Backspin: From an unplayable position

After facing final liquidation, two luxury estates are back on course, writes Brendan Peacock

Prime plots being sold at Romansbaai Beach and Fynbos Estate on the Western Cape's Danger Point are north facing and sheltered from the prevailing southeaster.

This geographical boon is a handy analogy for the business rescue process that has enabled this estate and Port Elizabeth's luxury golf estate Wedgewood to emerge as viable concerns from the jaws of liquidation.

South African serial entrepreneur David Mostert, the developer and one of the original landowners, had placed the Romansbaai development into Pinnacle Point, which imploded five years ago.

When the Pinnacle Point development company went into liquidation in 2011, Mostert stood to take a significant loss. The group had sunk R270-million in infrastructure costs at Wedgewood, along with R60-million at Romansbaai.

The final liquidation account was all but signed off when Mostert and some allies in the form of a company called Cardinet applied for Wedgewood and Romansbaai to be placed in business rescue in October 2012.

"At Wedgewood it was a case of literally not being able to see the wood for the trees - the golf course had become completely overgrown with bush," said Mostert.

"We analysed the development that had already been done, with consultants. The big budgets for the development had been drawn up during the property boom period. We cut out all the middle layers."

The business-rescue plan seems to be working - which hasn't been the case in every instance where an ailing company has taken this step.

Business rescue is a relatively new development in South Africa, thanks to the new Companies Act. The aim is to "rehabilitate" a financially distressed company by providing temporary supervision of its affairs and instituting a moratorium on claims from creditors - rather than simply plunging it into liquidation.

The results have been mixed. Most famously, low-cost airline 1Time abandoned business rescue and eventually folded, while discount clothing retailer Meltz and African-themed restaurant chain Moyo entered business rescue in the hopes of either a sale or successful restructuring.

Gold miner Southgold Exploration, transport company SA Roadlink, IT company Zaptronix, weapons maker ATE South Africa, engineering firm Thuthuka Group, as well as construction companies Cosira and First Tech - involved at Medupi - all filed for business rescue.

Probably most sadly, the Johannesburg Philharmonic Orchestra was also forced to face the music and applied for voluntary business rescue in 2012.

At Romansbaai, the creditors, notably Nedbank, needed some convincing that the plan might work.

The bank had resigned itself to the liquidation, and had twice opposed the proposal for business rescue in court on the basis of the late stage.

"This was the first time a company in final liquidation had gone into business rescue," Mostert said.

"We presented a new budget based on different quotes, at a fraction of what they were before, and at figures that were assumed to be impossible during the property boom.

"We went to court in mid-January, and the judge ruled in our favour. Hans Klopper was appointed as business rescue practitioner."

Mostert, friends and family put up R17-million cash and over the past eight months transformed Wedgewood. About R20-million in property sales and pending transfers later, Mostert said he would have his money back in another two months.

He also spent R15-million at Romansbaai, where 37 of 202 first-phase units have been sold - including a R3.4-million front-row beachside plot to South Africa's richest man, Christo Wiese.

"I see R300-million to R400-million in sales possibilities at Wedgewood. Every extra thing we do adds value. It's what business rescue was supposed to do. The act makes provision for rescue to proceed even after summons if a court order has been obtained, before the final asset has been sold off. If we'd got into Wedgewood a month later it would have been lost."

Business-rescue statistics have shown a relatively poor turnaround success rate, but awareness and knowledge among businesses, creditors and business-rescue practitioners are growing.

"We presented a rescue plan and sourced all the funding in cash. We demonstrated to the court that we had the funding, that contractors were on board, and that we had the expertise to finish within the budget. Once Nedbank understood our plan they ceased to resist and we ended up with a plan based on consensus," Mostert said.

Klopper, the business-rescue practitioner in this case, said creditors and banks in particular felt vulnerable when they could not dictate terms. "Any scenario that removes distress and returns the business to solvency is first prize.

"A variety of techniques can be used to restructure, like reduction or writing-off of debt, but the process must place creditors in a better position than liquidation - the worst-case scenario. That's where it becomes a win-win."

In the case of Wedgewood and Romansbaai, a public auction as agricultural land would have brought much less than riding out the turnaround.

"We proposed a three-year repayment plan in the business plan, from forecast sales and based on a percentage of sales allocated to the repayment of debt. This is where a lot of business rescue plans can be bled dry. In our plan, the bank takes 50% of sales and the developer has some leeway - we needed the freedom to keep cash flowing through the business," said Mostert.

"If it makes commercial sense, creditors tend to buy in. My office has dealt with over 100 cases, and I'd say less than 10% failed. We have rescue plans and various ways to restructure in a rescue.

"My assessment of Wedgewood and Romansbaai is that they're already a success. Just look at the Wedgewood infrastructure. A year ago that was overgrown bush. If the process takes longer than the timeline set out in the plan, so be it - it's a success," said Klopper.

The three-month guideline for rescues is tight, and extensions are the norm, but Klopper said local lawmakers had got the process right.

"The legislation is a hybrid of the US's Chapter 11, with some Canadian and Australian measures thrown in. I've been to conferences overseas and delegates from the Far East especially - Japan, Korea, Hong Kong - are in awe.

"Business rescue is fantastic - I'd tag onto rescues if I could, fix businesses when the fundamental business plan has failed, and take opportunities," Mostert said.

He is not alone. Some private equity players are even sniffing around prerescue candidates to invest, according to Routledge Modise director Alex Eliott.

"The notion that business rescue is an investment opportunity has gained traction. There has been fund talk from the CIPC registering authority and the Industrial Development Corporation, although they have no money to set one up at the moment.

"Distressed investing will come, probably from private equity players. Creditors can even become owners - if there's a good business somewhere within a troubled company, that's an opportunity."

Eliott said receptiveness among creditors to business rescue had increased, although somewhat reluctantly.

"Creditors have had to lower their expectations. It may not result in getting 100 cents in the rand, but it's often better than a liquidation scenario. We now hear fewer complaints without substance from creditors."

The rescue landscape was changing, Eliott said. "There is consolidation - one-man practices have been allying with each other and with support staff. Specialised industry skills can be allocated, and even within one business there can be specialisation in the turnaround.

"Practitioners also cannot rely on one rescue at a time, and each case requires intensive attention. Skills are improving with experience."

What has to go right?

"You need an external entrepreneur to work in conjunction with the existing team, free cash and a way to do things differently from before," says David Mostert.

"You cannot follow the same route, plan and management to get a different outcome. Nothing was a holy cow when we devised the business rescue plan for Wedgewood and Romansbaai. All the creditors would get their money back," he said.

Mostert said that when they presented the rescue plan for Romansbaai, the banks didn't oppose it. He could show that the development could still meet its obligations to creditors.

"So far we've adhered to the business parameters and implemented ahead of the timelines, which were tight to begin with. All the preliminary work was finished before lodging the application. We also had a competent, engaging and pragmatic practitioner," he said.

He said they "took a scalpel to the previous structure, which had remained from the boom years".

Hans Klopper, insolvency and restructuring attorney and the business-rescue practitioner for Wedgewood and Romansbaai, said the urgency accompanying business rescues was unfortunate, but simply the nature of the process.

"You can't change until something goes wrong. Then the penny drops. Business leaders are usually in denial - they don't enter business rescue early enough, sometimes out of pride and reluctance to admit defeat. Business failure doesn't always lead to doom. It is, by nature, an eleventh-hour affair."