2022 Deloitte Restructuring Survey - The battle for trust: improving restructuring outcomes in an uncertain world
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2022 Deloitte Restructuring Survey The battle for trust: improving restructuring outcomes in an uncertain world April 2022
Contents
Foreword
Economic growth: a distant dream? ............. 2 It gives me great pleasure to share The views of the C-Suite are critical to
the results of our 2022 Deloitte understanding one of the key challenges
Restructuring Survey with you. This faced by the restructuring industry
A crash of grey rhinos ................................................... 5 year’s survey is by far our most ambitious – that restructuring negotiations are
undertaking to date. Not only have we triggered too late, limiting the options
expanded the stakeholders surveyed available for recovery. So when in our
A stitch in time: measuring distress ........... 10
to include the views of our clients – the survey the C-Suite says that seeking
C-Suite – but we have also broadened the external support is of lesser importance,
Business rescue: a crisis of trust? ................. 15 regions to include key African countries: this should set alarm bells ringing that
Nigeria and Kenya. Our ambition is for management teams and their key
this survey to become the first port of stakeholders are working at cross-
The rise of distressed M&A .................................. 20 call for restructuring views Africa-wide; to purposes, which inevitably causes more
that end, we will continue to expand into delays.
new territories in the years to come.
Survey methodology .................................................... 24 It appears that business rescue has lost With the overall sentiment for economic
Our 2021 survey predicted a sharp its shine and distressed M&A is rapidly growth in South Africa for the next 12
increase in restructuring activity gaining pace in being the preferred exit months being pessimistic, and strong
compared to 2020. However, this did route from distress. Not only is this optimism for growth in restructuring
not materialise for the majority in the highlighted through our survey results, activity, it looks like the restructuring
restructuring profession. Predominantly but also in the analysis of Companies industry is in for an interesting ride!
legacy matters kept practitioners busy. and Intellectual Property Commission Will this be the year that the predicted
There are many hypotheses as to why (CIPC) business rescue statistics and increase in restructuring activity
this was the case, including: the reversal Stats SA’s insolvency and liquidation materialises?
of 2020 credit impairment positions, statistics. There is clearly much work
Covid-light covenants, and greater to do in improving trust between
accommodation by lenders and other business rescue practitioners (BRPs) and
financial stakeholders in extending tenor their stakeholders, with respondents
and repayment profiles. However, a slow expressing a clear desire for regular,
Jo Mitchell-Marais
return to ‘normal’ may start to unwind honest communication and robust
the accommodative stance enjoyed by regulation. Africa Turnaround & Restructuring
clients over the past two years. Leader
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 1
Economic growth: a distant dream? 2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 2
This survey was conducted in January 2022 when green C-Suite (SA) 40% 60%
shoots were beginning to bloom for the South African Figure 1.1: How optimistic are you about growth prospects in South Africa over the next 12 months?
economy in the wake of the Covid-19 pandemic. Pent-up
demand was being fuelled by consumers who were finally Lenders (SA) 68% 32%
C-Suite (SA) 40% 60%
emerging from 18 months of intermittent lockdowns;
the accompanying surge in trade triggered a commodity
boom, low interest rates provided relief to households and South Africa 63% 37%
corporates alike, and the first shot had yet to be fired in Lenders (SA) 68% 32%
Ukraine. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
South Africa Pessimistic Optimistic 63% 37%
Despite these benign conditions, 63% of respondents
felt downbeat about growth prospects in South Africa.
But this pessimism was far from unanimous. Our C-Suite 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
respondents were far more optimistic than those in the Pessimistic Optimistic
restructuring industry, having experienced the buoyant
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders
factors above first-hand along with unprecedented lenience
from lenders.
Figure 1.2: Consumer price inflation vs central bank rate
Lenders, on the other hand, were the more skeptical group, 8%
which we believe is driven by two key factors: inflation and
consumer sentiment.
Inflation bites 8%
6%
In 2021, global inflation ticked ever higher as demand from
lockdown-free consumers in Europe and North America
outstripped supply from key hubs in Asia where production 6%
4%
continues to be interrupted by draconian lockdowns. The
war in Ukraine is likely to compound this as wheat supply
interruptions trigger food inflation and energy prices soar.
4%
All eyes will turn to central banks, and the United States (US) 2%
Federal Reserve in particular. As Figure 1.2 shows, both the
US federal rate and South African repo rate are due a rise.
Market commentators disagree on whether this should be
a 100, 150 or even 200 basis point increase, but our lender 2%
-
respondents are well placed to foresee the impact on their Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
corporate and retail clients.
SA repo rate US fed rate SA inflation US inflation
Source: Economist Intelligence Unit, 2022
-
Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
SA repoinrate
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes an uncertainUS fed rate
world SA inflation US inflation 3
Consumers under pressure Figure 1.3: Labour and consumer market conditions in South Africa
9% 90.0%
% (real wage growth, house price growth, default rate)
Reported
unemployment of The gap
35% between
rich and poor
6% 60.0%
is now the highest in
widens
% (unemployment rate)
the world
3% 30.0%
Another key driver for the pessimism of survey respondents
is the increasing pressure on consumers. Many of the almost
0% 0%
three million jobs lost in the pandemic have not returned 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
and reported unemployment of 35% is now the highest in
the world. For those in work, real wage growth has been
falling since 2010 while the growth in asset prices over the -3% -30.0%
same period has widened the inequality gap with each
passing year. It is no surprise then that consumer defaults
are at their highest level since the global financial crisis,
despite record low interest rates. -6% -60.0%
House price growth Real wage growth Consumer debt default rate Unemployment rate
As the gap between rich and poor widens, consumer
Source: Economist Intelligence Unit, 2022
spending patterns will continue to polarise, and demand for
convenience, accelerated by the pandemic, will be the norm.
Companies exposed to the South African consumer can
either adapt to these trends and thrive or ignore the signs
and suffer the consequences.
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 4
A crash of grey rhinos 2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 5
Michele Wucker coined the term “grey rhinos” for high
impact risks people should see coming but invariably ignore Figure 2.1: How do respondents perceive the impact and likelihood of grey rhino risks?
until it is too late, like reacting to a rhino aiming its horn in
Top five risks by likelihood: Top five risks by impact:
their direction and preparing to charge. In her 2016 book
The Gray Rhino, she cautioned that “the frequency of 1 Climate change 1 Price instability
pandemics warns of a much bigger global health threat to
2 Emigration of talent 2 Political uncertainty
come: it’s not a matter of if but when”. As the world recovers
from the last grey rhino charge, and with the next one 3 Sovereign debt crisis 3 Sovereign debt crisis
already with us, it seems a fitting time to ask for respondent 4 Income inequality 4 Corruption
y-axis = likelihood of impact
views on what risks they see on the horizon. (5 = greatest likelihood, 1 = least likelihood)
5 Political uncertainty 5 Income inequality
5.00 Climate change
Africa’s grey rhino risks Emigration of talent
Sovereign debt crisis
As shown in Figure 2.1, survey respondents across Africa Income inequality
Political uncertainty
4.00
are most concerned about local risks: political uncertainty,
the emigration of talent and sovereign debt crises featured
x-axis = severity of impact on business if risk were to occur Commodity
prominently across jurisdictions. Global risks that keep (5 = greatest impact, 1 = least impact) shock
Corruption
leaders in advanced economies awake at night – climate Average impact = 2.95 / 5.00 3.00
change, geopolitical tension, and digital inequality – are less 2.00 2.50 3.00 3.50 4.00
New health crises
of a concern for Africa. This could partly be due to Africa
Credit crunch
having enjoyed relative shelter from the worst financial Digital inequality
Currency risk
and health effects of the global financial crisis and Covid-19 2.00
pandemic respectively. Protest action
Geopolitical
More likely is that for businesses leaders in Africa, political tension Low consumer confidence
and economic uncertainty are more pressing priorities. 1.00 Price instability
Average likelihood = 2.92 / 5.00
By 2024, developing countries (excluding China) are Global risk Local risk
expected to be 5.5% behind pre-pandemic
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions and stakeholders
GDP, while advanced economies are
forecast to be 0.9% ahead. While the By 2024,
focus on immediate risks that loom developing countries
Advanced
large for Africa is understandable, (excluding China) are
economies are
recent events in Ukraine show that expected to be
5.5%
forecast to be
business leaders should not lose
sight of global risks that could have behind pre-pandemic
0.9% “We are all lurching from crisis to crisis in the current circumstances,
an impact on the continent. GDP
ahead so who knows what’s going to happen over the next 12 months?”
– Restructuring Partner, South African law firm
Source: IMF World Economic Outlook, October 2021
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 6
With that said, increasing divergence between developing
economies in Africa and advanced economies elsewhere Figure 2.2: To what extent do you consider the risks selected to be short term, medium term or long term?
brings local risks to the fore, and our survey respondents
believe that these will play out over extended timeframes – Long term risks:
Climate change
see Figure 2.2. > three years Sovereign debt crisis
Emigration Corruption
Income inequality
of talent
Political Geopolitical tension
uncertainty Digital inequality
These risks will become more frequent, and arrive
Price instability New health crises Currency risk
simultaneously – a crash of grey rhinos. For companies, this Protest action
Low consumer confidence Commodity shock
Credit crunch
means operating in a highly uncertain environment which Medium term risks:
one to three years
requires resilience and agility. For lenders and restructuring
professionals, this means that clients that look like winners in
one season can quickly become distressed in the next.
Short term risks:
< one year
Global risk Local risk
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions and stakeholders
How can companies respond to Figure 2.3: How prepared are you/your clients to respond to the risks you selected?
grey rhino risks? Emigration of talent 85% 15%
Price instability 85% 15%
Survey respondents across Africa, including the C-Suite,
believe that management teams are most prepared for the Commodity shock 80% 20%
crises of the past: top of the pile are new health crises (63% Credit crunch 79% 21%
believe companies are prepared), protest action (50%) and Income inequality 79% 21%
currency risk (44%). Climate change 76% 24%
Political uncertainty 75% 25%
Concerningly, the risks respondents believe companies are
Geopolitical tension 74% 26%
least prepared for are those they rated as highest likelihood
or impact in Figure 2.1: price instability (15% believe Digital inequality 69% 31%
companies are prepared), emigration of talent (15%) and Sovereign debt crisis 67% 33%
income inequality (21%). Low consumer confidence 64% 36%
Corruption 62% 38%
Currency risk 56% 44%
Protest action 50% 50%
New health crises 37% 63%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Unprepared Prepared
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions and stakeholders
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 7
So how can management teams better prepare their
companies for grey rhino events? C-Suite respondents Figure 2.4: Please rank the following actions in Figure 2.5: Please rank the following actions in
ranked actions within their control – diversification, response to a risk event (C-Suite response) response to a risk event (lender response)
establishing crisis committees and appointing advisors –
the highest. Lenders, on the other hand, recommend their Ensure
Ensure
emergency
emergency
Diversification
Diversification
to to 2.0 2.0 2.9 2.9
clients engage with their bankers to ensure emergency manage
manageindividual
individual
risksrisks funding
funding
lines
lines
are are
available
available
funding lines are available.
Establish
Establish
crisis
crisis
committee
committee 3.2 3.2 Seek
Seek
professional
professional
advice
advice 3.0 3.0
Creating financial resilience Seek
Seek
professional
professional
advice
advice 3.3 3.3 Develop
Develop
crisis
crisis
playbook
playbook 3.2 3.2
One of the hard lessons from the Covid-19 pandemic was Develop
Develop
crisis
crisis
playbook
playbook 3.6 3.6 Establish
Establish
crisis
crisis
committee
committee 3.3 3.3
the importance of liquidity buffers. A key aspect of financial
Ensure
Ensure
emergency
emergency 4.0 4.0 Diversification
Diversification
to to 3.7 3.7
resilience in the face of a grey rhino risk is having sufficient funding
funding
lines
lines
are are
available
available manage
manageindividual
individual
risksrisks
cash runway to implement the operational and financial
Increase
Increase
insurance
insurance 4.9 4.9 Increase
Increase
insurance
insurance 4.8 4.8
rightsizing required to survive and thrive. coverage
coverage coverage
coverage
0 0 1 1 2 2 3 3 4 4 5 5 0 0 1 1 2 2 3 3 4 4 5 5
While lender respondents to our survey have indicated
Average
Average
ranking
ranking
(1 = (1
most
= most
important
important
action)
action) Average
Average
ranking
ranking
(1 = (1
most
= most
important
important
action)
action)
that they may be open to discussing emergency funding
Source: Deloitte Africa Restructuring Survey results, 2022 Source: Deloitte Africa Restructuring Survey results, 2022
lines, contingent credit is still credit. So, as demonstrated by Respondents: All regions, C-Suite only Respondents: All regions, lenders only
lenders’ response to the question “What actions would you
recommend to clients when approaching you with a credit
request?” (Figure 2.6), the following factors will determine Figure 2.6: What action(s) would you recommend to clients when approaching you with a credit request?
the success of an application:
y Use of funds: emergency funding lines are exactly that – for Demonstrate 'skin in the game' 85%
emergencies. Lenders are unlikely to look favourably on
additional requests if the original loan was used for Demonstrate plan for repayments 62%
day-to-day needs
Provide adequate protection
54%
y Demonstrate skin in the game: consider alternative sources (e.g. security)
of funding, for example, shareholders, and show lenders Provide robust financial information
31%
that these have been exhausted to support the request
y De-risk the request: lenders prefer requests supported by Seek professional advice 15%
robust cash flow forecasts that show that, even in a
Be proactive: apply before it becomes
worst-case scenario, the emergency funding can be repaid time critical
15%
in full.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions, lenders only
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 8
A key additional aspect to consider is timing. While lenders
believe timing is less important than the other factors in Figure 2.7: Month-on-month change in private sector credit extension
Figure 2.6, this is a reflection of how important those other
10%
factors are, not that timing is not critical. Management
and their advisors should consider obtaining funding lines
well before they are needed. As the pandemic proved,
last-minute requests will join a queue as credit committees 5%
become overwhelmed by credit applications.
We at Deloitte believe that the time to have these
conversations is now. As shown in Figure 2.7, corporate 0%
Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
credit extensions have been on the decrease since the
height of the pandemic as well-run companies take a
conservative approach to leverage and weaker companies
-5%
struggle to access capital. At the same time, the cost of not
lending capital is increasing for banks (Figure 2.8) and the
interest rate environment is likely to remain accommodative
relative to historical levels in the immediate term. -10%
Household debt Corporate debt
Halting a crash of grey rhinos may well be impossible, but by Source: SARB, 2021
encouraging proactive steps to managing risk, the worst of
the charge may be avoided.
Figure 2.8: Weighted average cost of funding for South African banks
100
This graph shows deposit rates relative to
JIBAR, i.e. the relative cost of holding
deposits for a bank. A higher basis point
50
suggests a higher relative cost of holding
deposits (cost of funding).
Basis points
0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
-50
-100
Source: SARB, 2021
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 9A stitch in time: measuring distress 2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 10
In a world of frequent grey rhino events and consistent
uncertainty, new winners and losers will emerge across Figure 3.1: Please rank your level of optimism about growth in the following sectors over the next 12 months
regions, countries, social classes and sectors, as well Technology 3.22
as between peers within sectors. The pandemic was Telecoms, media & entertainment 2.97
devastating for sectors highly reliant on nine-to-five office Healthcare 2.83
workers – real estate, automotive and transport – while Banking & capital markets 2.80
sectors such as technology and telecoms benefitted from Oil, gas & chemicals 2.77
work-from-home trends. This is reflected in our South Mining & metals 2.76
African respondents’ sector sentiment in Figure 3.1. Investment management 2.71
Life sciences 2.69
While its duration is uncertain, the war in Ukraine will shift Tourism & hospitality 2.67
trends again as consumers feel the impact of fuel and food Insurance 2.66
Consumer products 2.64
inflation; retailers that were reaping the rewards of pent-up
Power, utilities & renewables 2.63
demand six months ago may show signs of stress later this
Retail 2.59
year. Meanwhile, gold and Platinum Group Metals (PGM)
Industrial products & construction 2.47
producers that were in the doldrums in 2020 are likely to ride
Transportation 2.40
ever-higher commodity prices.
Real estate 2.29
Automotive 2.20
In this environment, where winners can become losers Infrastructure 2.08
alarmingly quickly, the proactive tracking of indicators Central government 1.73
of financial stress is critically important for boards, 0 1 2 3 4
management teams, lenders, and other financial Average sentiment (4 = very optimstic, 1 = very pessimistic)
stakeholders.
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders
Tracking indicators of financial Figure 3.2: Please select the five KPIs you consider to be the most effective indicators of financial stress
stress Declining operating/free cash flow 85%
Change in revenue 58%
A key question posed to survey respondents was which Adverse change in debt ratios 56%
metrics they consider to be the most effective indicators of Working capital movement 56%
financial stress. The top answer was declining operational/ EBITDA/operating margin erosion 55%
free cash flow; 85% of respondents across Africa included Negative closing cash 47%
this in their top five, and the remaining top metrics were Gross margin erosion 41%
trading or cash flow related. Net profit margin erosion 40%
Declining net asset value 34%
Professionals in the restructuring industry will not be Share price volatility 14%
surprised by this finding: cash is the lifeblood of business Other 10%
and close cash flow tracking and management are critically
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
important as signs of stress appear.
Frequency of selection
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions and stakeholders
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 11While survey respondents across geographies and roles
broadly agree on which are the most important indicators Figure 3.3: What are the most effective measures of financial stress and how often are these tracked by
of financial stress, views diverge on how often these are companies ?
tracked by management teams. y-axis = importance of metric
(100% = very important)
100%
Our C-Suite respondents believe that they regularly track Declining operating/free cash flow
revenue, profitability, cash flow and working capital, but
Change in revenue
acknowledge that debt ratios are less of a priority. Lenders’ EBITDA margin 80%
Working capital movement
perception, however, is almost diametrically opposed: they
believe that cash flow and balance sheet metrics are tracked Adverse change in debt ratios Negative closing cash
less often than headline-making revenue and share price Average use = 3.3 / 4.0 60%
Declining operating/
free cash flow
Change in revenue
indicators. x-axis = how often is metric used Working capital movement
(4.0 = most often) 3.4 3.6 3.8 4.0
2.6 2.8 3.0 3.2
This misalignment between the information that lenders 40% Share price volatility Declining net asset value EBITDA margin
Negative closing cash Gross margin Net profit margin Adverse change in debt ratios
and other restructuring professionals would like to see
Gross margin
measured and the actual information tracked and provided Net profit margin
to stakeholders is further demonstrated in Figure 3.4, 20%
Declining net asset value
where lenders across Africa rank the availability of reliable
Share price volatility
information as one of the highest barriers to decision-
0%
making, second only to the bank’s reputation.
Average importance = 49%
Key: = cash flow metric = income statement metric = other metric Green text = lender response Blue text = -C-Suite response
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions and stakeholders
Figure 3.4: To what extent are the following factors barriers to taking appropriate action as a lender?
“Clients wake up to indicators of distress
when things have fallen off a cliff.” Reputational risk 2.96
Availability of reliable financial
– Restructuring Banker, Development Finance 2.92
information
Institution
Systemic impact of action 2.88
Pressure from government 2.62
Pressure from other creditors 2.54
Pressure from unions 2.38
0 1 2 3 4
Extent of barrier (4 = very high barrier, 1 = very low barrier)
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions, lenders only
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 12Stakeholder dynamics Figure 3.5: If you became aware of one of the following triggers, what corrective action would you take?
C-Suite respondents across Africa prefer to manage stress Withdrawal of facilities 45% 18% 27% 10%
and distress in-house. Figure 3.5 shows management’s
preferred course of action when distress triggers Threat of creditor action 9% 36% 10% 45%
materialise; in-house corrective actions are in shades of teal Share price erosion 18% 10% 18% 36% 18%
while external actions are in shades of grey. It is telling that
even for trigger events that would almost certainly require New acquisition is performing poorly 18% 27% 27% 28%
external input at some stage – withdrawal of facilities,
Loss of key customer/supplier 18% 82%
forecast insufficient cash flow for debt service, covenant
breach forecast within the next 12 months – our C-Suite Impairment of cash-generating assets 18% 18% 36% 28%
respondents’ instinct is to monitor trading, take action as a
Forecast insufficient cash flow for debt service 36% 36% 28%
management team and consult with the board.
External funding required 27% 10% 45% 18%
When external support is required, our C-Suite respondents
identified legal counsel as their first port of call, followed by Covenant breach forecast 36% 55% 9%
financial advisors and then lenders. Auditors are by some 0% 25% 50% 75% 100%
distance the last to the party. Frequence of selection
Monitor trading Take immediate action as a management team
We believe that the combination of factors discussed in Consult with the board Seek professional advice
this section – management teams placing less focus on Seek support from external stakeholders
tracking key cash-focused indicators of financial stress, and Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions, C-Suite only
their reticence to alert external stakeholders of the warning
signs – make surprises the new normal. Long-ignored grey Figure 3.6: Please rank the following external stakeholders in the order in which you would approach
rhino risks will suddenly rear their heads and financial them if your company began experiencing financial stress
stakeholders will discover their true impact on companies
when it is almost too late.
Legal counsel 2.45
Financial advisors 2.64
Lenders 2.82
Suppliers/customers 3.18
“In South Africa, we say ‘n boer maak
‘n plan – management focus their Auditors 3.91
attention on the fire that is burning.” 0 1.0 2.0 3.0 4.0
Average ranking (lower number = higher ranking)
– Head of Restructuring, Development Finance
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions, C-Suite only
Institution
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 13This, in turn, will result in an uptick in distressed financial
restructurings where time and optionality are limited. And Figure 3.7: How optimistic are you about growth in
survey respondents agree: 84% of restructuring lawyers, your local restructuring industry?
lenders and practitioners are optimistic about growth in
restructuring activity over the next 12 months, and 62%
(Figure 3.8) believe that business rescue can be improved
by providing BRPs with more time to assess rescue options,
16% 15% 10%
whether before or during business rescue.
Increase
Very optimistic
84% 30% 60% No change
Optimistic
Decrease
Not optimistic
are optimistic
69%
about growth in
restructuring
activity 62%
believe that BRPs
need more time
Source: Deloitte Africa Restructuring Survey results, 2022
Respondents: All regions and stakeholders excl. C-Suite
Figure 3.8: Which of the following factors would most improve business rescue success in South Africa?
“Speaking to colleagues and clients in
Pre-assessment prior
to business rescue 37% the banking world, there is a lot that
Time given to assess reasonable is bubbling underneath the surface
25%
prospect of rescue
– indulgences have been given and
Better oversight of business
rescue practitioners 18% hard decisions now need to be taken.”
More powers to creditors 8% – Restructuring Partner, South African law firm
Clarify the ranking of claims 5%
Other 7%
0% 10% 20% 30% 40%
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 14Business rescue: a crisis of trust? 2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 15
While business rescue may have taken a back seat in 2021
(Figure 4.1), it does look to make something of a comeback Figure 4.1: Number of liquidations vs total business rescues in South Africa
in 2022, with 60% of respondents saying that they expect 3 000 500
the level of business rescue in their portfolios to increase, if
450
not significantly increase (Figure 4.2). This is unsurprising
given respondents’ pessimism around economic growth in
400
South Africa.
350
2 000
No. of business rescues
No. of liqudations
300
250
200
1 000
150
“The negative perception of business
100
rescue in South Africa needs to
be addressed. Liquidation is often 50
preferred.” -
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Liquidations Business rescues
– Head of Restructuring, South African law firm
Source: Source: CIPC, 2021
Figure 4.2: How do you expect the proportion of clients in business rescue to change
63% over the next 12 months?
are pessimistic about
economic growth in
16% 15% 10%
South Africa
60% Increase
are expecting Very optimistic
an increase in 30% 60% No change
Optimistic
business rescue Decrease
Not optimistic
69%
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 16However, what is evident is that there is a widening trust gap
between practitioners and their stakeholders. Low success Figure 4.3: What has the success rate been of clients you have dealt with that have entered business
rates, experienced especially by lenders, contribute to this rescue?
(Figure 4.3). The suitability of the BRP is also rated as one of
the main reasons that business rescue fails, ranking closely
behind a lack of post-commencement financing (PCF) as a
Lawyers 30% 20% 15% 35%
cause of failure (Figure 4.4). While the adage of the past was
“no PCF, no BR”, perhaps this needs to change to “reputable
BRP, successful rescue”?
Lenders 48% 16% 28% 8%
Practitioners 24% 17% 31% 28%
0% 25% 50% 75% 100%
0% - 25% 26% - 50% 51% - 75% 76% - 100%
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
Figure 4.4: Please rank the following factors from the most likely to cause an unsuccessful business
rescue process to the least likely
No reasonable 2.1
prospect of rescue
No post-commencement 2.3
financing available
Unsuitable business 2.4
rescue practitioner
“The Companies Act … includes the spirit
Stakeholder conflict
of what business rescue is supposed to 3.5
be. The problem is that many BRPs lack Other 4.6
the skill and ethics to do it properly.”
0 1 2 3 4 5
Average ranking (lower number = higher ranking)
– Business Rescue Practitioner
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
2022 survey – BRPs 90% 10%
2022 survey – South Africa 21% 43% 7% 22% 7%
2021 survey – South Africa 27% 44% 16% 12% 1%
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 17Despite there being 393 registered BRPs on the CIPC
database as at 27 January 2022, 77% of respondents believe Figure 4.5: How many business rescue practitioners do you believe are adequately skilled and qualified to
that there are fewer than 30 BRPs who are adequately skilled perform their duties?
and qualified to perform their duties. This is also the view
BRPs 40% 20% 30% 10%
of 90% of the BRPs interviewed (Figure 4.5). What speaks Consequences for poor peformance 16%
directly to the trust gap is that ethics and integrity, together South Africa total 34%
Ethics and integrity 22%16% 21% 14% 3% 6%
22%
with consequences for poor performance, are cited as the
Experience
0% level (nature or length) 25% 14% 50% 75% 100%
main areas which, if addressed, should improve this skills 42%
Depth in business rescue
100
and qualification gap (Figure 4.6). Interestingly, in 2021,
ethics and integrity (22%) ranked behind level of experience Ability
Source: Deloitte Africa to manage
Restructuring stakeholders
Survey results, 2022 | Respondents: South Africa, all11%
stakeholders excl. C-Suite
(42%), whereas they are front and centre in 2022 with length Extent of regulation in the industry 8%
22%
of experience ranking third – supporting the view that this is
Figure 4.6: Please select up to three factors that8%you believe would improve the skills and qualifications of BRPs
Mentorship programme
the biggest issue that needs to be addressed. Consequences for poor peformance
Publicly available track record 7% 16%
Ethics and integrity
Entrance exam 4% 16%
8% 22%
Lenders and lawyers further require regular, honest
Experience level (nature or length)
Other 3% 14%
communication to improve trust in the process, followed 6% 42%
Depth
2022 in business2021
rescue practitioner team 0% 13%
closely by taking immediate control of cash. Some may argue survey survey 10% 20% 30% 40% 50%
that this is essentially ‘doing your job’ (Figure 4.7). This Ability to manage stakeholders 11%
finding speaks to the low levels of confidence and trust in Extent of regulation in the industry 8%
22%
the professionals tasked to oversee business rescue, which Mentorship programme 8%
if not quickly corrected and addressed, could tarnish the Publicly available track record 7%
reputation of business rescue irreparably.
Entrance exam 4%
8%
Other 3%
6%
2022 survey 2021 survey 0% 10% 20% 30% 40% 50%
Source: Deloitte Africa Restructuring Survey results, 2021 & 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
Figure 4.7: To what extent would the following business rescue practitioner factors improve your trust in
the process?
1%
Regular, honest communication 85% 14%
Immediate control of cash 71% 22% 5% 2%
Track record of delivery 68% 30% 1%
1%
Previous experience working with the BRP 62% 29% 7% 2%
Fast development of a common information platform 45% 44% 10% 1%
1%
Regular, honest communication 0% 25% 85% 50% 75% 14% 100%
Greater extent Some extent Lesser extent Not applicable
Immediate
Source: Deloitte Africa Restructuring control
Survey results, 2022 | of cash
Respondents: South Africa, all stakeholders excl. 71%
C-Suite 22% 5% 2%
Track record of delivery 68% 30% 1%
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 18
1%In terms of BRP fees, survey respondents acknowledged
that the process is complex and that a fee structure should Figure 4.8: Do you think the uplift in fees requested by BRPs results in fair compensation?
reflect this. However, what is starting to emerge is that a
greater proportion of respondents believe that fees should
be linked to creditor recoveries. Not surprising is that none 2022 survey – BRPs 90% 10%
of the BRPs selected this option; instead, 90% favoured
fees being reflective of complexity (Figure 4.8). The greater
emphasis on linking fees to creditor recoveries again 2022 survey – South Africa 21% 43% 7% 22% 7%
aligns with a lack of trust as many stakeholders that were
interviewed cited misaligned objectives in business rescue
as a reason for concern, which often played out in terms of 2021 survey – South Africa 27% 44% 16% 12% 1%
fees.
0% 25% 50% 75% 100%
Where does responsibility lie for closing the trust gap? If Yes, the fees set out in the Companies Act are outdated
consequences for poor performance and better oversight Yes, it is a complex process and the fees need to reflect this
No, substantial implementation is rarely achieved and therefore objectives are misaligned
are required, this is surely the responsibility of the regulator
No, fees should be linked to creditor recoveries
and professional bodies. Arguably, the judiciary is playing
No, the fees for BRPs are regulated under the Companies Act and should be applied
its part, with 61% of respondents citing recent case law as a
force for positive change (Figure 4.9). However, the industry Source: Deloitte Africa Restructuring Survey results, 2021 & 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
cannot ignore the recent case law stating that the court does
not possess the necessary powers to order BRPs to repay
fees on account of misconduct as this is considered beyond Figure 4.9: How do you think that business rescue
the court’s powers. This places the burden firmly back on the case law over the past 12-18 months will impact the
CIPC and professional bodies to drive high ethical standards success of business rescue?
and ensure disciplinary procedures are robust and managed
fairly.
14%
Business rescue’s struggles have given rise to enhanced
opportunities for distressed M&A. It is no secret that M&A Improve success
has been experiencing a global boom as private equity
25% 61% No change
sponsors make up for a quiet 2020, cheap capital continues
Reduce success
to be widely available and strong demand for technology
assets continues. However, distressed M&A, hasn’t been
given much airtime or credence.
With business rescue experiencing a crisis of trust, is this the
opportunity for distressed M&A to shine? Source: Deloitte Africa Restructuring Survey results, 2022
Respondents: South Africa, all stakeholders excl. C-Suite
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 19The rise of distressed M&A 2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 20
Lenders 69% 15% 12% 4%
In the last year, the rise of distressed M&A, especially when
used as an exit strategy, has become evident. BRPs were Figure 5.1: What proportion31%
BRPs of your clients/portfolio
15% undertook
15%distressed M&A activity
39%in the past 12
the stakeholders that indicated that distressed M&A played months?
a greater part in their portfolios compared to any other
stakeholder. Commercial banks, possibly given the trust South Africa total 57% 15% 14% 14%
issues of business rescue, also expect greater distressed Lenders 69% 15% 12% 4%
M&A activity in their portfolios with 31% of commercial banks
indicating that more than 25% of their portfolios undertook 0% 25% 50% 75% 100%
distressed M&A in the past year (Figure 5.1), which is BRPs 31% 15% 15% 39%
0% - 25% 26% - 50% 51% - 75% 76% - 100%
expected to rise to 38% over the next year (Figure 5.2).
South Africa total 57% 15% 14% 14%
31% of commercial
banks indicated that
This is 0% 25% 50% 75% 100%
more than
expected to rise to
25% 38% 0% - 25% 26% - 50% 51% - 75% 76% - 100%
of their portfolios Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
over the next year
undertook distressed
M&A in the past year
Figure 5.2: What proportion of your clients/portfolio do you expect to undertake distressed M&A activity
in the next 12 months?
Lenders 62% 27% 11%
BRPs 23% 15% 23% 39%
South Africa total 40% 25% 21% 14%
Lenders 62% 27% 11%
0% 25% 50% 75% 100%
BRPs 23% 15% 23% 39%
0% - 25% 26% - 50% 51% - 75% 76% - 100%
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, all stakeholders excl. C-Suite
South Africa total 40% 25% 21% 14%
0% 25% 50% 75% 100%
0% - 25% 26% - 50% 51% - 75% 76% - 100%
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 21The C-Suite clearly see the opportunity that distressed
M&A will bring (Figure 5.3) as there is an expectation that Figure 5.3: Where do you see the opportunity for distressed M&A activity in the current environment?
competition will increase for distressed assets (Figure 5.4).
Those deals in more accommodative jurisdictions should be Access to new market 45% 27% 28%
more successful than others as regulatory risk remains, in
their opinion, the greatest challenge (Figure 5.5). Strategic fit 40% 50% 10%
Access to new capabilities 36% 45% 19%
“Restructuring is M&A on steroids,
Bargain valuation 18% 55% 27%
something is bound to sell during a
restructuring.” 0% 25% 50% 75% 100%
Very important Important Not important
– Business Rescue Practitioner Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: All regions, C-Suite only
Figure 5.4: Do you expect to see increased Figure 5.5: Where do you see the main
competition for distressed assets in your sector? challenge for distressed M&A activity in the
current environment?
9%
9%
18%
18%
18%
46%
46% 18%
18%
64%
18%
“In every single one of my big mandates
18%
there has been distressed M&A – there
Regulatory/political risk
is always a play by ariskthird party for the
Regulatory/political Definitely will not
Culture fit
Culture fit Probably will not
asset.” Access to liquidity to fund purchase Probably will
Access to liquidity to fund purchase
Quality of financial information/due diligence
Quality of financial information/due diligence Definitely will
– Head of Business Rescue, South African law firm
Source: Deloitte Africa Restructuring Survey results, 2022 Source: Deloitte Africa Restructuring Survey results, 2022
Respondents: All regions, C-Suite only Respondents: All regions, C-Suite only
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 22Distressed M&A can, and often does, go hand-in-hand with
business rescue. When the lawyers were asked to make one Figure 5.6: What change(s) would you make to the Companies Act 71 of 2008, Companies Act 61 of 1973 or
recommendation to improve business rescue legislation, the Insolvency Act 24 of 1936?
ability to conclude a ‘pre-pack’ business rescue was ranked
in the top three options behind establishing a dedicated Establishment of dedicated commercial courts 2.6
commercial court (perhaps no surprise for a legal audience!)
and almost equal with clarity regarding the ranking of PCF Promote and facilitate pre-pack deals 2.9
(Figure 5.6). Clear and enhanced PCF ranking to increase its availability 3.0
Ultimately, one could argue that a transaction in business Robust and formal accreditation process for BRPs 4.4
rescue through a distressed M&A would achieve both Ability for BRPs to convene enquiries 4.9
objectives of business rescue. Not only would one rescue
the business and provide opportunity for continued trade Clear and robust definition of financial distress 5.4
for creditors, but also ensure that creditors achieve a
Updating BRPs' fee structure 5.5
better result than in liquidation through the distribution of
proceeds to the pre-commencement creditors. Allow management to retain some control in business rescue 7.5
0 2 4 6 8
Average ranking (lower number = higher ranking)
Source: Deloitte Africa Restructuring Survey results, 2022 | Respondents: South Africa, lawyers only
“We love distressed M&A!”
– Head of Restructuring, Development Finance
Institution
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 23Survey
methodology
The Deloitte Restructuring Survey is an annual survey of restructuring
professionals and C-Suite executives, which as of this year was conducted
across South Africa, Kenya and Nigeria. Survey responses were collected
between 10 January 2022 and 11 February 2022. We are delighted to
report a 46% increase in the overall survey sample size to 111 compared to We are delighted
2021 (21% like-for-like increase to 92 in South Africa). to report a
The survey questions were tailored to stakeholder groups and regions. 46%
For example, the full population of 111 answered questions in relation to increase in the overall
survey sample size
grey rhino risks, while only the C-Suite were asked how they manage risks.
As a result, the sample size varies by question, but we ensured that
the response rate per question was sufficient before including
it in this document.
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 24Key contacts
Jo Mitchell-Marais
Africa Turnaround & Restructuring Leader
Direct: +27 11 209 6871
Mobile: +27 71 677 4038
jmitchellmarais@deloitte.co.za
Ken Afrah
Associate Director, Turnaround & Restructuring
Direct: +27 11 209 6469
Mobile: +27 78 941 1692
kenafrah@deloitte.co.za
Gregor Adrian Böttcher
Associate Director, Turnaround & Restructuring
Direct: +27 21 427 5467
Mobile: +27 72 894 9535
gbottcher@deloitte.co.za
Dakalo Maliga
Senior Manager, Turnaround & Restructuring
Direct: +27 11 209 8377
Mobile: +27 71 614 3495
dmaliga@deloitte.co.za
2022 Deloitte Restructuring Survey: The battle for trust: improving restructuring outcomes in an uncertain world 25Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more. Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our global network of member firms and related entities in more than 150 countries and territories (collectively, the “Deloitte organization”) serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 334,800 people make an impact that matters at www.deloitte.com. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities. © 2022. For information, contact Deloitte Touche Tohmatsu Limited. (SJH)
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