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German Distressed Corporate Loans

German Distressed Corporate Loans. Frankfurt, 5 October 2005. S UN E UROPEAN P ARTNERS , LLP. EQUITY INVESTMENT PARAMETERS Philip A. Dougall - Managing Director. THE INTERCONTINENTAL HOTEL, FRANKFURT, GERMANY / 2005. Company Quartile Performance. Losses. 4th. 3rd. 2nd. 1st.

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German Distressed Corporate Loans

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  1. German Distressed Corporate Loans Frankfurt, 5 October 2005

  2. SUN EUROPEAN PARTNERS, LLP EQUITY INVESTMENT PARAMETERS Philip A. Dougall - Managing Director THE INTERCONTINENTAL HOTEL, FRANKFURT, GERMANY / 2005

  3. Company Quartile Performance Losses 4th 3rd 2nd 1st <--------------------------- Sun Capital ---------------------> <------Traditional Buyers----> Sun Investment Niche • Middle market/large market focus • Revenues of €70 million and above • Distressed situations, underperformers, insolvency situations • Quality companies in more difficult situations • Market share, brand, products

  4. Distressed Company Situations - Acquisition Attributes • Capital • Ability to commit • Speed • Ability to close transactions rapidly • Certainty • No financing contingencies • Partnership • A solutions – based approach • Flexibility of structure • Shares, assets, distressed debt conversions • Operating experience and expertise

  5. Sun Portfolio Company Examples • Hunnebeck (Germany) – Acquired September 2003 • Leading player in scaffolding / formwork • Thyssen Krupp divestiture • Active in 10 European countries • Nexia (France) – Acquired December 2004 • Leading player in chilled transportation • Acquired from EXEL plc and management • Mandat ad hoc • Lee Cooper (UK) – Acquired May 2005 • Leading branded jeans manufacturer and marketer • Acquired from Matalan plc • Restaurant Chain (US) – June 2005 • Chapter 11 restructuring • Partnership with a US-based hedge fund • Additional capital investment into company

  6. Jefferies International Limited Authorised and regulated by the Financial Services Authority Debt Investors Richard Nevins THE INTERCONTINENTAL HOTEL, FRANKFURT, GERMANY / 2005 CONFIDENTIAL DRAFT

  7. Considerations for Debt Investors • Purchase existing debt in order to influence events • Make debt investment to finance the completion of a restructuring (exit financing) 1

  8. Influencing Events US • Active voice in negotiations • Conversion to equity (with the possibility of control) • Control over disposition of collateral Germany • Risk to management whilst in the zone of Insolvency • Administration regime 2

  9. Assets • Accounts receivable • Inventory – not as attractive Exit Financing Like any other new money loan, lenders look at: Adequacy of capitalization Cash flow Management / Sponsor Inter-creditor agreement 3

  10. Recognise value – Realise valueValuation and Sales of Industrial AssetsPresentation for :German Distressed Corporate Loans Conference,October 5, 2005 in Frankfurt

  11. GoIndustry- Service Offering GoIndustry values, takes inventory of and sells industrial assets world-wide Valuation/ Consulting Recognise and manage values Corporate Solutions Optimise asset employment Effective marketing – profitable disposal – reliable execution Disposal Services

  12. GoIndustry- Facts • Founded as start-up company in April 1999, then acquisition of some major industrial auction houses around the globe: • Henry Butcher Ltd. (UK and Far East) • Michael Fox International (USA) • Karner & Co. GmbH (Germany & Austria) • Appelboom N.V. (Benelux) • Extention of the traditional product offering through implementation and use of innovative technologies • 285 employees worldwide, of whom more than 100 are machine- and asset specialists (30 certified valuers) • 42 Locations in 20 countries worldwide • Extensive experience in all sales formats – more than 10.000 auctions held up to date • Data base with in excess of 1,2 Mio. profiled customers • More than 450 auctions and negotiated sales per annum; asset turnover > 250 Mio. €

  13. GoIndustry- Valuation and Appraisal Services • Restructuring • Leasing • Asset Based Lending • Non-Performing Loans Purposes • Locate and describe theasset pool • Value the assets/ determine residual values • Give a market commentary • Assess lender/ owner risks • Define an exit strategy including time scale and cost estimates • Manage the assets • Dispose of the assets Services Bank of America, GMAC, Lloyds TSB, Fortis Bank, GE Capital, Venture Finance, Ernst & Young, Deloitte Touche, Morgan Stanley, Merrill Lynch, Goldman Sachs, KPMG, Lombard, VR-Leasing, Raiffeisen Leasing, Clients

  14. Specific Services for NPL-Transactions • Valuation of industrial assets based on real sales data & experience not formulas or rules of thumb • Expertise and coverage in almost all industries and geographies • Experience in advising the seller and the buyer/ knowledge of expectations/ process Valuation of Collateral • Risk of ownership (securing and handling the assets and liabilities) • Market risks (Volatility and liquidity) • Valuation risks (reference projects/ minimum realisation guarantee) Risk Appraisal • Options and methods of sale • 3rd party influence (landlords etc...) • Description of market place, geographies and economies • Time scale and costs of realisation Exit Strategy

  15. Case Study: Far East - Korea Secured Loan Porfolio Auction – Advising the buyer Client Morgan Stanley • Give valuation advice in connection with MS‘s bid for a major portfolio of secured NPLs offerd for sale by the Korean Asset Management Corporation (KAMCO) • Outstanding principalle balance of over 800 Mio. €, 25% of which was secured principally against machinery & plant • Very limited time frame of 3-4 weeks • Rudimentary documentation (just addresses and very limited mortgage documentation Task • Report covering: • Allocation of machinery & plant to over 80 loans • Realisation estimates • Disposal time frames • Key target market information Product delivered Result Morgan Stanley successfully bid for 3 of the 5 loan pools offered for sale

  16. GoIndustry - Overview GoIndustry Service Offering in more Detail

  17. Worldwide Network – Main Locations North-America Europe Asia USA • Baltimore, MD • Beverly Hills, CA • New York, NY Canada • Ottawa Germany • Munich • Berlin • Frankfurt • Erfurt Austria • Salzburg Belgium • Antwerp England • Birmingham • Bristol • Leeds • London Turkey • Istanbul Spain • Barcelona Irland • Dublin Italy • Rome China • Hong Kong India • New-Delhi Korea • Seoul Malaysia • Kuala Lumpur Philippines • Manila Singapore Thailand • Bangkok Indonesia • Jakarta Africa South-Africa • Capetown

  18. Service Offering - Breakdown • Sale of entire companies going concern • Marketing, Projekt management und support of negotiation process Company Sales Going Concern • Entire plants and production facilities as well as high value production lines • Live Auctions (with and without Webcast), Online-Auctions, Negotiated sales and Internet-Marketplace Disposal Services • For Restructuring, Leasing, Asset Based Lending - und Non Performing Loan -Tansactions • Appraisals / Valuations • Consulting on disposal and exit scenarios Valuation/ Consulting • Software and services for the internal redeployment of surplus assets in multinational corporates with numerous production facilities Corporate Solutions

  19. Sales Formats • Bidders assemble physically in one location • Auctioneer takes bids from the floor – highest bidder wins Live Auction 1 • Maximum Sales proceeds • Situation specific disposal solution • All bids received online • At pre-defined close time, highest bidder wins Online Auction 3 • Bids are being submitted online only, transaction takes place only in the internet • Suited for sale of single assets (24h, worldwide) Internet Marketplace 4 • Privately negotiated sale • Suited for high value and complex production lines or entire plants Negotiated Sales 5 Tailor-made disposal due to wide range of sales formats • Same as live auction but... • Bidders can participate remotely from PC via live link to auction room Live Auction with Webcast 2

  20. Live Auctions 1 Fast, competitive and high realisations… • Many assets / lots • Discrete machines vs process line • Competitive bidding likely… • Time urgency or need to clear site • With Webcast if relevant…

  21. Live Auction with Webcast % sold via Webcast 100% 75% €1.4mn 50% 25% 55% 1 2 3 4 5 Plant 29% 18% 20% 21% 2 User-friendly Handling ensures additional bidders… • Case Study:American Teleco-Supplier • 5 plants: sales proceeds in excess of €500.000 via Webcast • 1,764 lots sold to Webcast-bidders from 17 countries • Case Study:U.S. High-Tech Equipment • €400.000sales proceeds via Webcast (34% of total) • 75 Lots and 24 bidders • 1,166 Webcast-bids in total

  22. Online Auctions 3 Innovative Online Sales offering and proprietary auction platform! • Can execute a wide variety of sales at minimal costs including group lots, single assets and collective sales • National and international bidders compete in a fast and efficient bidding contest • Discrete auction format - no event on the company premises • Significant cost savings for bidders and auction house

  23. Internet Marketplace 4 Suited for single assets that can sell over a longer period of time • 24h advertising, worldwide • Cost-effective marketing as almost comletely internet-based • Longer disposal period • Exclusivity not required • Customer handling by call-center • Bids can be submitted online or via call-center

  24. Negotiated Sales 5 For complex and high value assets • Complete plants / lines • Specialised, high value assets • Market limited – competitive bidding less likely • Benefit from long exposure to market • 3 months to 5 years • Project orientated • Plants often still in production

  25. Innovative Marketing tools Ads in Trade publ. Faxmailing Flyer Email Marketing Website Marketing

  26. Overview of the Sale Process Project-Management from A - Z… Asset data collection Valuation • Auction (live / webcast / online) • Private treaty Method-of-sale assessment Define project plan Site preparation Market research Marketing execution Sale execution Site clearance Agreement with client Financial settlement

  27. Expert Know-how in the following sectors • High Technology • Manufacturing • Media/Broadcast • Oil & Gas • Packaging/Printing • Pharmaceuticals • Rubber & Plastics • Telecommunications • Textiles • Transport • Woodworking • Automotive • Beverage/Brewing • Chemicals • Construction/Mining • Energy/Utilities • Engineering • Ferrous/Non-ferrous • Finance • Food Processing • Healthcare • Inventory

  28. Reference Clients Major Cients in all industries...

  29. Asset Appraisal – Machinery & Equipment Comprehensive asset appraisal services, including: • Determination/ description of asset pool • Market research and valuation • Amortisation plan • Market commentary • Lender risk assessment • Security advice • Exit strategy

  30. Asset management Asset managment is key to secure your values: • Asset tagging • Regular inspections • Surveillance of tech. & sector changes • Valuation review Secure that assets do exist and can be identified Control condition and use/ maintenance Ensure that overall market trends aretaken into consideration Secure that valuation is up to date/ incorporate any significant changes

  31. Exit Strategy Key elements of an exit strategy definition: • Predicates front-end lending values • Legislative and regulatory control • Options and methods of sale • 3rd party influence e.g. finance co’s and landlords • Description of marketplace, geographies and economies • Timescale • Costs of realisation

  32. Contact Details Bodo Kipper Director Continental Europe, Geschäftsführer Karner & Co GoIndustry AG Landshuter Allee 38 80637 München Tel: +49 8912 555828 Mobil: +49 1743210105

  33. US restructuring tools in Germany – Legal perspective Detlef Hass detlef.hass@lovells.com

  34. US tools in German insolvency law • insolvency plan (also pre-packaged) • protection of insolvency proceedings (automatic stay) available prior to an event of illiquidity • self-administration („debtor in possession”)

  35. (…) …and this is how the practice has emerged since • Dip finance – difficult • Involving equity stake holders in restructuring - new • Legal environment beneficial for hedge funds • Debtor in possession progressing • Group insolvency on its way • Pre-insolvency workout US style

  36. Dip finance • Dip Finance means „Financing arranged by a company while under the Chapter 11 bankruptcy process. DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims“. Source: http://www.investopedia.com/terms/d/debtorinpossessionfinancing.asp

  37. … • Massedarlehen(loan granted after opening of insolvency) • Senior to existing indebtedness • secured • Bridge loan • Pre- and post filing cash requirements • by core banks (generally no unencumbered assets available) • Security agreement extended to cover bridge loan • small risk of challenge by insolvency administrator • Not senior over existing indebtedness

  38. Do equity stake holders have a blocking power in insolvent restructuring? • Shareholder no party to insolvency proceedings • No cram down available • Role of Asset deal

  39. (…) • Restructuring with the inclusion of the equity position requires pre- or post-insolvency status • Exception: insolvency plan conditional upon approval of shareholders • In any case: SPA with voluntary element as key risk • Example: „Ihr Platz“ restructuring through insolvency

  40. What is the role of shareholder loans? • Equity funding formalistic • also: no interest payments • Shareholder fund through loans • Shareholder loans subordinated in crisis • Rank junior to indebtedness versus third parties • No role in insolvency (unless senior creditors satisfied) • Little/no value for conversion into equity as contribution in kind

  41. Why not go elsewhere? VDN / Deutsche Nickel AG / DNIC Ltd. (2005) (simplified) • Major creditors of Deutsche Nickel AG (former part of the VDN-group) bought the company and its debts • Changed corporate structure into English Ltd. • Corporate Voluntary Arrangement to cram down minority creditors • Shareholder loans qualify as loans on a pari-passu-basis • “debt for equity swap”

  42. (…) • pro: • no agreements (German law) needed for “debt for equity swap” but “Company Voluntary Arrangement” (majority in creditors’ assembly) • Capital replacement rules (subordination of shareholder loans) not applicable • con: disputable if debt transfer to company under foreign law valid without explicit consent of each creditor

  43. Group insolvency • Joint filing • in Germany available • In Europe depending on COMI (Parmalat/Eurofood vs. Collins & Aikman) • no joint insolvency plan for group of companies in Germany (example Babcock) • Trend for UK insolvency

  44. “Debtor in possession” • practical importance not yet as high as chapter 11 proceedings in the US • discretion of the judge; may only be ordered if no detrimental effect on creditors is expected • courts remain sceptical about the concept of debtor in possession

  45. “Debtor in possession” – recent examples • Kirch Media and Babcock • Management replaced by experienced insolvency practitioner prior to request for “debtor in possession” procedure • Ihr Platz (drug retailer) • “Debtor in possession” order 1 September 2005 (AG Osnabrück) • Management assisted by experienced insolvency practitioner (Piepenburg) • History: 13 major creditors sold claims to Deutsche Bank and Goldman Sachs (EUR 120 million); waiver for further claims (EUR 89 million), meanwhile Goldman Sachs has also acquired Deutsche Bank-claims

  46. Debt trading / Vulture Funds • legal framework in favour of vulture funds: contractual prohibition of debt trading between debtor and creditor invalid (§ 354a HGB) • Rinol (2005) • German flooring specialist • Hedge fund D.B. Zwirn and Morgan Stanley bought > 90 % of Rinols debts and main part of a convertible bond (EUR 160 million) • D.B. Zwirn installed new management, declared partial write-off and pushes rest of bondholders to further waiver of interest • Perspective: “debt for equity swap”

  47. Pre-insolvency workouts • influx of US turn around managers • implementation of chapter 11 type proceedings without filing for insolvency • payment holiday • bridge loan • restructuring: waiver/subordination of claims, debt for equity swap, etc.

  48. Conclusion • use of US strategies increase in Germany dramatically • appointments of turn-around specialists increase • Competition between legal systems – still way to go for German restructuring business

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