South Africa’s national airline faces key reform test

Subject

SAA business rescue.

Significance

State-owned South African Airways (SAA) was placed into business rescue on December 5, as the government attempted to avoid the likely shutdown and disorderly liquidation of the debt-ridden and technically bankrupt airline. Business rescue involves temporary management control by ‘business rescue practitioners’ (third-party supervisors) with wide restructuring powers, curtailment of influence of other stakeholders and a temporary moratorium on creditors' rights. The government hopes by these means at best to restructure SAA as a going concern or, failing that, to provide for its orderly liquidation by negotiation with stakeholders, including creditors.

Impacts

• A restructuring plan involving continued government bailouts for SAA will undermine Pretoria’s proposals on reining in public debt.
• Liquidation would pose risks for other indebted parastatals given cross-default clauses in SAA’s financing and leasing agreements.
• The outcome of the business rescue will be keenly watched by markets as a test of Pretoria's resolve to reform and restructure parastatals.