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South African banks' debt rescue act

1 April 2010

Following the domestic recession of 2008/09, South Africa's banks have been coming up with innovative solutions for individuals and companies in debt distress - nursing a number of well-known firms out of insolvency, and saving thousands of homes from the auction floor.

According to Auction Alliance chief executive Rael Levitt, while the incidence of officially recorded insolvencies in the country grew only slightly - by 4.7 percent - in 2009, corporate and individual debt distress was not as mild as reflected in the official statistics.

"In light of the domestic recession in 2008/09, all the South African commercial banks have taken a non-liquidation recovery route when dealing with distressed debt," Levitt said in a statement on Wednesday.

For the banks, liquidation was the very last strategy they followed.

"They have all come up with a host of initiatives to avoid bankruptcy and home foreclosure."

Levitt said that in 2009, Auction Alliance had taken over 5 000 individual residential houses to the auction floors, all arising from distressed debtors and debt delinquency.

"The various voluntary programmes which were initiated by Absa Bank in 2008 were designed to avoid foreclosure," Levitt said. "The Absa programme, called RAP, was soon followed by the other home loans banks."

Levitt said there could be have been another 12 000 litigated house foreclosures and insolvencies in South Africa in 2009 had the banks not created their various voluntary sales relief programmes.

Corporate debt distress

"Furthermore, when it comes to corporate distress, several well-known companies, such as Seardel, Super Group and Pinnacle Point, have been quietly nursed out of distress and into recovery by banks and other creditors who have sat around board room tables instead of the Master of the High Court's offices."

Levitt said the reality was that even before the implementation of the Business Recovery Act, banks had been doing their own voluntary business recovery.

Not only was this approach critical for the general economy, it also supported the banks' results and their shareholders.

"The stability of South African banks emanates from their institutional memory of dealing with previous financial crises and downturns, many unique to South Africa; something that international banks had not seen for a generation".

National Credit Act

The fact that the official liquidation figures were so low was also an indication of the effects of the National Credit Act, which contributed towards creditors seeking alternative ways to recoup monies owed to them, Levitt said.

"This has reduced the incidence of legal action being taken against debtors who have not been able to meet their debt servicing requirements."

He added that the five percent reduction in interest rates between December 2008 and August 2009 had started assisting the financial health of individuals by January 2010, and this was reflected in the sharp drop of houses coming under the auctioneer's gavel in the first quarter of the year.

In the case of compulsory company liquidations, growth shot up to 9.1 percent in February, "but the official statistics only take the volume and not the value of liquidated companies into account."

Unfortunately, the value of companies hitting the wall had grown by over 190 percent since January 2010, Levitt said.

"We are seeing some significant bonds of security being lodged at the various Master's Offices nationally, largely coming out of the embattled property development sector."

He added that in the last two quarters, over 25 companies with value of over R100-million had hit the wall.

"This critical statistic is not revealed by Stats SA, and is quite concerning, despite the fact that the corporate sector appears to have managed the recession fairly well and lower interest rates have recently begun to feed through to assist the sector."

Levitt suspected that the improvement in overall economic activity, coupled with the lagged impact of lower interest rates, was helping to limit the deterioration of personal and business distress, but the lag effect of liquidations and voluntary business recovery would still be felt over the next 18 months.

Sapa