Could HCI go into business rescue as Covid-19 infects hotel sector?
Ramaphosa acknowledged that tourism was the country's largest source of employment. Tourism-related industries comprise of travel and tour services, transportation, accommodation, hospitality industry and food and beverages among others.
Statistics SA’s latest bi-monthly report “Business impact survey of the Covid-19 pandemic in South Africa” showed that the financial situations of businesses were worsening, with notable drops in employment and turnover reported in April. Expectations are for the performance of the economy to continue to worsen.
Of course, the impact of Covid-19 has hit all sectors of the economy. including private companies and public companies.
The question is, how many will be able to survive post-Covid-19, considering that a large number of black-owned firms are operating under significant debt.
One firm in question is Hosken Consolidated Investments (HCI), which suddenly finds itself having amassed debt that by far exceeds its assets.
HCI - which has interests in gaming hotels and leisure, media and broadcasting, transport, as well as property, among others - has seen its share price crash by a massive 84.8 percent from a one-year high of R113.99 to about R17. Notably, its steepest decline was witnessed after the Covid-19 pandemic was declared a national disaster in South Africa.
This presents a rather serious problem as HCI’s market cap is now only about R1.4 billion, while its consolidated debt is about R24 billion.
Anticipating the rout the group’s gaming hotels and leisure firm Tsogo Sun implemented some drastic cost-cutting measures.
HCI is also the main shareholder in Tsogo Sun, holding 51.2 percent of the shares, excluding treasury shares.
In its trading update for the year to March, Tsogo Sun announced “an orderly deactivation of a number of hotels in the key nodes where the group has multiple properties and consolidating the available demand into the remaining operating hotels in those areas”.
The first phase affected up to 40 percent of Tsogo Sun’s portfolio, including 36 hotels.
“Given the environment of the past few weeks we had already implemented actions in order to reduce costs and capital expenditure, and these have now been expanded to eliminate virtually all variable costs, substantially reduce the fixed cost overheads, conserve cash in order to preserve the sustainability of our business and the people whose livelihoods depend on us,” reads Tsogo Sun’s Sens statement.
Although the group has been approached by public and private healthcare sectors to assist in the provision of Covid-19 quarantine facilities through the use of the hotels, the income generated from that is not likely to match the consolidated debt and it may have to consider going the business rescue route.
Werksmans Attorneys says in its report “Basics of Business Rescue” that “a company should commence business rescue proceedings at the first signs of it being financially distressed, within the meaning of the Companies Act.
"That is, either when it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediately ensuing six months or when it is likely that the company will become insolvent in the immediately ensuing six months.”
Several companies largely linked to travel and tourism, such as Kulula.com owner Comair, have cut their losses and called in the business rescue practitioners as the coronavirus effects ravage numerous economy sectors.
With HCI invested in hotels all over Africa, it becomes extremely difficult to imagine how they will be able to service that debt with revenue streams depleted to current levels.
HCI does not have enough assets to be able to cover the acquisitions they made, and even if it were to opt to sell these assets there is no entity in the market that will be able to take these assets off their books.
We also cannot ignore the impact the pandemic has also had on the media and advertising. eTV may even be forced to go to Remgro, who own eTV with HCI, for a rescue package.
Economists and market watchers have noted that the impact of Covid-19 on businesses has been severe, and 36.4 percent of businesses in South Africa have laid off staff, while 45.6 percent expect their workforce to decrease in May. The economy is expected to contract sharply this year compared to last year.
A recent survey found that 75.7 percent of businesses believed that Covid-19’s impact would be substantially worse than the impact of the 2008-09 global financial crisis, with another 10 percent saying it would be worse.
Market crashes are not novel occurrences, they do happen, and so do market recoveries.
However, with the current market uncertainty far from over, business rescue if not liquidation remains inevitable for many.