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FTI Corporate Finance European Restructuring Trends 29 September 2010

FTI Corporate Finance

European Restructuring Trends

29 September 2010

FTI Corporate Finance European Restructuring Trends 29 September 2010

Agenda

Looking back on 2010

Current Trends

Junior debt holder battles

UK Case studies

Looking forward for 2011

Irish implications

Page 1

Trends  Junior debt holder battles  UK Case studies  Looking forward for 2011 

Looking back on 2010 – European Restructuring Market

2009 was a game of two halves:

- Debt to equity swaps

- Amendments

Expected to see in 2010:

- More complex restructurings (operational as well as financial)

- Wave of refinancing / restructurings from the amendment behaviour in 2009

- Higher insolvency rate as lenders walked away

- Distressed M&A as an exit route

- Country crisis (Dubai, Iceland, others?)

What we have actually experienced in 2010 (so far

)

- Benign corporate restructuring environment (ie boring)

- A couple of high profile financial restructurings (eg Gala Coral)

- Valuation battles (eg IMO car wash, Almatis)

- The old names recycled (eg Wind Hellas, Treofan, Stahl)

- A few high profile casualties (eg Connaught, Cattles (?))

- Country issues (Greece, Portugal, Spain, Dubai)

As a result, market participants are having to look wider for deal opportunities

Page 2

Portugal, Spain, Dubai)  As a result, market participants are having to look wider for deal

Restructuring methods - Banks

Depending on where the value breaks, lenders have a choice between a range of short and medium term solutions

Covenant reset Debt for equity swap Re-pricing Restructure Control via the debt Bank Options existing
Covenant reset
Debt for equity
swap
Re-pricing
Restructure
Control via the
debt
Bank Options
existing
facilities
Trading
M&A process
insolvency
Sell debt

Maintain Bank Relationshipfacilities Trading M&A process insolvency Sell debt Exit Now PagePage 33 Covenant reset A reset of

Exit Nowprocess insolvency Sell debt Maintain Bank Relationship PagePage 33 Covenant reset A reset of financial covenants

PagePage 33

Covenant reset

A reset of financial covenants with the term and structure of the

facilities remaining unaltered.

Re-pricing

A change in the effective return on the debt to a higher rate

through a re pricing of the debt instrument to reflect increased

risk and any underlying market movement.

Restructure existing facilities Imposition of a tiered pricing structure and a restructure of the existing facilities to reflect value, leverage and risk.

M&A process Agree with the Board of Directors that they will undertake a sale process of whole or part of the group as a condition of the lenders’ ongoing support.

Sell debt

A sale of the debt instrument to a financial or trade buyer

Trading insolvency An orderly wind down of the business through a business and asset sale by administrators.

Control via the debt

Obtain economic and management control without an equity

conversion

Debt for equity swap

A debt for equity conversion involving the equitisation of part of

the existing debt facilities.

.

Debt for equity swap A debt for equity conversion involving the equitisation of part of the
Current state of the debt markets – New Issuance  LBO volumes virtually ceased during

Current state of the debt markets – New Issuance

LBO volumes virtually ceased during 2009 – no real pick up in 2010

Most activity was related to maturity extensions and not M&A deals

Mezzanine and Second Lien almost non existent with nearly all issuance first lien

Equity portion of enterprise value reducing – expected to drop back to “normal levels” in back end 2010

Pricing of restructured debt increased by minimum 200bps per tranche, with significant up front fees

Pricing of debt in the secondary market has recovered from 2009 levels, yields more attractive on new issuance versus 2007 paper

Investors attracted by strong yields and the need to put ‘wall of cash’ to work

European LBO Debt Volume ($Bn) 180 160 140 120 100 80 60 40 20 0
European LBO Debt Volume ($Bn)
180
160
140
120
100
80
60
40
20
0
2003
2004
2005
2006
2007
2008
2009
YTD 2010
YTD Q209
YTD Q210
European High Grade Average Quarterly Margins 250.0 225.0 200.0 175.0 150.0 125.0 100.0 75.0 50.0
European High Grade Average Quarterly Margins
250.0
225.0
200.0
175.0
150.0
125.0
100.0
75.0
50.0
25.0
Average margin (bps)
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10 td

Page 4

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
Current state of the debt markets – Bond Issuance  Absence of traditional loan providers

Current state of the debt markets – Bond Issuance

Absence of traditional loan providers led to increased reliance on capital markets for funding

HY provided a real alternative to refinancing through bank debt; Convertibles, investment grade and high yield bonds all being issued

HY market used to refinance short term maturities of bank debt, or conduct exchange offers for other notes that are falling due

Investors attracted by strong yields and the need to put ‘wall of cash’ to work

Strong benefits to corporates and banks of having an active and open bond market

Still some resistance to European bond market:

- Biannual financial reporting,

- Limited secondary activity,

- Lack of covenant transparency.

European High Yield Issuance ($Bn)

Corporate Bond Issuance in 2010

20 18 16 14 12 10 8 6 4 2 0 1Q 06 2Q 06
20
18
16
14
12
10
8
6
4
2
0
1Q 06 2Q 06 3Q 06 4Q 06 1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10
$2.6bn €1.2 bn £1.5 bn €1.0 bn €2.1 bn $1.0 bn €1.0 bn €1.2 bn
$2.6bn
€1.2 bn
£1.5 bn
€1.0 bn
€2.1 bn
$1.0 bn
€1.0 bn
€1.2 bn
€0.2 bn

Page 5

4Q 09 1Q 10 2Q 10 3Q 10 $2.6bn €1.2 bn £1.5 bn €1.0 bn €2.1
Junior Lender Positions  Value fallen and often breaks in the Senior debt  “out

Junior Lender Positions

Value fallen and often breaks in the Senior debt

“out of the money” junior layers

-“buy” value or be the solution in restructured capital

- Dispute valuation

- Dispute “junior” status (structural subordination)

Alongside or in competition with Sponsors

Ability to recover loss

Otherwise risk of being squeezed out

Consensually vs Scheme of Arrangement or Administration

‘no economic interest’ eg IMO car wash, McCarthy and Stone

Ransom payments, stub or hope equity value (anti embarrassment)

eg IMO car wash, McCarthy and Stone  Ransom payments, stub or hope equity value (anti
eg IMO car wash, McCarthy and Stone  Ransom payments, stub or hope equity value (anti
eg IMO car wash, McCarthy and Stone  Ransom payments, stub or hope equity value (anti

Page 6

eg IMO car wash, McCarthy and Stone  Ransom payments, stub or hope equity value (anti

UK Case Studies

Leverage fall-out driving a debt restructuring

UK betting shop and casino operator - good business but over-levered

Original buy out by Candover and Cinven and later Permira

£2.6b debt including £558m of Mezz

Significantly impacted by the UK smoking ban, tighter gaming regulation and on set of the recession

By July 2009 forecasts predicted leverage covenant breaches in early 2010

regulation and on set of the recession  By July 2009 forecasts predicted leverage covenant breaches

Participants - the strategy

‘Loan to own’ strategy through the mezzanine by distressed investors including Apollo, Cerberus, Park Square and York Capital

100% of mezz converted to 100% equity and full control after Candover, Cinven and Permira did not take up offered equity stakes in the restructured group

Sponsors took small cash payment to walk away

Page 7

Outcome

A £588m conversion of mezz to equity giving the new shareholders control in addition to a £200m cash injection pushed out:

Permira and loss of their £370m equity; and

Candover and Cinven who had £150m invested

De-levered balance sheet – new money paid straight to Senior

The syndicate led by RBS, Lloyds and Alcentra benefitted from increased fees, £200m debt pay down, no mezz remained; improved security position.

Lloyds and Alcentra benefitted from increased fees, £200m debt pay down, no mezz remained; improved security

UK Case Studies

Senior lender drive a ‘rollover scheme and prepack’

Acquired by Carlyle in 2006 through a leveraged buy-out for £450m.

Tough trading conditions and high leverage meant that the Group was under pressure to reduce debt. The Group was breaching covenants and unable to service all interest on senior debt (£313m) and mezz debt (£119m).

Group was valued by the senior lender advisors (PWC, Rothschilds) at around £265m, with value breaking in senior. Market testing for sale performed

Senior debt trading in the 60’s, mezz fully subordinated

breaking in senior. Market testing for sale performed  Senior debt trading in the 60’s, mezz

Participants - the strategy

The Senior strategy was a to restructure the debt package through a Scheme of Arrangement & pre-pack.

Senior lender intention was to force the 15% non consenting senior lenders to agree to take control

If all Senior had consented, simple pre-pack to Newco would have been performed

In so doing so the mezzanine lenders would be excluded from lender controlled NewCo

Page 8

Outcome

Schemes of arrangement were used to force the 15% of the non consenting senior to ‘roll-over’ into NewCo

Mezz argued directors were in breach of duty and that value of the business was greater than the value of the Group’s assets.

L.E.K was engaged who using Monte Carlo simulation valued the group at in excess of £320m - breaking in Mezz

Senior lenders successful in driving through the rollover and pre-pack. Important ruling for valuations argued by “out of the money” creditor groups

through the rollover and pre-pack. Important ruling for valuations argued by “out of the money” creditor

UK Case Studies

Bankruptcy process to drive mezz to equity conversion

World’s largest producer of alumina products, acquired for $1.2b in 2007 by owner Dubai International Capital’s (DIC)

Following the rapid deterioration of the trading environment in early 2009, management engaged in discussions with its lenders and shareholders regarding a financial restructuring of $1bn (£639m) of debt

regarding a financial restructuring of $1bn (£639m) of debt  In May 2010, Almatis filed for

In May 2010, Almatis filed for a pre-packaged Chapter 11, despite not yet having sufficient lender support for a restructuring plan

Participants - the strategy

Oaktree Capital Management purchased senior debt on secondary market (controlled 46% of senior debt: £311m)

Sought to take ownership of the Group and restructure debt

Cram down the sponsor and Mezzanine claims

DIC unwilling to walk away from its investment and sought refinancing of senior debt

Management filed Group for Ch11 protection

Page 9

Outcome

DIC submitted re-financing plan which was approved by the courts in August 2010 resulting in 40% of equity stake handed to the junior creditors (Babson Capital, Permira and Alcentra)

Remaining 60% stake retained by DIC post additional $100m equity injection

New Senior facilities arranged

Senior lenders including UBS, Commerzbank and Bank of Ireland in addition to Oaktree repaid in full at par with no equity stake offered

including UBS, Commerzbank and Bank of Ireland in addition to Oaktree repaid in full at par
Looking forward for 2011 Restructuring – Refinancing Wall  Over € 567Bn in LBO debt

Looking forward for 2011 Restructuring – Refinancing Wall

Over 567Bn in LBO debt maturities in 2010 – 2017 (excludes corporate lending)

Sheer scale will broaden the type of company caught in the restructuring net:

Stressed and distressed businesses

Industry and sector driven issues

“Sticking-plaster” solutions from FY09 / FY10

2005/2006 buy-outs that are approaching back end amortisation

“good businesses” that can service debt, but not meet repayments of principle

Valuation issues

Sovereign Issues (Icelandic, Portugal, Greece, Spain etc)

Limited source to meet this demand – Basel III implications restricting further lending

European LBO Debt Maturing € M
European LBO Debt Maturing € M

Page 10

source to meet this demand – Basel III implications restricting further lending European LBO Debt Maturing
Corporate Approach to Beating the Refinancing Wall  Proactive approach required to ensure access to

Corporate Approach to Beating the Refinancing Wall

Proactive approach required to ensure access to capital:

- Communicate with lenders

- Work on information provision

- Get control of the house-keeping:

- Manage cash flow

- Reduce working capital

- Prudent cost control

- Plan for the unexpected

- Look at other areas of the balance sheet for cash opportunities

For lenders who have exposures to borrowers with pending maturities:

- Encourage the management team to get organised early

- Engage support

- Look at wider opportunities for introduction of capital

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management team to get organised early - Engage support - Look at wider opportunities for introduction
Implications for Ireland Restructurings  European influence noticeable on Irish restructurings (larger corporate)

Implications for Ireland Restructurings

European influence noticeable on Irish restructurings (larger corporate) -‘London’ approach – consensual, stakeholders working together

- Debt trading

- Liquidity position driving the urgency of processes

NAMA process hugely influential in the next steps for large restructurings (consensual vs enforcement routes?)

Bilateral banks – waiting on direction from NAMA

More to come in 2011?

- Corporates reliant on government spending

- Domestic volume reliant businesses

- Multi nationals looking to reduce footprint

Property related stress – different from most of the European names (Industrial, Consumer Goods, Retail etc)

- Difficult to fix operationally

- Market wide deadlock with no sign of easing

New money / liquidity will be the determining factor – bank / PE / sovereign investment

Page 12

no sign of easing  New money / liquidity will be the determining factor – bank

Curriculum vitae - Mark Dewar

Curriculum vitae - Mark Dewar Mark Dewar Senior Managing Director, London Direct Tel: +44 (0)20 3077

Mark Dewar

Senior Managing Director, London

Direct Tel:

+44 (0)20 3077 0523

Direct Fax:

+44 (0)20 3077 0599

E-mail: mark.dewar@fticonsulting.com

Mark Dewar is a Senior Managing Director in FTI‘s Corporate Finance practice and is based in London

Mark has over 14 years of experience in advising stakeholders including Senior Finance providers, Corporates, Private Equity investors and Junior debt providers. The industries which Mark has been involved with include financial services, telecommunications, software, engineering, building and construction and the automotive sector.

Prior to joining FTI, Mark worked as a Director in the London restructuring practice of Ernst & Young where he also completed a 15 month secondment to the Leverage Finance team at the Royal Bank of Scotland. Mark was also a member of the Ernst & Young working capital management practice where he worked for a number of corporates assisting management to drive cash from the balance sheet.

Prior to joining Ernst & Young, Mark worked for a FTSE 100 IT Services company and in New York for Credit Suisse First Boston. He commenced his career in Australia where he worked in the audit practice of Ernst & Young, qualifying as a chartered accountant in 1997.

Page 13

Recent experience

Advisor to NAMA on the review of Business Plans for the largest 10 borrowers who are transferring their loans into NAMA.

Advisor to the lenders to Quinn Group, one of Irelands largest private groups. Advice included review of the business plan and strategy, advice on financial restructuring options and providing contingency planning alternatives.

Led a team responsible for managing the liquidity position of a global mortgage lender (loans written in 2006 c$30bn), during the sub prime mortgage crisis. Role included diligence of distressed targets on behalf of equity sponsors and strategic reviews of European subsidiaries.

Led the team appointed by an Icelandic listed Corporate to assist in executing a full refinancing of the existing 300m of debt facilities.

Advisor to Icelandic Corporate needing to refinance $250m of term and acquisition facilities following the failure of its current Icelandic lenders.

Led the European team responsible for advising the syndicate of banks to Lyondell Basell, one of the worlds largest chemical manufacturing businesses ($25Bn debt), following the Groups Ch11 filing.

Performed the financial review of a listed UK high street specialist retail chain including strategic review of the store portfolio, identification of cost reduction opportunities, and liquidity review. Advised the lenders through the financial restructuring including the pensions restructuring and the debt for equity conversion process.

Advised the bond holders of Damovo Group SA through the financial restructuring in 2006. The role included the review of the Italian operation and resulted in the Bondholder Group gaining control.

Led the team appointed by Mowlem plc, (Global construction business, £2bn turnover), to assist the new management team in preparing financial forecasts upon which to refinance the business.

Appointed by a blue chip private equity investor to assist a mobile telecommunications portfolio company with debt of £200m, to rebuild their business plan and gain greater visibility over existing cash availability and forecast flows

of £200m, to rebuild their business plan and gain greater visibility over existing cash availability and