South African Airways (SA, Johannesburg O.R. Tambo) has formally entered into business rescue following the appointment of Les Matuson from Matuson Associates as its practitioner.

The bankrupt carrier said a notice of commencement of business rescue proceedings had been filed with South Africa's Companies and Intellectual Property Commission (CIPC) on December 5 in which Matuson's appointment was approved. Matuson is now the sole entity responsible for running SAA given its board and sole shareholder, the state, have now been divorced from its running.

As it stands, Matuson must now review the airline's standing and, within 10 working days of his appointment i.e. by December 20, must meet both creditors and employees to advise them on whether or not SAA can be saved. However, Adriaan Smuts, a certified turnaround practitioner and CEO of Business Rescue Exchange (BRX), told the South African edition of Business Insider that given the complexities involved, Matuson will likely ask creditors for more time to thoroughly review SAA's books - possibly two to three months.

If Matuson believes SAA's future can be salvaged, he will then devise a business rescue plan which more than 75% of creditors will have to approve. If it passes, only the “independent” creditors – those which are not subsidiaries or related to SAA – will be allowed to vote again. The threshold for approval, in this case, is 50%.

SAA is being funded through the restructuring process via a ZAR4 billion rand (USD275 million) disbursement of which ZAR2 billion (USD137.5 million) will come from existing lenders as post-commencement finance (PCF) which is guaranteed by government and repayable out of future budget appropriations. As SAA's sole shareholder, Government will, through the National Treasury, provide an additional ZAR2 billion of PCF. It highlighted in a statement that the funding would be done in "a fiscally neutral manner" and was not "a bailout".

While the lender-extended ZAR2 billion had already been factored into the budget, the source of the state's ZAR2 billion tranche funding was not revealed. SAA board member Martin Kingston told Business Day TV on Friday that the board understood that government would likely raise it via the sale of unspecified state-owned assets.

"I'm not sure the ZAR4 billion is adequate. It is certainly adequate to chart a different path to the one that would have been taken in the absence of this - liquidation - which would have come with very significant ramifications," he said.

Overall, Matuson is expected to recraft SAA into a sustainable, profitable enterprise capable of luring in an investment partner. As such, a massive reduction in headcount and a restructuring of the airline's network and operations is expected to feature in any turnaround plan. Given the state of South Africa's economy and soaring unemployment, any attempt to adjust the size of the airline's workforce will likely encounter massive trade union response. It is recalled that a recent attempt to reduce it saw SAA incur losses of around ZAR400 million rand (USD27.37 million) on the back of an eight-day-long strike.

During his interview, Kingston told Business Day TV that in light of its "massive liquidity crunch", had the carrier not filed for business rescue on Thursday, the only other course of action would have been liquidation, a far more "catastrophic" option for the country, the government, and the public at large.

According to him, SAA's inability to secure urgently needed funding from lenders, coupled with government's unwillingness to extend the capital needed to fund its restructuring, had triggered last week's events.

"In order to implement the longterm turnaround strategy, a full recapitalisation was necessary; that wasn't going to be forthcoming from the lenders. We had on our balance sheets seven billion rands-worth of guarantees but they were only going to be available if the state was going to let us access them. It became apparent that that wasn't going to be possible in the last couple of weeks. And therefore, as we had no access to credit from the lenders and no access to recapitalisation or the guarantees, our only option was liquidation or business rescue."

He went on to warn that business rescue in itself would not stave off the prospect of liquidation. In particular, he highlighted systemic risks at SAA's associated subsidiaries such as its MRO wing, SAA Technical, which, if it were to be liquidated, would have serious repercussions for its airline parent.

Kingston also warned that SAA had to undergo a drastic and rapid restructuring in order to stand any chance of survival. But, despite its woes, he confirmed that prior to filing for business rescue, SAA had attracted interest from a "number" of prospective investors, both local and foreign, all of which Matuson would likely have to explore as part of his discovery process.