FI_Debt Recovery and Restructuring_SACE

SACE’s procedures in case of default. Debt recovery and restructuring

Rome, 20 November 2008

Valerio Ranciaro

11

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina – case study

22

Claims and Collections: short term vs. medium-long term Short term

Medium-long term

• • • • •

• • • •

Small amounts (30-50K € or less) Huge volumes per year Process much faster Need standardization In-house collection more effective

Big amounts Small volumes per year Process slower Files management is customized depending on debtor • Often a problem for different ECAs • Complex restructurings

33

1.

Introduction

2.


3.


4.


5.

Restructurings

6.


44

Claims: historical data SACE’s indemnified claims shown a decreasing trend. Recoveries have also improved Claims(€mln)

Premiums + Recoveries – Claims (€mln)

€2.500m

€5.500m €4.500m

€2.000m

€3.500m €2.500m

€1.500m

€1.500m €1.000m

€500m €(500)m

€500m

€(1.500)m €0m

€ mln

2004

2005

2006

€ mln

2004

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

€(2.500)m

2005

2006

17.1

19.1

Recoveries

Claims

Commercial Risk

15.2

Commercial Risk

27.2

25.7

5.6

Political Risk

55.7

21.0

11.9

Political Risk

978.2

3,168.0

5,198.9

Total

82.9

46.7

17.4

Totale

993.4

3,185.1

5,218.0

55

1.

Introduction

2.


3.


4.


5.

Restructurings

6.


66

Claims and recovery process overview Claims Process

Recovery Process Commercial Commercial Credit Credit Recovery Recovery

Claim Claim notification notification

Claim Claim Assessment Assessment

Indemnity Indemnity Payment Payment

Credit Credit Recovery Recovery

Recovery Recovery Sharing Sharing between between SACE SACE and and Creditors Creditors

Recovery Recovery Repayment Repayment

Sovereign Sovereign Credit Credit Recovery Recovery

77


File File Registration Registration

Policyholder notifies claim

Claim Claim Assessment Assessment Cover Cover Analysis Analysis

Customer Customer Relationship Relationship

Settlement Settlement (Repay (Repay Indemnity) Indemnity)

Assess the claim Check cover limit Enter liability

Pass Pass the the file file

Who

Pass the file to Collections

Claim officer

Reserving Reserving

Make a financial reserve for claim Reserve calculation is made from status of insurance file (solvent or insolvent) and liability It is updated if some collections are made It is subject to legal constraints Has to be equal to the final cost of the claim to be paid

Collection Officer Collection Correspondent Debtor Creditor

88

1.

Introduction

2.


3.


4.


5.

Restructurings

6.


99


Claim File

Open Open aa collection collection file file

Pass Pass the the collection collection file file

Manage Manage aa file file

Collection Order

Recover Recover with with pre-legal pre-legal actions actions

Claim officer Collection Officer Collection Correspondent

Follow Follow up up insolvency insolvency procedure procedure

Recover Recover with with legal legal actions actions

Phone collection (in-house) Legal action Enter replies Local correspondents

Fill in the proof of claim Choose, register and follow the payment plan (depending on law)

Manage Manage the the costs costs

Manage Manage recoveries recoveries

Debtor Creditor

Produce Produce statistics statistics and and reports reports

Follow up the recovery repayment

Repay Repay recovery recovery to to creditor creditor

Settle the costs: pre-legal, legal

Send the repayments to clients

10 10

1.

Introduction

2.


3.


4.


5.

Restructurings

6.


11 11

Meaning of the term restructuring

Typically, restructuring is limited to mean a restructuring of the debtor’s financial obligations in response to a change in economic conditions. A restructuring usually takes the form of a rescheduling, compromise, conversion of debt into equity or a combination of all three. Restructuring ≠ Turnaround: Restructuring should be distinguished from the term “turnaround” which is a more pervasive reorganization of both the debtor’s financial obligations and operational processes. In emerging markets where creditors’ rights are usually impaired, a turnaround is almost always unachievable unless there is a willingness by the borrower to do so.

12 12

Restructuring process overview

Phase 1

Phase 2

Financial Due Diligence and Cash flow Projections

Assess Assess Financial Financial Models Models

Standstill Standstill

Assist Assist toto implement implement standstill standstill so so management management can focus on can focus on managing managingthe the business businessand and solutions solutionscan can be bedeveloped developed

Step 1

High level negotiation & Implementation

Critique Critique business businessand and industry industry position position

Identify Identifyand and assist assist creditor creditortoto select selectaa restructuring restructuring solution solution

Assess future Assess future cash flows

Negotiate Negotiate selected selected restructure restructure solution solution

Timeframe depends on the co operation between all parties involved

Implement Implement restructure restructure and andmonitor monitor performance performance

Timeframe depends on requirements of restructuring

Step 2 Commercial Strategies and Fallback Scenarios

Negotiate/ Negotiate/ prepare preparefor for fallback fallback scenarios scenarios

Implement Implement fallback fallback scenarios scenarios

13 13

Steps in the restructuring process

The steps in the Restructuring Process involve: – Due diligence – Standstill – Development of Restructuring Plan – Negotiation and implementation In practice, some of the above steps may be either unnecessary, or unachievable in the circumstances.

14 14

1. Due Diligence

Legal and financial review The legal due diligence is necessary to: – Determine whether any creditor’s claim is legally impaired. – Ascertain the steps necessary to preserve the creditor’s rights. – Determine legal options available to creditors to enforce their claims in the event that a consensual approach fails. The financial due diligence is necessary to gain a full understanding of: – The current financial and organisational positions – Future cashflow position – Strengths and weaknesses

15 15

1. Due Diligence (continues)

The financial due diligence is usually undertaken by external professional consultants, familiar with the restructuring process, the industry and the jurisdiction in which the business operates. The objectives of the review are to determine whether the business is viable, gain an understanding of the events leading to the corporate crisis and assess, at a broad level, remedial action that may be implemented.

16 16

2. Standstill

A standstill is a commonly employed technique to provide sufficient time to all stakeholders to assess the position of the business, the legal rights and to determine a restructuring strategy, without additional pressures being created by precipitous creditor action. During this stabilization phase, the due diligence and assessment for organizational change will occur. Standstills can be arranged formally or informally: – Formally – through the legal system – Informally – require a contractual agreement between the debtor and the creditors to not enforce their rights, and to preserve the parties’ respective positions for a period of time.

17 17

3. Development of a restructuring plan

Development of a financial and organizational strategy to address the causes of the corporate crisis. A restructuring plan needs to deliver a financially better outcome for creditors than the cessation of business and the liquidation of its assets . Financial parameters for a restructuring plan – –

likely recovery using available legal options the recovery from a going concern analysis of the cash-flow from operations.

The terms of any restructuring plan depend on a realistic assessment of both the creditors’ legal rights and the debtor’s operational performance

18 18

3. Development of a restructuring plan (continues)

The development of restructuring plan needs to take into account: – –

what is available to the creditor group how is that going to be split amongst the creditors

To determine what may be available for creditors it is necessary to develop a business plan for the debtor.

19 19

Business Plan

The business plan development will usually be undertaken by management, in order to identify the direction the organisation intends proceeding, and the mechanics to achieve this. If this is not possible, usually in the context of an uncooperative debtor, the creditors’ financial adviser will need to develop the business plan.

FINANCIAL CONSTRAINTS

20 20

Inter-creditor Issues

Determining how the funds available for distribution to creditors are split between the creditors sometimes gives rise to a variety of inter-creditor issues, such as: Competition of secured and unsecured creditors. Rights of creditors against different group borrowers. Treatment of various classes of creditors, such as employees, trade creditors and related party debt.

SHOULD BE RESOLVED BEFORE NEGOTIATING

21 21

4.Negotiation and implementation

The key issues for the negotiation process are: •

Understanding the commercial strengths and weaknesses of the creditors’ position.

•

Developing leverage within the inherent constraints of the commercial weaknesses to achieve the desired commercial outcome.

•

Identifying commercial issues that are of significance to the creditors and developing a consensus amongst the creditors in relation to the issues.

•

Leading the process by consensus, but by action if necessary.

22 22

Instruments to protect the creditors 1.

Opening of an audited account on which all the revenues will converge;

2.

Payments will be made according to a priority order: Waterfall Structure

Restructuring costs (advisors, creditors’ expenses) Operating costs Debt service New investments (CAPEX) Excess cash sweep Subordinated debt Dividends

23 23

Commercial restructurings Over the past few years SACE has successfully restructured some large corporate defaults. Some of the most notable examples are Country

Company

Date

Exposure

Mexico

July 2002 to August 2003

USD 11.6m

Kenya

October 2003

USD 19.0m

Indonesia

October 2003

USD 23.3m

Argentina

December 2003

USD 13.6m

Argentina

February 2004

USD 9.4m

Argentina

April 2004 to August 2005

USD 26.5m

China

October 2007

USD 29.5m

24 24

Debt sale on secondary market

Restructuring usually involves long periods and - sometimes - poor results in terms of NPV.

An example: Restructured amount USD 23,3 mln.

Indonesia Tranche A: 11%

maturity 2014

Tranche B: 29%

maturity 2017

Tranche C: 59%

maturity 2026

25 25


Restructuring usually involves long periods and - sometimes - poor results in terms of NPV.

An example: Restructured amount USD 23,3 mln.

Indonesia Tranche A: 11%

maturity 2014

Tranche B: 29%

maturity 2017

Tranche C: 59%

maturity 2026

NPV = 33 ¢/$

26 26


Question: was it possible to obtain better results?

27 27


Question: was it possible to obtain better results? NO!

28 28


Question: was it possible to obtain better results? NO!

Indonesia APP Indonesia is the largest corporate defaulter in the Emerging Markets’ history. In 2003 USD 5 billions were restructured! Total outstanding debts (including those not restructured) are equal to USD 14 billions.

Indonesia Exposure SACE EKF EKN ÖKB EULER HERMES CESCE COFACE Finnvera Total

(Millions USD Equiv.) 23,3 3,3 78,7 66,8 254,7 11,9 3,6 79,1 521,4

29 29


One of the post-restructuring alternatives consists in the sale of the debt on the distressed loans secondary market

30 30

1.

Introduction

2.


3.


4.


5.

Restructurings

6.


31 31

Telecom Argentina -case study-

32 32

The SACE policies Policy A Guaranteed amount SACE cover Outstanding principal

USD 58,4 80% USD 21,8

Policy B Guaranteed amount SACE cover Outstanding principal

USD 8,4 90% USD 4,6

Total paid claims

USD 22,7

Total outstanding principal

USD 26,5

Total ECAs’s claims

USD 244

33 33

History of a default April 2002 – Telecom Argentina (TA) announces the suspension of the debt service because of the Argentinean economical crisis November 2002 – 1° restructuring proposal: not accepted February 2003 – 2° restructuring proposal: not accepted December 2003 – 3° restructuring proposal of all the financial unsecured indebtness, via the filing of an APE (Acuerdo Preventivo Extrajudicial, binding if approved by 66,6% of the creditors). This proposal was not acceptable as well: negotiations continued. May 2004 – Final restructuring proposal: APE.

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The APE proposal

Creditors received, for every 1.058 unit of nominal value of the debt (amount determined including capitalized interests): OPTION A (100% nominal value) - 10 years "step up" notes (after 15/10/2008 interest increases from 5,53% to 8%); or OPTION B (94,5% nominal value) - 7 years "step up“ notes (9% until 15/10/2005, 10% until 15/10/2008; 11% until 2011); or OPTION C (cash tender) – cash consideration for an amount between 80,34% and 69,94% of 1.058 units, to be determined with a "modified dutch auction".

Creditors who elected to receive Option B consideration, had to accept that up to 37,5% of their credit could be prorated into Option C until the latter was entirely subscribed; therefore Option B was mixed with Option C.

35 35

NPV analysis

NPV 12%

13,50%

15%

Option A

82,5

77,2

72,5

Option B

96,5

92,3

88,4

Option C

79,7

78,9

78,3

Option B – in spite of the 5,5% principal forgiveness – had an higher NPV thanks to the higher interest rate. Option C, even if in cash, had a lower NPV because the payment was going to be made at the closing of the APE (Dec. 2004).

36 36

NPV analysis

NPV 12%

13,50%

15%

Option A

82,5

77,2

72,5

Option B

96,5

92,3

88,4

Option C

79,7

78,9

78,3

Option B – in spite of the 5,5% principal forgiveness – had an higher NPV thanks to the higher interest rate. Option C, even if in cash, had a lower NPV because the payment was going to be made at the closing of the APE (Dec. 2004). SACE elected to receive Option B consideration

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NPV analysis with prorationing The following table shows how Option B NPV changed according to the prorationing into Option C or into both Options A and C.

Option B Best case scenario No prorationing

Expected scenario Prorationing on Option C

Worst case scenario Prorationing on both A and C

12%

NPV 13,50%

15%

96,5

92,3

88,4

90,2

87,3

84,6

89,5

86,5

83,6

According to this scenario, the final one, 37,5% of the credits which elected to receive Option B consideration were prorated into Option C.

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Results of the restructuring (mln.)

Policy A Outstanding principal

USD 21,8

Allocated Option B

USD 13,6

Allocated Option C

USD 8,2

Paid Option C

USD 6,9 + i

Policy B Outstanding principal

USD 4,6

Allocated Option B

USD 2,9

Allocated Option C

USD 1,7

Paid Option C

USD 1,4 + i

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How to contact us HEADQUARTER Roma Piazza Poli, 37/42 • 00187 Roma Tel. +39 06 67361 • Fax +39 06 6736225

REGIONAL OFFICES Milano Via A.de Togni, 2 - 20123 • Milano Tel. +39 02 434499701,Fax +39 02 434499749 Modena Via Elsa Morante, 71 - 41100 • Modena Tel. +39 059 331201, Fax +39 059 820832 Torino c/o ICE - Via Bogino 13 - 10100 • Torino Tel. +39 011 836128 - Fax +39 011 836425 Venezia-Mestre Viale Ancona 26 - 30172 • Venezia - Mestre Tel. +39 041 2905111 - Fax +39 041 2905103

REPRESENTATIVE OVERSEAS Moscow Krasnopresnenskaja Naberejnaja, 12 123610 Moscow • Office n.1202 Tel 007 4952582155 • Fax 007 4952582156 Hong Kong 40/f Suite 4001 – Wanchai, Hong Kong Central Plaza 18, Harbour Road Tel. +852 3620 2323 – Fax +852 36210227 Johannesburg c/o ICE – 42, Chester Road 2193 Parkwood Johannesburg P.O. Box 1261 – 2121 Parklands Tel: +27 118808383 – Fax: +27 118809040/8809041 São Paulo c/o ICE - Avenida Paulista, 1971 3° - 4° andar São Paulo – SP Brasile 01311 - 300 Tel: +55 11 21487250 – Fax: + 55 1132664051

SACE BT: Piazza Poli, 37/42 • 00187 Roma Tel. +39 06 6976971 Fax +39 06 697697725

SACE Surety: Via A. de Togni, 2 - 20123 • Milano Tel. +39 02 480411 Fax +39 02 8041292

www.sace.it

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Contacts

Thank you for your attention

Valerio Ranciaro Head of Claims and Corporate Recoveries Tel. +39 06.6736266 [email protected]

Tel. +39 06.6736264 - 267 [email protected]

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Disclaimer

This presentation has been prepared solely for information purposes and should not be used or considered as an offer to sell or a solicitation of an offer to buy any insurance/financial instrument mentioned in it. The information contained herein has been obtained from sources believed to be reliable or has been prepared on the basis of a number of assumptions which may prove to be incorrect and, accordingly, SACE does not represent or warrant that the information is accurate and complete.

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FI_Debt Recovery and Restructuring_SACE

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