Lumkile Mondi

Funding in tough times As the financial crisis begins to bite, the IDC has had to look at various approaches to bail out distressed firms. The IDC's Chief Economist, Lumkile Mondi outlines the organisation's tactics.

...Before providing assistance to struggling companies, we need to ensure that they meet the right criteria.

The US has bailout fever. In October last year, Congress passed the Emergency Economic Stabilisation Act, which authorised the Treasury Department to spend $700 billion to combat the financial crisis. Banks, insurers and auto manufacturers lined up one after the other, begging bowl in hand, as the US Government doled out financial assistance to keep them from going under. In South Africa, we unfortunately don’t have the luxury of this magnitude of funding to help out every ailing company.  

It’s a hard pill to swallow.  With workers being retrenched on a massive scale and economic growth shrinking, shareholders and investors are looking to the IDC to save them.  But as a self-financing development finance institution, the IDC has a responsibility to ensure that its investments facilitate the preservation of value and generate returns, which it can reinvest in developmental opportunities for the longer-term benefit of South Africa, and the rest of the continent. 

The IDC’s objective is to provide development finance for industrial and entrepreneurial development and to protect SA’s valuable industrial capacity.   We do this on the basis of economic and developmental merit, with a view of supporting sustainable businesses that make a real difference in terms of their positive impact on rural development, black economic empowerment, jobs and regional diversification in South Africa. 

The IDC has a long track record of supporting struggling clients - our Workout and Restructuring Unit is core to the IDC’s business model and has been in existence long before the global downturn. The department’s mission is to contribute to the development of sustainable businesses by adopting a patient approach to existing IDC partners who are in distress and by providing solutions which result in their turnaround.  Last year, the IDC helped provide restructuring solutions to more than 50 clients. 

While a bailout comprises a liquidity injection into struggling companies, there are numerous other ways in which the IDC can assist distressed companies. These include restructuring a business partner’s debt obligations with the IDC, for example converting debt finance into equity or the deferment of capital and interest repayments.  Other turnaround solutions may include finding new investors, bringing in strategic operating partners, appointing consultants and providing business support through our Business Support Programme.  

We use our skills to evaluate the economic viability and sustainability of businesses on a case-by-case basis, but before providing assistance to struggling companies, we need to ensure that they meet the right criteria. If bailouts are to be the basis of a sustainable long-term solution, we need to ensure that these companies will survive post-crisis. The bottom line is that we can’t use good money to keep bad businesses in business.

One of the factors we consider when we’re looking to assist distressed companies is whether their financial problems are the result of the financial crisis or are caused by other factors.  Good candidates for bailouts include businesses that have been well run for the previous three years and whose management is committed to turning the business around.  Globally competitive companies are prime candidates of the IDC’s support due to their critical role in addressing the country’s widening current account deficit in the balance of payments.

With regard to mitigating the effects of the global crisis, the IDC has been in close discussion with the Department of Trade and Industry, which forms part of the task team appointed by the President, to present solutions to struggling industries in these challenging times. 

It’s worth remembering that South Africa faces very different challenges to the US.  We have a far higher unemployment rate and a lower skills base.  What works in the US, does not necessarily work here and we need to resist the temptation of using an American prescription to treat a South African ailment.

What makes a good bailout candidate?

• Strong performance track record over the past three years
• Management and shareholder commitment to turning the business around
• A sound restructuring and business plan
• Ability to pay back the IDC and its shareholders