RESTRUCTURING IN AN INTERNATIONAL ENVIRONMENT Lecture for:

1. RESTRUCTURING IN AN INTERNATIONAL ENVIRONMENTLecture for: Presented by: Dr. Stefan Schwarzfischer

2. Agenda • Why is restructuring of an international company different to that of a national operating company? • What are the international restructuring requirements? • What are your opportunities and risks for international restructuring? • What skills does one need to do international restructuring?

3. Restructuring of an International v National Company

4. In int’l projects crisis indication takes longer Turnover / cost level National International Expansion phase Signal phase Crisis phase Renovation phase High growth Functioning markets Loss of turnovers Rising fixed costs sensitivity Missing extent of utilisation Massive profit drop Missing liquidity Rising turnover Sinking costs Liquidity procurement Cost development Turnover development Strategical crisis Profit crisis Liquidity crisis high Available time budget low

5. At the beginning of an int‘l crisis the objections are always the same ... Misjudge the situation CEO: ”We still believe in our international markets!“ Partial acceptance of the situation CFO: “We received the first signs that something is wrong, but nobody wanted to listen!” Subsidiaries still believe in success MD subsidiary: “We could perform better, but the cost of goods and our sales prices are to high!” Shareholder pretends not to be informed Shareholder: “We believe in the company and its management, but we did not receive a single P&L for 6 months!”

6. Wrong market estimate and fraud are the main causes for an international crisis National International Not adapted cost structure 36% 15% Wrong estimate during the bus. development 31% 60% Weaknesses in the product portfolio a./o. in the performance 30% 25% 20% 40% Fraud Cross profit erosion 19% 19% 13% Loss of market share 5% Missing financing 9% 30% 9% Balance error 21% Losses in the investment portfolio 7% 7% 6% 20% Losses of receivables Collapsed acquisitions 3% 15%

7. Wrong estimate during the business development • Foreign competition • Lack of sales channels • Implementation of new sales forces by “amigos” • Less good market research versus well chosen sales structure abroad • “Buy in” in an existing sales organisation • “Buy in” will cost gross profit, but will stabilise sales by an professional / countrywide approach • Exploring a foreign market requires an investment for at least 3 years

8. Fraud is one of the main int’l causes for a crisis • Selling of stock by management either with no invoice or smaller gross profit and kick back payment • Poor controlling instruments encourage these processes • Management claims to receive damaged stock • To minimise these fraud risks one should consider putting the following measures in place: • Elect trusted (national) person as head of local accounting • Head of local accounting always reports to the Mother Company • Damaged stock should always be sent back to Mother Company • Implementation of international cash and invoice management • One integrated stock and financing tool for all subsidiaries and the Mother Company • Site visits to the subsidiaries instead of video conferencing.

9. Weakness in the product portfolio • Most countries have different market or product requirements and regulations • Adapted products are required • Example 1: Car dealer • Individual choice of every part of the car • Immediate delivery of a car • Example 2: IT • Sales of desktop computer only • Computer package required including software, cables, flat screen etc. • Increase of complexity • Solution: • Choose countries with same client demands • Reduction of complexity • Gaining liquidity

10. Missing finance • Subsidiaries in general do not have own loan facilities • They gain their liquidity by sales or from inter company loans from the Mother Company • In a sales crisis Mother company or home bank needs to provide further funding • As securities such as stock, etc. are located abroad in a house bank in general is not very keen to provide the extra cash • Implementation of cash desk to prevent insolvency – close all cash depots at short notice

11. Balance error • The greatest re-evaluation on the balance sheets from previous projects is the goodwill and the stock value • The goodwill is very often created by market and not by book values • Especially in a crises company could not fulfil these market expectations • Stock value often shows first day of shipment value only • Re-evaluation leads to extraordinary loss • Reduction of equity • Banks lose security

12. Losses of receivables • Local management very often knows that approx. 20% of the receivables should be cleared out of the books • Fear to lose face as they need to stick to their sales forecast • Careful evaluation of receivables in the cash forecast

13. There are several factors to consider in relation to the distressed companies’ national environments Financial information Local market conditions Local regulatory/ legal environment Relative positions of creditors Management

14. International Restructuring requirements

15. Laws Local laws are generally well known to management and advisors, especially in regard to company, labour and insolvency law. Comparison International National Issues • Management and shareholders liability differ from country to country. Int’l advisors need to build up a worldwide network to deal with law issues properly. • IT systems • In general the mother company has implemented the most advanced IT structure. • IT structured in subsidiaries is less advanced, therefore stock control, etc. is more difficult and it takes longer to receive the information if required. • Communication barriers • Communication barriers are no real threat in a distressed situation. • Nevertheless cultural differences forces higher communication skills. • Bank behaviour • The relationship with the local banks of the subsidiaries is less enhanced. Depending on the country bank receive stock, account receivables and a letter of comfort by the mother company. The letter of comfort is a especially high liability risk in a restructuring, as the lay off of a subsidiary gets more difficult. • Traditionally the mother company has a strong and long lasting relationship with its home bank. This relationship can be used for future restructuring.

16. Restructuring concerns in the world today Management structure Increase in derivative products Distress across a variety of sectors Multiple creditors Political interference General economic weakness in Europe Changing national insolvency laws Financial reporting and transparency Corporate governance

17. Debtorfriendly Creditor friendly Evolving insolvency laws • United Kingdom • France • USA • Nordics • Amendment to bankruptcy laws anticipated by year end (Chapter 11 like). • No practical change anticipated. • Heavy bias toward employee and social interest/(no significant changes envisaged). • Rescue culture. • Debtor friendly. • Creditor protections predictable by establish precedent. • Enterprise Act 2003 • Objective to promote Rescue culture. • Curtails power of secured creditors. • Pending Pensions Bill major implication for restructurings. • Most lending secured. • Court driven/creditor friendly process. • Insolvency processes rarely used. • Italy • Germany • Ireland • Spain • Heavy court and government involvement. • Primary objective to preserve jobs. • Extraordinary Administration existed before Parmalat. • Parmalat has not prompted new reforms in Italian bancruptcy law. • Court intensive process, but can restructure outside of court. • Heavy bias toward employee and social benefits (no significant changes envisaged). • Self managed bankruptcy ie debtor in possession available but use not widespread yet. • Examinership, debtor friendly, but rarely used in practice. • Receivership and liquidation dominates restructuring. • Eurofood/COMI decision will set precedents. • New Bankruptcy Law • effective 2004 (Chapter 11 • rescue). • Introduces professional • insolvency practitioners into • restructuring/ insolvency • process.

18. Practical issues for lenders Lender liability issues Attitude of financial creditors Protecting and enforcing security Threats to restructure • Difficulty in providing new money in Germany and France • Shadow Director issues an U.K • Ability to drive restructuring in Italy • Perceived senior lender dominance • Lack of experience with inter-creditors issues (Continental Europe) • Divergence of interest within creditor class when some creditors are insured • Length of hardening periods (Germany and Portugal) • Court discretion to over-ride contractual documents • Credit derivatives • Incentives to force insolvency Availability of financial information Corporate Governance Actions of company directors • Frequency of reporting • Undisclosed financial commitments (Italy) • Varying accounting standards across Europe • Level of independence • Strong links between Shareholders and Board (Italy) • Difficulty in authorising the movement of cash within a Group in restructuring • Risk of Director liability

19. Market opportunities and risks for Corporate Restructure

20. The main opportunities and risks within an international environment • Opportunities: • International projects in comparison to national projects achieve higher advisory sales volumes • The hourly rates within international projects are generally higher • Requirements for more services and products such as tax, legal, etc. • Risks: • High risk of reputation, as there are many parties involved • High complexity of these projects, requiring intensive project management, which is not always paid for by the client • Fraud action by management can cause immediate end of a project

21. Opportunities in Europe • Key drivers of restructuring: • Leverage transactions (UK, Germany, France, Belgium, Italy, Poland, Romania) • Reduced cost competitiveness (Spain, Portugal) • Banking reform (Germany, Eastern Europe, Austria) • New bankruptcy law (France, Italy) • High accumulated debt (The Nordics, Bulgaria, Russia)

22. Opportunities in USA and SEA SOUTH EAST ASIA USA • Key drivers of restructuring: • Huge bank expertise for impaired loan management • Banks have great restructuring expertise • Market decreased during the last years • Key drivers of restructuring: • Chief Restructuring Officers • Enhanced debt trading of banks • Strong restructuring tradition

23. Skills required in international restructuring

24. There are many requirements for the restructuring professionals Practical experience advising lenders all over the world Cross-border and insolvency experience In-depth sector and industry knowledge Complex cross border restructuring Ability to manage inter-creditor issues Dedicated local staff Broad range of market contacts Corporate finance advice

25. Advisor specifications Stamping/requirements lowhigh 1 2 3 4 5 6 • Power of persuasion • Ability to assert • Stress stability • Conflict ability • Negotiating skill • Motivation ability             = international  = national  = classical management consultant