SAA’s R3.5 billion lifeline is just another government bailout: analyst
National Treasury has been unable to find the funds to fulfil its R2 billion promise to South African Airways (SAA) so it appears to have just fobbed it off to the Development Bank (DBSA), says Rashaad Tayob, fund manager at Abax Investments.
This means that the R3.5 billion lifeline the bank has given to the failed airline is basically just another government bailout, which appears to be the direction the ‘business rescue’ process is going.
Speaking to CNBC Africa about the funding, Tayob said that having a state-owned company funding another state-owned company is “literally moving money from one hand to the next”.
“It was a bit of a surprise stop-gap measure because Treasury has been unable to pay the R2 billion it committed to in December, when they announced they were putting SAA into business rescue,” he said.
“Some of us believed this (business rescue) was a good measure – but based on the events that have unfolded – ie putting in R4 billion – ‘business rescue’ has just turned into another bailout.
“With Treasury unable to make the transfer, they’ve obviously enlisted the DBSA to use their balance sheet and put the money in,” he said.
SAA’s business rescue practitioners said that the funding will be used for the restructuring of the airline, and that this will provide an opportunity to “develop a sustainable, competitive and efficient airline with a strategic equity partner remaining the objective of government”.
They added that this exercise will result in the preservation of jobs wherever possible.
However, while the funding might do well for SAA, which reportedly needs R8 billion to restructure, the R3.5 billion hit to the DBSA may not be as well received.
“The DBSA is one entity where the credit quality has been decreasing over time,” Tayob said.
“Historically, it has been a AAA-rated local entity because of its level of capital – they look to be in a very strong position with almost a 40% capital ratio. However, there are concerns about the nature of the loans on their balance sheet.”
Specifically, Tayob pointed to a R15 billion loan – unguaranteed – to Eskom, and the group’s exposure to financially insecure countries, and a large number of municipalities in South Africa, which are widely known to be in financial and operational disarray.
“Handing R3.5 billion to SAA, you might as well add it to the non-performing loan book on day one, because it’s impossible for them to make good on that loan – especially given the unwillingness to restructure the company,” he said.
Tayob said that going forward, investors are likely to be hesitant putting their lot in with state-owned groups like the DBSA and Industrial Development Corporation (IDC) if their exposure to failed SOEs increases like it did with the SAA deal.
He said that fund managers and investors have always suspected, and worried, that the state would increasingly turn to groups like the DBSA and IDC, which have good credit and high capital, to bail out state owned companies.
“(The SAA bailout) is evidence that our suspicions are coming to fruition,” he said.
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