need the cash flow at full value and cannot afford to wait out the rise in the share price.
‘But for creditors who would be at the end of the queue in a bankruptcy, this is an attractive option. Bankruptcy will offer them a fixed ratio of cents in the rand with no option to wait things out for a more attractive outcome. Also, for all those relying on SAA for income, whether employees or suppliers, a strategy that restores it to viability is far more attractive than one that shuts it down.’
Article disclaimer: While we have made every effort to ensure the accuracy of this article, it is not intended to provide final legal advice as facts and situations will differ from case to case, and therefore specific legal advice should be sought with a lawyer.
