1. Presentation to Portfolio Committee
14 February 2018

2. Presentation outline Executive Summary and Background
sefa’s differentiation from commercial financiers
The role of Post Investment Monitoring and Workout
Standard operating procedures
Post investment strategies
What has sefa done – Business Diagnostic analysis
Conclusion

3. Approach to Business Rescue
sefa has a patient approach to defaulting debtors. Even if a client is in the Legal Book there are continuous engagement and negotiation to find an appropriate solution.
sefa does not initiate Business Rescue but will participate in Business Rescue proceedings due to the challenges experienced with Business Rescue specifically with small businesses. sefa prefers to restructure debt timeously.
Prior to the transfer to the Legal Book, sefa pro-actively monitors clients and intervene when early warning signals are observed. These interventions mainly consist of the provision of business support (through mentorships) and loan restructurings.
The legal process is implemented in compliance with the National Credit Act.
If the client comes forward at any stage in the legal process with a reasonable proposal, sefa will usually suspend legal action and the loan can even move back to the Performing Book if the client keeps to that arrangement.

4. Approach to Business Rescue (BR)
sefa systems and procedures & BR (extracts from sefa systems documents)
“Once it has been confirmed that a client could be economically viable, the next step is to determine the optimal solution within a reasonable time line. The following are the guidelines to follow depending on the nature of the transaction. The optimal solution could be achieved through:
Financial Restructuring,
Turnaround or
Business Rescue interventions.”
“A client that has been placed under Business Rescue is essentially under a turnaround process and the same process that is recommended for turnarounds should be followed, albeit under the guide of Business Rescue legislation.”
“Turnarounds - This refers to Clients where extensive and advanced turnaround work is required and a possibility of a business re-organisation is a real possibility.
Examples are: (a) where the business model shows growth potential but requires operational and technical efficiency improvements and other growth strategies to realise potential (b) where sefa exposure is uncovered and sefa will in all likelihood suffer loss in the event of liquidation but there is a belief in the business/management.”

5. Approach to Business Rescue (BR)
BR is not applicable to all defaulting clients
BR is NOT applicable for clients that are ALREADY INSOLVENT or ALREADY in a position NOT to honor its debts. There needs to be a view that the business can be economically viable over time:
“A company is financially distressed when it appears that the company is reasonably unlikely to be able to pay its debts as they fall due and payable over a period of 6 months, or when it appears that the company will be reasonably likely to become insolvent within the next 6 months” (Reference: (s128(1)(f) of Companies Act No. 71 of 2008)).
It is not applicable to clients who acted in bad faith.
Insolvency in many distressed SMEs are often accelerated due to the weak capitalization of these businesses.

6. Approach to Business Rescue (BR)
There are two ways of initiating Business Rescue Proceedings:
Proceedings may be initiated by the Company where the board resolves that the company voluntarily begins business rescue proceedings, or
By Affected Person(s), such as a Creditor(s) who may apply to court for an order placing the company under business rescue proceedings.
sefa does not initiate BR. This approach is mainly as a result of the challenges experienced with BR (explained later)
sefa does not oppose an application of BR but will participate when an entrepreneur or other creditor opts for such process.
sefa prefers to restructure said loan facilities for loans with potential repayment-ability. Forty accounts totaling R98 million were restructured during the 2016/17 financial year.
sefa’s approach towards the initiation of BR

7. Approach to Business Rescue (BR)
Typical challenges experiences with BR:
Clients file for business rescue without sefa knowledge.
Clients lack BR knowledge.
Business rescue is a costly exercise and needs to be funded
Clients file for BR too late in the process.
Clients don't use sefa's internal debt restructuring or turnaround mechanism.
BR timelines are too tight.
Management & control of the company is handed over to the Business Rescue Practitioner (BRP).
Issues regarding regulation of BRP appointments
Delays in BR plan publication.

8. Approach to Business Rescue (BR)
Current Clients in Business Rescue
sefa currently has approximately 7 loans that are in the process of Business Rescue.
These loans have a total outstanding balance of R22 million and constitutes 4% of the Direct Lending Legal Book.
Most of these loans relate to longer term facilities (longer than 48 months)
Most of these loans are more than 180+ days in arrears
The loans were approved in 2013, 2014 and 2015.
They are based in Eastern Cape, Gauteng, Mpumalanga and Northern Cape,.
Consist mainly of term loans and Instalment Sale Agreements.
Only one of these loans is in “Sale in Execution” phase whereas most of the others are in early stages of legal action such as “Letter of Demand” and “Promise to Pay” stage

9. Post Investment and Workout
Sefa established a Post Investment Monitoring Division that is a dedicated unit that monitors investments from disbursements to ultimate repayment (or exit). The Division facilitates the financial and developmental outcomes of sefa’s investments and was established in 1 April 2016.
The approach of the Division is to be developmental through the provision of
mentorship support to sefa clients and also
to facilitate restructuring of loan facilities, where there are potential for such restructuring.
In its Wholesale business, sefa does not deal directly with the SMMEs or co-operatives, but most of the interactions are with intermediaries. In its due diligence on the intermediary attention is given to the alignment of the intermediary with the developmental objectives of sefa.
In the Direct Lending business, sefa deals directly with the entrepreneur(s) and its business(es).

10. Post Investment and Workout
The role of Post Investment Monitoring and Workout;
To monitor and manage (protect) the investment portfolio
Ensure that impairment rates are minimised and collections are increased.
To minimise business failure through effective:
Portfolio monitoring
Workout and restructuring
Provision of mentorship and business support
Portfolio risk management
Collections
To contribute to the building of sustainable sefa and small businesses
To contribute towards job creation and maintenance

11. Standard Operating Procedure
Post Investment Monitoring (PIM)
(management of the “Performing Book”)
After first disbursement
Loan repayment period
Handover between Investment Officer and Post Investment Officers after disbursement
First client visit within 1 month after first disbursement with the following objectives
Introduction of post investment staff and mentor
Confirm application of funds
Work with client through undertakings of the loan agreement
Identify early warning signals
Remind the client 2 weeks in advance of first payment due.
Currently the handover in Wholesale Lending happens earlier as PIM facilitates those disbursements.
Monthly monitoring and analysis of undertakings / covenants / restrictive conditions (incl. management accounts) / mentorship reports & also the repayments
If any warning signal is observed by analysing the above, a client monitoring visit needs to be arranged and implement interventions (such as deferments /restructurings or additional business support / mentorship / assistance from other such as SEDA).
If the client is in breach then a formal notice of default letter needs to be issued to client
If the client is in arrears - request the client to formally submit a promise-to-pay (PTP), in order to catch up with his/her arrears. Keep the client to this PTP, and if it skips a payment issue a letter of demand.
Client visit will determine if the business case is still adequate to ensure sefa repayment.
If business case is NOT perceived to be viable to repay sefa, pursue formal legal action starting with a letter of demand. The loan account is then transferred to the Legal Book.
Legal Book
The sustainability of the underlying business and the repayment of the sefa loan drives the PIM activities.
It can move to the Legal Book, if the client is not co-operating or sefa perceives the business not to be viable. It can also move back from the Legal Book, if the client start to co-operate or the client start to repay sefa.

12. Standard Operating Procedure
Legal Process
(Management of the “Legal Book”)
Debt Collectors
Letter of Demand (in compliance with NCA)
Judgement
Court
Order
Warrant of Execution
Attachment of assets
Sale in Execution
Summons
Letters of Demand are in compliance with the NCA and provide opportunities to the debtor to negotiate the debt repayments, refer the matter for debt review or to the Ombudsman.
If the client comes forward at any stage in the legal process with a reasonable promise-to-pay process, sefa will usually suspend legal action and the loan can even move back to the Performing Book if the client keeps to that arrangement.
sefa will act more decisively in cases where businesses or entrepreneurs acted in bad faith or intentionally try to defraud sefa.
sefa never initiates liquidation or business rescue applications.
sefa is not allowed to write-off any debt if the legal process has not been fully exhausted, hence the full legal process needs to be concluded up to the sale in execution.

13. Standard operating Procedure
Some challenges faced by sefa in terms of Post-Investment processes
sefa does not have real time access to bank account movements (such as commercial banks) to monitor its clients.
sefa relies mainly on the co-operation of clients to provide information during the monitoring process (either through own communications or feedback from mentors). The legal process (Letters of demand) is often used to obtain co-operation from our clients (in compliance with the NCA).
Late disclosure of the true condition of the business results in late interventions and due to the lack of capitalization of small businesses, their cash position will degenerate over a very short period of time.
Lack of cessions makes it extremely difficult to ensure government contracts are used to repay loans.
sefa has limited internal resources and not adequate skills to effectively manage the loan book.
In terms of sefa policy a loan can only be written off after the full legal process has been exhausted.

14. Post-investment monitoring
Standard operating Procedure
Summary
Post-investment monitoring
Soft collections
Restructuring
Hard Collections
Focus
Performing debt
Non-performing debt
Non-performing debt exceeding 120 days/ non-co-operation / fraud
Activities
Educate client to pay in time & continuous business performance monitoring
Follow up on outstanding payments through client contact
Monitor promises-to-pay
Restructuring of arrear loans
Write-off of non-recoverable loans
In most cases a legal process involving ITC,
LOD, tracing, debt proposal negotiations, summons, judgement, recovery
Responsibilities
PIM (Collections Dept.)
Workout & Restructuring Dept.
PIM with Legal Dept.

15. Monitoring 12

16. Differentiated approach to Monitoring
Conducting regular site visits
Early identification of warning signals for portfolio investments
Proactive monitoring of cessions
Implement necessary interventions
Entrench co-ordination with Business units to mitigate on early warning signals
A periodic review of the portfolio performance on a basis through IMC
Proactive monitoring of the accounts
Sectors
Products
Aging buckets

17. Remedial Actions on Free State Clients in Litigation (Separate Presentation)12

18. Monitoring Collections
SMS notification system - Reminder for payments due and arrears
Monthly account statements and follow ups
Enhanced the collection function by recruiting permanent Collections Specialist
Integrating collection management systems for Direct and Wholesale Lending 14

19. Restructuring and workout
Monitoring
Restructuring and workout
Early identification of signs of distress between 30 and 120 days.
Addressing the underlying causes of distress rather than symptoms.
Prioritisation of relatively larger and salvageable investments without losing sight of smaller loans.
Utilisation of mentorship and business support in compiling and collecting management accounts, AFS and other information for workout and restructuring.
Cross-sectional portfolio analysis –
Size of transactions
Exposures to various loan products
Regions
Products.
Portfolio triangulation to inform pockets of medium and high risk relative to -
Product type and deal size

20. Mentorship and Value Add services
Monitoring
Mentorship and Value Add services
Provision of a basket offering to prospective and sefa approved clients.
Provision of specialised assistance during the pre due diligence phase.
Provide a channel of networking and business development and other opportunities (quality deal flow).
To provide technical assistance to the sefa clients – Sector specialists, compilation of management accounts, turnaround specialists.
To provide mentoring and coaching sessions to management and staff of sefa clients . 16

21. Monitoring
Legal
Sending structured letters of default from the first day of delinquency .
Letters of breach and demand
Listing of clients on Credit Bureaus
Panel of Attorneys
Use of External Debt Collectors (EDCs)
Litigation and judgement- debt enforcement
Perfecting security and sale of assets
Other legal notices 17

22. What does sefa do when a client falls into arrears?
Monitoring
What does sefa do when a client falls into arrears?
Enter into a payment arrangement
Offer a mentor to do a diagnostic analysis to better understand the issues at hand
Restructuring.
Challenges
Client not cooperative
Decline the services of mentor
Clients do not submit management information to sefa to better assist them

23. Distressed Clients Process Flow Chart
Workout and Restructuring
Performing after W&R
Non-Performing after W&R
Monitor performance & Collections
LEGAL
Legal Collections

24. What has sefa done to assist clients in distress?

25. Business Diagnostic Analysis
The Owners/Entrepreneur
Clients commitment in his business - Is he fully operational in the business
Comment on Business Acumen, technical ability
Entrepreneur Character Risk
Finance
Are there adequate financial systems
How are they managing their finances
Revenue generation
Cash flow management
Complete a monthly breakeven turnover analysis for the previous three months (if no management accounts available, compile an estimate breakeven analysis based on discussions and from basic source documents (bank statements).

26. Business Diagnostic Analysis
Marketing
Competition Risk
Market demand for the product/service in particular
Technical / Operational Management
Human Capital Management–
Verify and indicate number of jobs created and or maintained
Other comments under HR
Statutory / Legal Compliance
Sefa loan repayment history
Sefa loan arrears (if applicable)
Check the assets that Sefa has financed
What are the challenges being experienced by the business
Possible solutions and way forward

27. Summaries From Mentorship Reports
Overall Business Management
• Inadequate understanding of business management
Financial
• No financial management
• Lack of financial understanding/Inability to interpret financial information
• No financial system in place
• No financial tools
• No Financial records
• No debt management system
• Negative cash flow
• High labour cost
• No working capital

28. Summaries From Mentorship Reports
Marketing
• No marketing strategy, plan or system in place
Operational/Technical
• No operational system/process in place/work process in place
• Poor utilisation of operational management system
• No adherence to safety systems
Human Resources
• Poor/low skills level of staff
• No human resources system
• No skills development plan
Statutory requirements
• Some companies not complying with tax requirements
General findings:
• Lack of enforcement to franchise obligations

29. sefa’s developmental approach
Conclusion
sefa’s developmental approach
Developmental role prior to legal action
Continuous post-disbursement monitoring through client visits and analysis of company information to detect early warning signals.
Pro-active interventions through business support (mentors, involvement of SEDA, other support institutions, facilitate resolve with other government departments to resolve specific problems).
Defaulting loans be considered for rescheduling either through a promise-to-pay or a formal restructuring.
Instituted legal action when (i) the client is in breach in terms (loan repayments or covenants) of the loan agreement and (ii):
Fraud is suspected or proven;
Client is acting in bad faith;
A client is not co-operating with sefa;
No or limited commitment is shown by the client;
There is no case for the restructuring of the loan;
sefa has tangible security (such as an Instalment Sale Agreement, General/Special Notarial Bond, or a Mortgage Bond, Cession of Debtors book) and other guarantees (such as from related companies).
Conclusion of legal process
sefa will consider execution of personal sureties, liquidations, sequestrations and business rescue on exceptional circumstances and on a case-by-case basis.
After a Court Order has been obtained, sefa’s will consider the appropriateness of the conclusion of the process, based on properly motivated consideration and based on the Delegation of Authority. The consideration will take cognisance of:
The nature of the breach (external factors out of control of the client such as weather conditions, non-payment by government)
Co-operation by the client with sefa through the process
Impact on the surety provider.
Client lifestyle considerations
A summary of such decisions will be provided to the Credit and Investment Committee on a quarterly basis.
Credit listings will remain for defaulting borrowers and sureties and the de-listing needs to be approved by the sefa Investment Monitoring Committee.