SAA - difference between capital injections and recapitalisation

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SAA - difference between capital injections and recapitalisation

Unread postby GL » Wed May 16, 2018 11:51 am

Can an airline accountant please help me understand what the difference is between a capital 'injection" and a recapitalisation?
SAA says it needs another R21 billion Capital injection - but my understanding is that this is not capital, but money to fund the operational loss. If it was to receive a 'recapitalisation' (to convert debt to equity?) would this not just be another bailout - in the form of a dilution of shares - by the government which already owns 100% of SAA shares anyway?
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Wed May 16, 2018 12:30 pm

GL wrote:Can an airline accountant please help me understand what the difference is between a capital 'injection" and a recapitalisation?
SAA says it needs another R21 billion Capital injection - but my understanding is that this is not capital, but money to fund the operational loss. If it was to receive a 'recapitalisation' (to convert debt to equity?) would this not just be another bailout - in the form of a dilution of shares - by the government which already owns 100% of SAA shares anyway?



Guy - I am sure Evanb or one of the accountants will react - but i think you need to split the funding "requirements" by SAA. The terms recapitalization and capital injections are being used randomly and incorrectly in my view.

SAA has oustanding loans at the banks (money they borrowed to fund the airline - buy aircraft etc).
These loans mature - and SAA then does not have the money to pay them back - so they have to be paid by Treasury or rolled over into a new loan (which the banks are reluctant to do...) and Treasury and the press call that "Recapitalization" ....
(you do not need any extra cash for that - if you now owe 1 Billion - and roll over the loan - you receive nothing - pay nothing and simply continue with the interest payments)

SAA also looses money on a daily basis - paying for fuel - food - and salaries - simply variable costs that they do not cover with revenue from airline tickets sold. For that part they need operational cash - (to pay bills and to keep flying) ... the Press and Treasury call that a "Capital Injection"
(This requires the cash - and a loss of 6 or 7 Billion per annum (including the 1.5 Billion interest for the loans) will add up to 21 Billion in 3 years or so. Which means SAA want that capital (cash) to spend to keep flying .....)

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Re: SAA - difference between capital injections and recapitalisation

Unread postby GL » Wed May 16, 2018 12:38 pm

HJK 414 wrote:
GL wrote:Can an airline accountant please help me understand what the difference is between a capital 'injection" and a recapitalisation?
SAA says it needs another R21 billion Capital injection - but my understanding is that this is not capital, but money to fund the operational loss. If it was to receive a 'recapitalisation' (to convert debt to equity?) would this not just be another bailout - in the form of a dilution of shares - by the government which already owns 100% of SAA shares anyway?



Guy - I am sure Evanb or one of the accountants will react - but i think you need to split the funding "requirements" by SAA. The terms recapitalization and capital injections are being used randomly and incorrectly in my view.

SAA has oustanding loans at the banks (money they borrowed to fund the airline - buy aircraft etc).
These loans mature - and SAA then does not have the money to pay them back - so they have to be paid by Treasury or rolled over into a new loan (which the banks are reluctant to do...) and Treasury and the press call that "Recapitalization" ....

SAA also looses money on a daily basis - paying for fuel - food - and salaries - simply variable costs that they do not cover with revenue from airline tickets sold. For that part they need operational cash - (to pay bills and to keep flying) ... the Press and Treasury call that a "Capital Injection"

JK

Yup - that's pretty much my understanding - and everyone is playing fast and loose with the term capital injection.
So what happens to capital and equity when the government pays off SAA bank debt?
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Re: SAA - difference between capital injections and recapitalisation

Unread postby V5 - LEO » Wed May 16, 2018 12:46 pm

.....heard that SAA walked out of parliament refusing to deliver a turn-around strategy??????????
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Wed May 16, 2018 1:04 pm

GL wrote:......Yup - that's pretty much my understanding - and everyone is playing fast and loose with the term capital injection.
So what happens to capital and equity when the government pays off SAA bank debt?


Guy ......... it is called Political shadow-dancing ...

As stated before - the Treasury would not "pay off the debt"............. [-(
That would cost too much cash in one hit ...... they would probably opt to roll them into Government bonds ....
That would give them a similar "cost" at the face value - and the payment of 1.5 Billion per year would move from the SAA books.

So - instead of loosing 6 or 7 Billion - SAA would loose 4.5 to 5.5 Billion per annum.
What would change is the SAA Balance sheet (all that debt gone) - so the assets and liabilities start to look more balanced.
And any "partner" would not have to assume the liability for all that debt if he wished to JV or take a part of the shares.
So - he is now joining - buying into a "cleaned up" Balance sheet.

Bottom line will remain that for the next 3 years - SAA will need 3 x the projected loss in Capital (cash !).
Be it 21 or 17 Billion - it still needs it to keep flying ...

What I find disturbing is that they are still not playing an "open game".
No one is talking about a fleet of A340's that are now getting really old ....(average 14 years - all from 2004 / 2005 era)
Those aircraft are the backbone of the long haul fleet (and if you look at the P&L - yielding revenue) - and they will have to start to replace those within the same next 3 years or so, but by replacing these aircraft with either A350 or B787 (probably the only feasible options) - they will start to add up to 2 Billion Rand in cost for lease to the Airline per annum. (for 10 aircraft)

So - if they improve the airline's bottom line by 2 Billion rand per annum (and reduce the losses to around 2 Billion per annum) - they will be back to square one - as soon as they replace that long haul fleet ...... Albeit that they will then save around 25.30 % of the fuel cost on the new aircraft.

Evanb can comment on the lease costs for A350 and or B787 - I do not have those available - but I would guestimate that the difference between the current A340's and a B787 or A350 will be at least 200 Million Rand per year (15 Mil US$ ) ... per aircraft.

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Re: SAA - difference between capital injections and recapitalisation

Unread postby danie.e » Wed May 16, 2018 1:46 pm

I know some folks are going to be irritated at my view but at the end of the day, a bankrupt entity is just that: bankrupt.

Regardless of bond issues, capital injections or whatever clever people want to call it. If at any given time, you close the doors, someone will be out of a fairly substantial amount of money. So if the government guaranteed the debt, they will have to repay the lenders that money and the taxpayer is the ultimate loser.

It does not matter what fancy tricks you do with P&L accounts or balance sheets, at the end of the day if you lose money, someone is going to be worse off and in this case it is the South African taxpayer.

In the case of SAA it has become a bottomless pit and taking the STAGGERING amount of TAXPAYERS money being wasted in keeping it afloat, I am actually astonished that no-one has started violent protest action against this blatant waste of taxpayers money.

The same goes for Transnet, Eskom and and and........ ad nauseam.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby avjhb » Wed May 16, 2018 3:02 pm

danie.e wrote:I know some folks are going to be irritated at my view but at the end of the day, a bankrupt entity is just that: bankrupt.

Regardless of bond issues, capital injections or whatever clever people want to call it. If at any given time, you close the doors, someone will be out of a fairly substantial amount of money. So if the government guaranteed the debt, they will have to repay the lenders that money and the taxpayer is the ultimate loser.

It does not matter what fancy tricks you do with P&L accounts or balance sheets, at the end of the day if you lose money, someone is going to be worse off and in this case it is the South African taxpayer.

In the case of SAA it has become a bottomless pit and taking the STAGGERING amount of TAXPAYERS money being wasted in keeping it afloat, I am actually astonished that no-one has started violent protest action against this blatant waste of taxpayers money.

The same goes for Transnet, Eskom and and and........ ad nauseam.


I don't find your view irritating, however I would tend to disagree. Just because an entity is bankrupt doesn't mean that it doesn't have future cash generating potential. A widely used method to value a business is to estimate its future free cash flow, this is not a fancy trick with the financials but rather, if done properly and with the necessary diligence, an objective assessment of the entity's ability to generate cash going forward. Many bankrupt businesses have been bought and sold for R1 or $1 etc on this basis.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Wed May 16, 2018 3:40 pm

GL wrote:Can an airline accountant please help me understand what the difference is between a capital 'injection" and a recapitalisation?
SAA says it needs another R21 billion Capital injection - but my understanding is that this is not capital, but money to fund the operational loss. If it was to receive a 'recapitalisation' (to convert debt to equity?) would this not just be another bailout - in the form of a dilution of shares - by the government which already owns 100% of SAA shares anyway?


The two terms are vague terms, so they could and likely mean the same thing. As you say, the Government own all SAA shares, which does cloud the distinction between the two. However, in the case of an actual transfer of cash from Treasury to SAA, this could take a number of forms:

Firstly, SAA could issue new shares that the sell to the Government. This would increase the share capital of SAA and would certainly be a capital injection or recapitalization, independent of what SAA do with the resources (i.e. whether of not they pay down external loans, use it for working capital or invest it in new aircraft). This is never repaid to shareholders under fixed terms, but through (potential) dividends or increases in shareholder value (i.e. an increase in the value of the shares).

Alternatively, Treasury could loan the money to SAA (a shareholder loan). While the funds could and would be used for the same purposes, this wouldn't be a recapitalization or capital injection since the money would be, theoretically, repaid to the shareholder under pre-agreed terms (those terms could vary just like any loan). Conceptually there are differences in the tax treatment between the two options, but importantly a loan should be repaid, while capital increases need not (although may be returned at the discretion of the Directors though various methods).

A third option is something in between which starts out as a loan, but could be converted to capital under certain circumstances. These might be called subordinated or convertible loans, the former usually if the loan is not repaid and the latter at the discretion of the loanee.

In terms of the balance sheet treatment, a capital injection or recapitalization is very much the first option, but both are probably bailouts. The reason why a capital injection or recapitalization would be preferable to SAA is that a loan from the Treasury replacing a loan from private banks guaranteed by Treasury would still be debt on the balance sheet. As such, Treasury would have a claim on SAA's balance sheet, which it wouldn't have if it were a capital injection or recapitalization. This claim on the balance sheet would still influence the terms of other transactions. For example, a lessor might wants more guarantees, or trade creditors might still want inferior terms since the debt is still an obligation to SAA, even if it were on better terms than previous ones. Furthermore, the debt, unless is has zero interest and no repayment schedule, would still be a drain on SAA's cash flows.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Wed May 16, 2018 3:51 pm

HJK 414 wrote:No one is talking about a fleet of A340's that are now getting really old ....(average 14 years - all from 2004 / 2005 era)
Those aircraft are the backbone of the long haul fleet (and if you look at the P&L - yielding revenue) - and they will have to start to replace those within the same next 3 years or so, but by replacing these aircraft with either A350 or B787 (probably the only feasible options) - they will start to add up to 2 Billion Rand in cost for lease to the Airline per annum. (for 10 aircraft)

Evanb can comment on the lease costs for A350 and or B787 - I do not have those available - but I would guestimate that the difference between the current A340's and a B787 or A350 will be at least 200 Million Rand per year (15 Mil US$ ) ... per aircraft.


I don't think the A340s are the backbone of the long-haul fleet anymore. A340s are only flying JFK, HKG, PER and FRA, while the A330s are flying LHR, MUC, ACC/DKR-IAD, LOS, ACC-ABJ and GRU.

But yes, you raise an important point. A new A350 or B787 is going to costs one about $900k to $1m per month to lease, while the leases on SAA's A340s are probably no more than $200k per month. Moreover, a large number of SAA's A340 are owned and fully depreciated (it could be as many as 9 of the remaining 16 although I don't know exactly). So the higher fuel cost is a balancing act against the lease costs. No doubt, SAA won't be in a position to purchase and will have to lease (just like the 11 A330s have had to be leased). That said, as oil prices continue to rise it makes the equation on the (cost side) more one-sided.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Wed May 16, 2018 4:46 pm

evanb wrote:.......
The two terms are vague terms, so they could and likely mean the same thing. As you say, the Government own all SAA shares, which does cloud the distinction between the two. However, in the case of an actual transfer of cash from Treasury to SAA, this could take a number of forms:

......... Furthermore, the debt, unless is has zero interest and no repayment schedule, would still be a drain on SAA's cash flows.


Hi Evan - thanks for the explanation .
I think Guy is referring to the following - as apparently stated by SAA

Quote - Business day:
SAA needs R21.7-billion to become profitable again, CEO Vuyani Jarana has told Business Day. This money will have to be raised over the next three years if SAA is to be turned around, and will come in the form of a Treasury bailout as well as loans from banks.

It was previously reported that SAA will need a R5-billion "bailout" from Treasury, but this is actually a "bridging loan" from banks, backed by Treasury, while SAA waits for the bigger bailout, to be finalised by the October budget, Business Day reported.

Jarana reportedly said the R21.7-billion would partly come as a capital injection from Treasury, and partly from debt raised from lenders and guaranteed by government. The size of the capital injection from Treasury is under consideration by a committee chaired by deputy finance minister Mondli Gungubele, Business Day reported.

end quote Business day

It is all the same in my view:
Whether Treasury comes to the party with :.........would partly come as a capital injection from Treasury,

Or whether it comes from : ........and partly from debt raised from lenders and guaranteed by government.

It is simply shadow dancing as the end result is that the Treasury will - ultimately be provider / guarantor and liable for the total amount.

That means in 3 years - under status quo in cost development (and no aircraft leases to be added) the total Treasury exposure for SAA will probably exceed 60 Billion Rand ......

And I still have not heard any concrete - diligent plan of action to address the losses ...
The only publicity that is prevalent is - "we need more cash ...... to turn it around.......... :? ....."

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Re: SAA - difference between capital injections and recapitalisation

Unread postby danie.e » Wed May 16, 2018 5:13 pm

AVJHB,

I am fully aware that business has been saved or turned around for the princely sum of R1 (OK bazaars and Whitey for instance) and I actually did make the suggestion on a different thread.

Unfortunately I do not think that with the exposure one would have in respect of SAA that there would be a willing buyer. It could maybe be done if Treasury write of a few billion rand.

Unfortunately with current Government and current policies, SAA is a ship that has already sunk and is an expense the S.A. Economy simply cannot afford.

The real messy stuff will hit the fan as soon as the Pharmaceutical companies start refusing to supply ARV's due to non payment once the money dries up because Government used their money to bolster a failed airline
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Re: SAA - difference between capital injections and recapitalisation

Unread postby HJK 414 » Wed May 16, 2018 5:31 pm

Evanb,

I do not know whether you ave read the piece in Business Day, but something that really caught my attention was Jarana's alleged statement about the domestic routes :

Most aircraft used by SAA are leased, and all domestic routes were making a loss even though the planes were full, he reportedly said.


That got my attention - because if it is true that they are competing on all day schedules at a loss - then I am simply astonished at why they do not stop that immediately - and start with "feeder" flights to and from the main hubs - only serving the long haul schedules ..
Which enables you to sell the total trip on 1 ticket ....... giving the passenger security of onward arrangement or a FIM if things really go wrong.

Premium time slots and feeder flights only..... ?/ As a start to re-structure ?
With these all day schedules - competing with the LCC's - Apparently the more they fly - the more they loose ......??

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Re: SAA - difference between capital injections and recapitalisation

Unread postby ARM505 » Wed May 16, 2018 9:21 pm

Meanwhile....

- Quite a few SAA B737 rated pilots seem to be chilling at home, fully paid of course, while they wait for Airbus conversions!?
- I'm pretty sure Comair plans on ditching SAAT a.s.a.p.
- SAA's appeal against the already awarded billion or so decision against them re. Comair's unfair competition claim is due in court in July? Something like that......don't know which way that will go (I'd imagine Comair's way), but they may need another billion or so....

1 Billion = R 1 000 000 000. The number is thrown around like it's nothing. That's when you know you're in the s***.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby Mouser » Thu May 17, 2018 6:05 am

I'm a technical person that know's very little about high finance but what I have gleaned is that SAA has no way at all of running as a going concern if all its debts are factored into its accounts. It is bankrupt; ongoing operation pretending it will trade its way out of its situation is fraud (I allege).

If the debt is generously and creatively shifted elsewhere the business is better but in no way clearly "viable" as it stands and will keep losing the money that got it into its parlous position in the first place. The environment (oil prices, leases etc) it finds itself in is not improving. I suspect that the ongoing "losing money" is due to top heaviness (both numbers [I don't believe the wild numbers but I think it is there at the top] and salaries), ongoing tenderpreneured procurement and just "good", old fashioned ANC cadre incompetence, inexperience and corruption. Like Eskom and Transnet this is mainly at the top - there are plenty of excellent people in the system and I am sorry for them but they must know its been a wobbly enterprise for years.

Someone "honest" would say shut it down / break it up smartly but I think the looting stream is just too tempting and lucrative for the marginally honest / corrupt. Happy to be schooled in this though.
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Re: SAA - difference between capital injections and recapitalisation

Unread postby evanb » Thu May 17, 2018 7:27 am

Mouser wrote:I'm a technical person that know's very little about high finance but what I have gleaned is that SAA has no way at all of running as a going concern if all its debts are factored into its accounts. It is bankrupt; ongoing operation pretending it will trade its way out of its situation is fraud (I allege).


I disagree. It is technically insolvent in that its liabilities exceed its assets, however, it is not bankrupt since a court has not declared that it is unable to pay its debts. While it is technically insolvent, the shareholder has guaranteed the majority of the debt. There are some semantics, but as long as the shareholder guarantees the debts and wishes them to continue trading there is not fraud.

Mouser wrote:If the debt is generously and creatively shifted elsewhere the business is better but in no way clearly "viable" as it stands and will keep losing the money that got it into its parlous position in the first place. The environment (oil prices, leases etc) it finds itself in is not improving. I suspect that the ongoing "losing money" is due to top heaviness (both numbers [I don't believe the wild numbers but I think it is there at the top] and salaries), ongoing tenderpreneured procurement and just "good", old fashioned ANC cadre incompetence, inexperience and corruption. Like Eskom and Transnet this is mainly at the top - there are plenty of excellent people in the system and I am sorry for them but they must know its been a wobbly enterprise for years.

Someone "honest" would say shut it down / break it up smartly but I think the looting stream is just too tempting and lucrative for the marginally honest / corrupt. Happy to be schooled in this though.


While I agree with the general feeling here, and share in the doubts regarding an ability to turn it around, I still think it's false to blame it one leases and massive overheads. SAA's cost structure isn't great, but it's not fundamentally terrible either. This is quite surprising given how much looting there has been, so without the looting it's not a lost causes. Nobody seems to be able to show any data that costs are the problem (we've seen some pretty embarrassing attempts to show that they're overstaffed with 50,000 people). Looking at SAA's financials, they met their operating unit cost target in the year to March 2017 (last published financials), in fact they beat it by about 4%, however they missed their unit revenue target by 10%. So they target was a 1% operating margin, which was pretty dismal, and they missed it by a mile, not because of costs, but they were not able to raise the revenue.



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