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Distressed debt opportunities in Africa

08 September 2016 Lyndon Norley, a consultant in the Insolvency and Restructuring Practice at Bowmans

According to Deloitte’s South African Restructuring Outlook Survey Results 2015, 73% of restructuring teams in South Africa expected an increase in activity in restructuring in 2016, with the resources, manufacturing and construction sectors seen as most at risk of becoming distressed and needing restructuring. This increase has opened up possibilities for investors looking for distressed debt opportunities in Africa.

Restructuring can refer to the rescue, reorganisation, and/or refinancing of financially stressed and/or distressed companies.

“Restructuring can occur either in or outside of a formal “in court” insolvency process. It may involve the cancellation, reduction or rescheduling of debt, as well as the sale of the business or assets, corporate reorganisations, or the winding down of unprofitable groups of companies,” explained Lyndon Norley, a consultant in the Insolvency and Restructuring Practice at Bowmans in Cape Town. Norley was speaking at a presentation to the Association for Savings and Investment SA, held at Bowmans Cape Town today.

Norley explained, “One way to take advantage of a distressed debt opportunity is via a consensual process conducted with the debtor. The advantages of using this process are that it allows for the easy identification of lenders to the debtor and/or willing sellers of the debt.The financing solution may involve the replacing, refinancing or equitisation of existing debt. In this process, conducting due diligence is possible to assess the company and its business and determine the “in money” fulcrum tranches of debt. This process can provide new money on improved, often longer maturity terms, and liquidity through an equity stake. It also reduces the implementation risk of triggering an event of default on the facilities,” he noted.

An alternative process for investment in distressed debt is the so called "Loan-to-Own” process. This begins as a hostile process, without the initial involvement of the debtor. It involves the external identification of lenders and/or sellers and the fulcrum debt. The process involves the purchasing of debt with the intention of taking control, in the event of default, for example negotiating a compromise to convert debt to equity as a means to gain control of the business.

“For this process, valuation of the company and determination of fulcrum debt is essential, as is the assessment of debt document rights and triggers,” he said.“However, there is a risk that the identified trigger may not occur or is cured, and the capital outlay and ability to enforce are also challenges,” he noted.

Norley explained an additional process of “distressed M&A”, which involves the purchase of a company, group company or assets at a discounted price as a result of financial impairment and/or the restructuring process. This process is opportunistic and again involves significant due diligence to determine appropriate values in the distressed scenario.

“At the end of the day, the restructuring process and investment in distressed companies should be a proactive and interactive process that saves the company, it business, and its employees. It should provide benefit to both the debtor to be able to continue its business, and investors with risk appetite, so that they can obtain favourable returns,” Norley added.

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