Can someone else really handle it?

With each review, it seemed as if it was getting worse and she couldn’t bear the strain brought by the plague she had any longer. She had been subjected to various remedies in the hope of resuscitating her and all these had been administered to her in the hope of rescuing her. She had invested so much and an entire generation depended on her for support.
Sensing that a dead soldier was no good for the army, “concerned” relatives feared the worst, they sought help from someone who could handle it.

This has been and still is a familiar story for most companies in Zimbabwe who have found themselves under friendly or hostile judicial management. At the turn of dollarisation firms found themselves with eroded capital, dilapidated or obsolete plant and machinery, massive brain drain and choking debt costs to name but a few.

These factors fuelled the number of corporate failures and consequently, the number of firms going under judicial management. Around 30 companies have suffered this fate since 2010.

Judicial management provides a company with a moratorium of debts, as such, a conducive environment is created to allow the judicial manager to re-assess the company and construct a rescue plan whilst the company is in a going concern mode.

Theoretically, this system is meant to be win-win situation to all company stakeholders in that creditors will have a better chance of recovering their debts, shareholders will realise value rather than lose out completely on their investment and employees will have an opportunity to keep their jobs and perhaps work for a more enhanced and better remunerating company.

Reality, however, is not as clean-cut and the playing field for the stakeholders is not level. Once a company is under judicial management there seems to be a huge dip in the confidence levels posed on that company and its management and this move might influence the lines of credit that may be availed to such a firm.

Upon analysing the root cause of this, one will realise that in most instances what is now left of the business is just the brand and the underlying business model is not sustainable. Perhaps this explains why in most instances, other than the common outcry on liquidity squeeze, the shareholders do not have to inject more capital into the business.

One would expect that though high cost debt is choking the firm and masking a viable business model, potential investors can take advantage of the undervalued firm and recapitalise the company to the benefit of most stakeholders e.g. employers and creditors.
Recently the Confederation of Zimbabwe Industries held its congress under the theme “Imperatives for Reversing De-Industrialisation” in order to map out a policy implementation matrix in the turnaround of the industry.

The main reasons cited for low capacity utilisation were lack of financing mechanisms, obsolete machinery and equipment and abundance of cheap imports. With this is mind, this means that a re-engineering of the current business models to accommodate technological and global advances as well as ensure competitiveness is inevitable.

There are a few success stories of re-engineered businesses like Capital Bank, which was a strategic reinvention of Renaissance Merchant Bank, however, if success rates for companies under judicial management are to improve, economic policies that address these challenges have to be crafted and implemented.

The real and effective judicial management rescue plan that can be crafted for any company is thus the national economic turnaround. In an economy with tight liquidity and facing stiff competition from regional and international players, using judicial management as an effective resuscitation tool should require a complete re-think of the company’s business model.

Manufacturing companies have been the worst hit as evidenced by the current 39,6 percent capacity utilisation in that sector. Many large corporate entities, like Cairns, David Whitehead, Steelnet, Jaggers, Wallace laboratories to name a few have not come out of the theatre alive.

Was it because the rescue plan was not efficient, or life support cannot be rendered to an already dead being? With the worrisome success rate of judicial management, one might assume that judicial management is a form of delayed liquidation.

Secured creditors will take some degree of comfort in their collateral, although in a liquidity squeezed economy they might not realise the initial worth of their security. Shareholders will have to swallow the bitter pill of being the last of the list, if at all they salvage anything from their once treasured investment.

Employees of the firm cannot put a price tag to their loss, as they may be forced to go for months on a fraction of their salary or even worse unpaid. Moreover, in such a scenario, investments towards a retirement plan through pensions will be minimal. Not to mention the impact on the future of the dependants of these employees who are to lead tomorrow’s economy.

Whilst the requirements for application of provisional judicial management are clearly spelt out, the timing as to when such a tool should be considered should be relooked at. Should relevant stakeholders watch the entire capital being eroded away before the emergency button is pushed?

Phoenix was recently added to the list of companies under judicial management, whilst still apparently having a positive NAV, but was hounded by one of its banking creditors. Whether this is the correct timing and if it will resurface on the stock exchange is yet to be assessed.

PG Industries latest set of financial results had no capital to talk about at a negative value of US$782,062 and yet the company continues to be active on the stock exchange. Perhaps the watchful eye of the regulator needs to be sharper and even assess the viability of business models of these companies.

In conclusion, who are the beneficiaries of judicial management. Is it the company itself, its shareholders, its workers, creditors and lenders, or the judicial managers themselves?

Many commentators regard the latter as being the major beneficiary as they certainly do not do the job for nothing. Interestingly, overseas, many companies do come out of judicial management.

For example, General Motors, one of the largest United States corporations, which filed under Chapter 11 for bankruptcy protection in the United States, came out of insolvency to re-list on the NYSE. Will that ever happen in Zimbabwe, and if not, why not?

This article was written by Zimnat Asset Management for FinX