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The Increased Focus on Debt Compliance. Jim Simpson, Co-Founder Jeff Wallace, Co-Founder September 7, 2010. Agenda. About Debt Compliance Services The increased focus on debt compliance Common debt compliance weaknesses Why debt compliance is so difficult Next steps.

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the increased focus on debt compliance

The Increased Focus on Debt Compliance

Jim Simpson, Co-Founder

Jeff Wallace, Co-Founder

September 7, 2010

www.debtcompliance.com

agenda
Agenda
  • About Debt Compliance Services
  • The increased focus on debt compliance
  • Common debt compliance weaknesses
  • Why debt compliance is so difficult
  • Next steps
about debt compliance services
About Debt Compliance Services
  • Debt Compliance Services LLC is the only firm providing an integrated, automated solution to covenant management
  • It is a joint venture of Corporate Finance Solutions, LLC, which was founded in 2002, and Greenwich Treasury Advisors LLC, which was founded in 1992

“Debt Compliance Services’ tools reduce my risk, save me and my team time and effort, and have made our compliance reporting easy. Gone are the days when we would have to pull out our worn, dog-eared loan documents to review all of the various covenants and restrictions before making critical strategic business decisions. With DCS, reviewing our agreements is literally done with a few clicks of the mouse.”

Al Gever, Executive Vice President & CFO, Smart Balance, Inc.

jim simpson co founder
Jim Simpson, Co-Founder
  • 35 years experience with 23 years as a corporate practitioner and 12 years as a consultant, in which he lead or consulted on over $4 bn in financings, including bank credit facilities, term loans, ABL’s, high yield bonds, convertible bonds, and international financings
  • Corporate experience includes Treasurer of Novartis USA, and CFO of two less than investment grade companies, CS Brooks (private, $200M sales) and CFO of Moore Medical (public, $300M sales)
  • Consulting experience includes a Manager at KPMG, Partner at Greenwich Treasury Advisors and as Founder of Corporate Finance Solutions
  • jim.simpson@debtcompliance.com, (203) 329-7491
jeff wallace co founder
Jeff Wallace, Co-Founder
  • 35 years experience, with 20 years as a consultant and 15 years as a corporate treasury finance professional
  • Founded Greenwich Treasury Advisors in 1992, and author of:
    • The Group of 31 Report: Core Principles for Managing Multinational Foreign Exchange FX Risk (AFP, 1999)
    • A Risk Metric Approach to Hedging (GTA, 2002)
    • FAS 133 chapter of The Handbook of International Finance & Accounting (John Wiley, 2004)
  • Vice President-International Treasury at American Express, AT International at Seagram, AT Finance & Operations at Dun & Bradstreet, and CPA at Price Waterhouse
  • jeff.wallace@debtcompliance.com, (303) 442-4433
the increased focus on debt compliance6
The Increased Focus on Debt Compliance
  • Under the new SEC proxy rule 33-9089, companies must disclose the Board’s role in risk oversight, including how such risks are identified, managed and mitigated
    • It is expected that this will include debt compliance because of the potential adverse effect on access to capital
  • Lenders are less forgiving regarding any covenant breach
    • Lenders are using all defaults including technical defaults to drop the credit or re-price the credit and charge much higher fees
  • Auditors are more aware of the risk of non-compliance and paying more attention to the frequent requirement of providing their assurance of no default to the lenders
  • Senior management is more concerned about the loss of credibility with the Board, lenders, vendors and other creditors
common compliance weaknesses
Common Compliance Weaknesses

No documented

policy or process

Not forward looking, leading to surprises

No comprehensive

covenant list

Complacency

No ownership outside of Treasury and Legal

Overreliance on 1-3 corporate managers

Manual, paper-

based data gathering

An incomplete, low

priority, quarterly process

compliance is much more than calculating ratios
Compliance is Much More than Calculating Ratios
  • Affirmative Covenants
    • Financial Reporting
    • Insurance coverage
    • ERISA filings
    • Corporate events
    • Legal undertakings
    • Environmental compliance
    • Litigation reporting
  • Negative Covenants
    • Restricted payments
    • Liens
    • Loans, leases and guarantees
    • Operating restrictions
      • Permitted baskets
      • Stock buybacks
      • Change of control
      • Acquisitions
      • Hedging restrictions
  • Reps & Warranties
      • Continuing
      • Post-closing events
  • Events of Defaults
      • Payment failures
      • Mandatory prepayments
      • Cross-defaults
managing compliance risk is difficult
What Clients Face

Scores of compliance requirements sprinkled throughout the agreement

Dense legal documents with 30 pages of definitions and 120 pages of cross-references

A time-consuming manual compliance process prone to errors and omissions

What DCS Delivers

A comprehensive compliance database summarizing all requirements with timings and responsibilities

Quick and efficient researching, clicking links, not flipping pages, with collaborative comments

Web questionnaires tailored for each titled position linked to the compliance requirements

Reports showing current and prior quarter compliance issues and their resolution

Managing Compliance Risk is Difficult
debt compliance can be very difficult
Debt Compliance Can Be Very Difficult
  • Example from a Loan Agreement
  • Section 1.9.(b)(i). Borrower must notify the Administrative Agent of a Disposition or Event of Loss of Property. Borrower shall prepay Obligations with the Net Cash Proceeds unless Borrower reinvests Net Cash Proceeds in similar assets within 180 days. Must notify Administrative Agent at end of 180 period that it has reinvested such Net Cash Proceeds. Does not apply if Net Cash Proceeds are below Threshold Amount ($250,000) unless there is an Event of Default. [The actual text was 5 times this length]
  • This typical clause represents four compliance questions, three of which would be answered by the business unit while all four would be answered by treasury:
  • Has your business unit or the company had a disposition of or an Event of Loss of a Property during the Quarter that was greater than $250,000? If yes, please include a description and the occurrence date.
  • If there was such a Property disposition or Event of Loss within the Quarter greater than $250,000, did you inform Corporate Treasury or the Administrative Agent promptly?
  • If your business unit or the company did dispose of or had an Event of Loss of a Property exceeding $250,000 in the last 275 days, has the resulting Net Cash Proceeds been reinvested in similar assets?
  • If there was a disposition of Event of Loss exceeding $250,000 in the last 275 days and the resulting Net Cash Proceeds were not reinvested in similar assets, were such proceeds used to prepay the Obligations promptly?
dcs covenant manager
DCS Covenant Manager™
  • DCS Covenant Manager™ is an automated, turnkey covenant compliance process that is comprehensive, efficient, and collaborative.
  • It is delivered in a secure, web-hosted application that converts the debt agreements and related documents into hyperlinked web pages.
  • The compliance process includes an exhaustive compliance database and corresponding web questionnaires, with database reporting of the responses, all linked to the relevant debt agreement clauses
  • Reading and researching the debt agreements is quick and thorough, clicking links rather than flipping pages, and supplemented by our extensive FAQ’s
debt covenant manager is best practice
Debt Covenant Manager™ is Best Practice

Debt

Compliance

Policy

Company

Training

Financial

Modeling

Detailed

Covenant

Checklist

CFO Letter

& Lender

Management

Web-based

Data

Gathering

Exception

Analysis

Deliverables

Calendar

dcs covenant manager services
DCS Covenant Manager™ Services
  • The DCS Covenant Manager ™ services consist of nine unbundled services that are custom-fitted to our clients’ compliance risks by individual debt agreement:
    • Not all debt agreements need all services
    • We offer umbrella coverage for multiple debt agreements
next steps
Next Steps
  • We arrange for a web-based demo of our services
  • We send you our NDA and a brief write-up on our services and a form for you to select the services you want for which debt agreement(s)
  • You send the completed form back with links or copies of the debt agreements you want us to cover
  • We send you a proposal with a firm quote
  • We formalize the proposal with an engagement letter containing the services to be delivered, work plan, mutual covenants of confidentiality and non-disclosure, customary terms and conditions, and our 100% guarantee that we deliver the functionality we promise