Debt Transactions Key Operational Issues Sergio Velez Alvarez - - PowerPoint PPT Presentation

Debt Transactions Key Operational Issues

October 2017

Sergio Velez Alvarez Senior Managing Director FTI Consulting Spain

Contents

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I. Debt transactions: Usual Investment Strategies II. Maximizing Asset Value III. Aligning Equity IV. Must-Do’s Pre-Transaction V. Case Studies

Debt Transaction

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Usual Investment Strategies

Debt Transactions Aligning Investor and Lender interests

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Lenders’ Considerations Investors’ Considerations Common Grounds

Outsource Portfolio Workout Enhance Balance Sheet Ratios Mitigate Bank Reputational Risk Deleverage Specific Industry Exposure Receive Upfront Cash Payment Partnership with a Capital Provider Address Non Performing Exposures Access Illiquid Assets Maximum Recovery in Minimum Time Invest Turnaround Situations Flexible Investor Partnership with Pillar Banks Leverage Expertise to Improve Results Achieve Value Maximization Option to receive cash from Investor Share Upside Potential New Capital Injections Delay Impairments Enhance Recovery Proceeds Removal of Misaligned Management Maximize Capital Efficiency

The question is “how to maximise asset value” (Pre–Transaction)

Debt Transactions Usual investment strategies

■ Equitization vs outright sale/Trading ■ Distressed-for-control investments ■ Catalyst oriented: spin-offs, security trading, asset sales, or other special sits ■ Value creation ■ Re-profiling strategies ■ Arbitrage ■ Other event driven investors ■ High Yield

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Debt Transactions So… Can we easily align Equity to preserve asset value?

■ No framework for equity cram-down ■ Shadow management risks ■ Subordination issues ■ Limited ‘in - court - recovery’ ■ Lilitigation risks –

– fraudulent transfer/preference claims, – breach of fiduciary duty, other

6 Credit Compensation:

• Art. 165

Spanish Insolvency Act Change of Jurisdiction, Call Options Convertible Instrument Sufficient “Control Rights” Upcoming Refinancing or Existing Default Enforcement

• f Security

Equity Incentivation 6 1 2 3 4 5 NEW MONEY

Debt Transaction

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Must-Do’s Pre-Transaction

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Debt Instrument Catalysts Transition Must Do´s - Pre Transaction

• Debt for Equity

Swap

• New Capital

Required

• Operational

Restructuring

• Balance Sheet

Restructuring

Debt Transactions Must-Do’s Pre-Transaction

• Convertible
• New Money
• Call Option
• Debt Upcoming

Default

• Blocking Toe hold
• Lender of Record
• Bond
• Guarantor

Control rights, Seniority, Security package, reporting package Maximizing asset value during bridge to conversion preserving security value during transition Governance change / upgrade: Ex BoD advisor, CRO, Interim Mgmt. Investor external support: Transformation plan Cash optimization Other Equity incentivation Insolvency risks mitigation

√ Asset value preservation/creation √ Ensure Equity good citizenship √ Align key management decisions

Debt Transaction

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Case Studies

Situation Investor in debt & equity transaction Need of bridge loan to closing Cash constraints required cash optimization during transition

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Bridging a Deal Closing 1 Accelerating D/E Swap 2 Done Pre-Transaction CRO Cash optimization throughout Interim Mgmt. Communication with key commercial stakeholder Investor sponsorship of the above Results & Timing CVA signed Bridge loan put in place /efficient draw downs 3 months Lessons Learnt Interim Mgmt. involved since red flag analysis Creditor/SHA Pre – agreements Negotiation roadblocks Situation D/E swap required acceleration Low pace of process with imminent constraints of liquidity Done Pre-Transaction Catalyst "independent" SPV created Acquisition of debt and conversion into equity Results & Timing D/E swap completed on time SPV set up & conversion 1 month D/E swap – 3 months Lessons Learnt No need to formally push for change of governance

Debt Transactions Case Studies

Situation B/S restructuring agreement Debt restructuring including traditional, semi- equity instruments and New Money BoD with unstable Shareholders

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Enhancing Governance 3 Accelerating Transformation Plan 4 Done Pre-Transaction BoD Advisor CRO triggering clauses Cash monitoring - sponsor external support Transformation plan - sponsor external support Regular creditor-company meetings Results & Timing New Independent BoDs - 1 month New full management team – 6/12 months Transformation plan put in place Lessons Learnt Strong inter-creditors agreement accelerates time of execution Situation Debt transaction with semi-equity instruments Material asset value embedded highly dependent on a transformation plan Done Pre-Transaction Pre- deal agreement on a Transformation plan execution by a third party leadership (sponsored by the investor) Results & Timing Transformation plan set up – 1 month Management focused towards EBITDA generation actions Lessons Learnt Strong sponsorship by investor on specific external support with operational capabilities

Debt Transactions Case Studies

THANK YOU

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