RESTRUCTURING IN AN INTERNATIONAL ENVIRONMENT Lecture for:

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RESTRUCTURING IN AN INTERNATIONAL
ENVIRONMENTLecture for

• Presented by Dr. Stefan Schwarzfischer

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Agenda

• Why is restructuring of an international company
  different to that of a national operating
  company?
• What are the international restructuring
  requirements?
• What are your opportunities and risks for
  international restructuring?
• What skills does one need to do international
  restructuring?

3
Restructuring of an International v National
Company
4
In intl projects crisis indication takes longer
Turnover / cost level
National
International
Expansion phase
Signal phase
Crisis phase
Renovation phase
High growth Functioning markets
Loss of turnovers Rising fixed costs sensitivity
Missing extent of utilisation Massive profit
drop Missing liquidity
Rising turnover Sinking costs Liquidity
procurement
Cost development
Turnover development
Strategical crisis
Profit crisis
Liquidity crisis
high
Available time budget
low
5
At the beginning of an intl crisis the
objections are always the same ...
Misjudge the situation
CEO We still believe in our international
markets!
Partial acceptance of the situation
CFO We received the first signs that something
is wrong, but nobody wanted to listen!
Subsidiaries still believe in success
MD subsidiary We could perform better, but the
cost of goods and our sales prices are to high!
Shareholder pretends not to be informed
Shareholder We believe in the company and its
management, but we did not receive a single PL
for 6 months!
6
Wrong market estimate and fraud are the main
causes for an international crisis
National
International
Not adapted cost structure
36
15
Wrong estimate during the bus. development
31
60
Weaknesses in the product
portfolio a./o. in the
performance
30
25
20
40
Fraud
Cross profit erosion
19
19
13
Loss of market share
5
9
Missing financing
30
9
Balance error
21
Losses in the investment
portfolio
7
7
6
20
Losses of receivables
Collapsed acquisitions
15
3
7
Wrong estimate during the business development

• Foreign competition
• Lack of sales channels
• Implementation of new sales forces by amigos
• Less good market research versus well chosen
  sales structure abroad
• Buy in in an existing sales organisation
• Buy in will cost gross profit, but will
  stabilise sales by an professional / countrywide
  approach
• Exploring a foreign market requires an investment
  for at least 3 years

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Fraud is one of the main intl causes for a crisis

• Selling of stock by management either with no
  invoice or smaller gross profit and kick back
  payment
• Poor controlling instruments encourage these
  processes
• Management claims to receive damaged stock
• To minimise these fraud risks one should consider
  putting the following measures in place
• Elect trusted (national) person as head of local
  accounting
• Head of local accounting always reports to the
  Mother Company
• Damaged stock should always be sent back to
  Mother Company
• Implementation of international cash and invoice
  management
• One integrated stock and financing tool for all
  subsidiaries and the Mother Company
• Site visits to the subsidiaries instead of video
  conferencing.

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Weakness in the product portfolio

• Most countries have different market or product
  requirements and regulations
• Adapted products are required
• Example 1 Car dealer
• Individual choice of every part of the car
• Immediate delivery of a car
• Example 2 IT
• Sales of desktop computer only
• Computer package required including software,
  cables, flat screen etc.
• Increase of complexity
• Solution Choose countries with same client
  demands
• Reduction of complexity
• Gaining liquidity

10
Missing finance

• Subsidiaries in general do not have own loan
  facilities
• They gain their liquidity by sales or from inter
  company loans from the Mother Company
• In a sales crisis Mother company or home bank
  needs to provide further funding
• As securities such as stock, etc. are located
  abroad in a house bank in general is not very
  keen to provide the extra cash
• Implementation of cash desk to prevent insolvency
  close all cash depots at short notice

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Balance error

• The greatest re-evaluation on the balance sheets
  from previous projects is the goodwill and the
  stock value
• The goodwill is very often created by market and
  not by book values
• Especially in a crises company could not fulfil
  these market expectations
• Stock value often shows first day of shipment
  value only
• Re-evaluation leads to extraordinary loss
• Reduction of equity
• Banks lose security

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Losses of receivables

• Local management very often knows that approx.
  20 of the receivables should be cleared out of
  the books
• Fear to lose face as they need to stick to their
  sales forecast
• Careful evaluation of receivables in the cash
  forecast

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There are several factors to consider in relation
to the distressed companies national environments
Financial information
Local market conditions
Local regulatory/ legal environment
Relative positions of creditors
Management
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International Restructuring requirements
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Comparison
International
National
Issues

• Local laws are generally well known to management
  and advisors, especially in regard to company,
  labour and insolvency law.

Management and shareholders liability differ from
country to country. Intl advisors need to build
up a worldwide network to deal with law issues
properly.

• Laws

• IT systems

In general the mother company has implemented the
most advanced IT structure.
IT structured in subsidiaries is less advanced,
therefore stock control, etc. is more difficult
and it takes longer to receive the information if
required.

• Communication barriers

Communication barriers are no real threat in a
distressed situation.
Nevertheless cultural differences forces higher
communication skills.

• Bank behaviour

The relationship with the local banks of the
subsidiaries is less enhanced. Depending on the
country bank receive stock, account receivables
and a letter of comfort by the mother company.
The letter of comfort is a especially high
liability risk in a restructuring, as the lay off
of a subsidiary gets more difficult.
Traditionally the mother company has a strong and
long lasting relationship with its home bank.
This relationship can be used for future
restructuring.
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Restructuring concerns in the world today
Management structure
Increase in derivative products
Distress across a variety of sectors
Multiple creditors
Political interference
General economic weakness in Europe
Changing national insolvency laws
Financial reporting and transparency
Corporate governance
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Evolving insolvency laws
United Kingdom
France
USA
Nordics
Amendment to bankruptcy laws anticipated by year
end (Chapter 11 like). No practical change
anticipated. Heavy bias toward employee and
social interest/(no significant changes
envisaged).
Rescue culture. Debtor friendly. Creditor
protections predictable by establish precedent.

• Enterprise Act 2003
• Objective to promote Rescue culture.
• Curtails power of secured creditors.
• Pending Pensions Bill major implication for
  restructurings.

Most lending secured. Court driven/creditor
friendly process. Insolvency processes rarely
used.
Germany
Italy
Ireland
Spain
Court intensive process, but can restructure
outside of court. Heavy bias toward employee and
social benefits (no significant changes
envisaged). Self managed bankruptcy ie debtor in
possession available but use not widespread yet.
Heavy court and government involvement. Primary
objective to preserve jobs. Extraordinary
Administration existed before Parmalat. Parmalat
has not prompted new reforms in Italian
bancruptcy law.
Examinership, debtor friendly, but rarely used in
practice. Receivership and liquidation dominates
restructuring. Eurofood/COMI decision will set
precedents.
New Bankruptcy Law effective 2004 (Chapter
11 rescue). Introduces professional insolvency
practitioners into restructuring/
insolvency process.
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Practical issues for lenders
Lender liability issues
Attitude of financial creditors
Protecting and enforcing security
Threats to restructure

• Difficulty in providing new money in Germany and
  France
• Shadow Director issues an U.K
• Ability to drive restructuring in Italy

• Perceived senior lender dominance
• Lack of experience with inter-creditors issues
  (Continental Europe)
• Divergence of interest within creditor class when
  some creditors are insured

• Length of hardening periods (Germany and
  Portugal)
• Court discretion to over-ride contractual
  documents

• Credit derivatives
• Incentives to force insolvency

Availability of financial information
Corporate Governance
Actions of company directors

• Frequency of reporting
• Undisclosed financial commitments (Italy)
• Varying accounting standards across Europe

• Level of independence
• Strong links between Shareholders and Board
  (Italy)

• Difficulty in authorising the movement of cash
  within a Group in restructuring
• Risk of Director liability

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Market opportunities and risks for Corporate
Restructure
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The main opportunities and risks within an
international environment

• Opportunities
• International projects in comparison to
  national projects achieve higher advisory
  sales volumes
• The hourly rates within international projects
  are generally higher
• Requirements for more services and products
  such as tax, legal, etc.
• Risks
• High risk of reputation, as there are many
  parties involved
• High complexity of these projects, requiring
  intensive project management, which is
  not always paid for by the client
• Fraud action by management can cause immediate
  end of a project

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Opportunities in Europe

• Key drivers of restructuring
• Leverage transactions (UK, Germany, France,
  Belgium, Italy, Poland, Romania)
• Reduced cost competitiveness (Spain, Portugal)
• Banking reform (Germany, Eastern Europe, Austria)
• New bankruptcy law (France, Italy)
• High accumulated debt (The Nordics, Bulgaria,
  Russia)

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Opportunities in USA and SEA
SOUTH EAST ASIA
USA

• Key drivers of restructuring
• Huge bank expertise for impaired loan management
• Banks have great restructuring expertise
• Market decreased during the last years

• Key drivers of restructuring
• Chief Restructuring Officers
• Enhanced debt trading of banks
• Strong restructuring tradition

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Skills required in international restructuring
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There are many requirements for the restructuring
professionals
Practical experience advising lenders all over
the world
Cross-border and insolvency experience
In-depth sector and industry knowledge
Complex cross border restructuring
Ability to manage inter-creditor issues
Dedicated local staff
Broad range of market contacts
Corporate finance advice
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Advisor specifications
Stamping/requiremen
ts low
high 1 2 3
4 5 6

• Power of persuasion
• Ability to assert
• Stress stability
• Conflict ability
• Negotiating skill
• Motivation ability

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international
? national
? classical management consultant