A one-day seminar HOW TO TURNAROUND DISTRESSED COMPANIES THROUGH EFFECTIVE AND COMPREHENSIVE CORPORATE RESTRUCTURING Ljubljana, 23rd of April 2014 partner TodayВґs Agenda Section Overview 1 Understanding the problem 1 2 Restructuring process 7 2.1 Independent Business Review as an option analysis 9 2.2 Restructuring options 19 2.3 Implementation 26 3 Estimation of creditorsВґ recovery in insolvency 32 4 Turnaround case studies 48 4.1 Case study 1 вЂ“ Complex restructuring of Czech chemical producer 49 4.2 Case study 2 вЂ“ Restructuring of a large Slovenian conglomerate 63 5 Major conclusions Page 80 Speakers introduction Petr SmutnГЅ Karel Е tefulГk LukaVesnaver Partner Senior Manager Director Business recovery services Business recovery services Deals Phone: +420 251 151 215 Phone: +420 251 152 023 Phone: +386 1 5836000 Mobile: +420 602 648 602 Mobile: +420 602 484 992 Mobile: +386 41 279890 Email: petr.smutny@cz.pwc.com Email: karel.stefulik@cz.pwc.com Email: luka.vesnaver@si.pwc.com April 2014 PwC PwC restructuring team has functional expertise across various industries вЂ“ major restructuring cases in the CEE region BRS EXPERTS BUSINESS RECOVERY SERVICES Petr SmutnГЅ Partner, CEE BRS Leader CEE вЂў Stephen Oldfield Partner вЂў Donald Bruce Director вЂў Muthiah Arunachalam Senior Manager Poland вЂў Piotr Zdrojewski Director вЂў Michal Lewczuk Manager Czech Republic вЂў Karel Е tefulГk Senior Manager вЂў Radim BaЕЎe Senior Manager Bulgaria вЂў Bojidar Neytchev Partner TERRITORY COVERAGE Hungary вЂў Miklos Fekete Partner вЂў Jeno Arva Manager Slovenia/Croatia вЂў Luka Vesnaver Director Romania вЂў Cristian Ravasila Senior Manager вЂў Marius Cidu Manager вЂў Independent business review вЂў Turnaround вЂў Debt advisory and refinancing вЂў Corporate insolvency вЂў Distressed sale/optimized exit вЂў Working capital optimization PwC restructuring services SELECTED CASES Steel Construction Forging Lottery Automotive Glass production April 2014 PwC Understanding the problem April 2014 PwC Section 1 вЂ“ Understanding the problem Early identification of oncoming crisis is crucial, yet the companies often react late MIN Corporate crisis curve Strategic crisis Insolvency risk The company is not fully aware of the issues (management ignores reality) The problem appears on the: Income Statement The problem is addressed by: Management Restructuring activity: No activity Profitability crisis The Company is aware of the issues Liquidity crisis Loss of control Balance Sheet Cash Flow Shareholders Creditors Management restructuring plan Advisor is involved MAX 70% COMPANIES SEEKING SOLUTION PwC WESTERN EUROPE 30% 60% CEE REGION 30% 45% 10% 70% 25% April 2014 2 Section 1 вЂ“ Understanding the problem Even though reasons for crisis can be various вЂ“ the underlying reason is inappropriate management of the company Reasons for crisis Internal factors A Strategic вЂў вЂў вЂў вЂў вЂў B Operational вЂў вЂў вЂў вЂў вЂў C Unbalanced company portfolio Changes in competitive position Growth is too fast, more emphasis on sales than profit and cash Too many investments and acquisitions Technological lag Low productivity Poor cost structure, low contribution margin Poor liquidity and WC management Parts of the company are loss making Inefficient processes Structural вЂў вЂў вЂў вЂў Corporate structure is too complex Unutilized synergies between divisions and companies A lack of controlling and relevant KPIвЂ™s for monitoring Ineffective incentive and management systems Ownership in management 85% Poor management 84% Unsucsessful acquisitions 72% Inadequate financial control 60% High costs in comparison with competitors 56% Large investment projects 20% Low marketing effort 20% External factors Changes on market (incl. regulation) 68% Stronger competitiors D вЂў вЂў вЂў вЂў вЂў PwC 44% Cultural Resistance to innovation Ineffective internal and external communication Divisional kingdoms Poor integration of acquired companies A lack of accountability among the employees Changes in inputs prices 20% Source: PwC Survey April 2014 3 Section 1 вЂ“ Understanding the problem Arising financial difficulties can be detected in advance via appropriate financial ratios вЂ“ quantified warning signals Qualitative Quantitative Warning signals вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў Altman Z-score implying risk zone Decreasing capacity utilization Decreasing CM (absolute and relative) Decreasing equity and increasing debt Decreasing headroom Decreasing or low order backlog Decreasing productivity Decreasing profitability or increasing losses Decreasing sales Increasing number of financing banks Increasing number of suppliers Worsening ageing structure вЂ“ primarily A/P, DPO2) Cash flow = liquidity issues вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў Breaching bank covenants Cross and double pledges Financial plan including hockey sticks Frequent management changes Change in accounting principles вЂ“ revaluation Missing 13-week direct Cash Flow plan No KPIs for the management No sales and CM breakdown Sudden change in strategy вЂ“ business model, product portfolio Lack of communication (management/owners) Selected ratios Popular financial covenants applied by banks in red PwC Altman Z-score 1) 0,717*T1+ 0,847*T2 + 3,107*T3 + 0,420*T4 + 0,998*T5 Current ratio Current assets / current liabilities Debt-equity ratio Financial debt/equity DPO2) (CCC3) ratios) Trade payables/daily sales EBITDA margin EBITDA/sales ROCE4) EBIT/(total assets-current liabilities) Debt service cover (DSCR) Available CF/principal and interest repayment EBITDA interest cover EBITDA/interest expenses Fixed-charge coverage ratio (EBIT + fixed charge)/ (fixed charge + interest) Leverage ratio Gearing ratio 1) 2) 3) 4) Formula Net debt/EBITDA Debt/(total assets вЂ“ liabilities вЂ“ intangible assets) T1 вЂ“ (current assets-current liabilities)/total assets, T2 вЂ“ retained earnings/total assets, T3 вЂ“ EBIT/total assets, T4 вЂ“ equity/total liabilities, T5 вЂ“ sales/total assets Days payables outstanding Cash conversion cycle Return on capital employed April 2014 4 Section 1 вЂ“ Understanding the problem The Altman Z-score bankruptcy combines warning signals ratios and confirms that companies are seeking help late Altman Z score analysis ALTMAN Z-SCORE OF 4 ADVISED COMPANIES BY PwC 3,5 3,0 Financially sound вЂў All restructuring projects and appointment of an external advisor were initiated by the financing banks when the companies were mostly in difficulties вЂњGrey zoneвЂќ вЂў For all cases, PwC has been appointed at the moment when the companies displayed severe warning signals (Altman Z-score zone of likelihood of bankruptcy) 2,5 2,0 1,5 вЂў Company with the worse Altman Z-score (company nr 2) went into formal restructuring process (insolvency), the other companies were subject to informal restructuring Company 3 1,0 Company 1 Company 5 0,5 Company 4 Likelihood of bankruptcy 0,0 Engagement of PwC -0,5 -1,0 Company 2 -4,0 2010 PwC 2011 2012 2013e Note: Altman Z score calculated as Z = 0,717 X1 + 0,847 X2 + 3,107 X3 +0,42 X4 + 0,998 X5, where T1 = (Current Assets в€’ Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities T5 = Sales/ Total Assets April 2014 5 Section 1 вЂ“ Understanding the problem Besides the warning signals the debt capacity assessment is a main driver avoiding risk of indebtedness Debt capacity quantification Net debt/EBITDA <4.0x Debt service coverage ratio (DSCR) >1.2x Company capacity to service the debt Net debt / EBITDA = (interest bearing liabilities - cash) / EBITDA DSCR = net operating income / total debt services Interest coverage = EBIT / interest expense LLCR = NPV of Cash flow Available for Debt Service ("CFADS") / Outstanding Debt Interest coverage >3.0x Debt capacity Loan Life coverage ratio (LLCR) 1.25x вЂ“2.5x1) Collateral - value (valuation report, NBV, GBV), type ( current / non-current asset), characteristics (liquidity of the collateral), defined x undefined (building x WIP) LTV (Loan-to-Value) вЂ“ loan value to appraised value of the property BankВґs acceptance of available debt security 1) The ratio can range from 1.25 in a highly geared infrastructure company to 2.5 or higher in an oil and gas firms. PwC April 2014 6 Restructuring process April 2014 PwC