German Distressed Corporate Loans

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German Distressed Corporate Loans

• Frankfurt, 5 October 2005

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

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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

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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

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

• Purchase existing debt in order to influence
  events
• Make debt investment to finance the completion of
  a restructuring (exit financing)

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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

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Exit Financing

• Like any other new money loan, lenders look at

Adequacy of capitalization
Cash flow
Management / Sponsor
Inter-creditor agreement
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Recognise value Realise valueValuation and
Sales of Industrial AssetsPresentation for
German Distressed Corporate Loans
Conference,October 5, 2005 in Frankfurt
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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
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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 gt 250 Mio.

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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
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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
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Case Study Far East - Korea
Secured Loan Porfolio Auction Advising the buyer
Client
Morgan Stanley

• Give valuation advice in connection with MSs 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
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GoIndustry - Overview

• GoIndustry Service Offering in more Detail

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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

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Service Offering - Breakdown

• 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
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Sales Formats
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
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Live Auctions
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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

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Live Auction with Webcast
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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
• 400.000 sales proceeds via Webcast (34 of
  total)
• 75 Lots and 24 bidders
• 1,166 Webcast-bids in total

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Online Auctions
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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

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Internet Marketplace
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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

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Negotiated Sales
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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

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Innovative Marketing tools
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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
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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

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Reference Clients
Major Cients in all industries...
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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

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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
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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 cos and
  landlords
• Description of marketplace, geographies and
  economies
• Timescale
• Costs of realisation

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Contact Details

• Bodo Kipper
• Director Continental Europe,
• Geschäftsführer Karner Co
• GoIndustry AG
• Landshuter Allee 38
• 80637 München
• Tel [phone]
• Mobil 49 1743210105

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US restructuring tools in Germany Legal
perspective

• Detlef Hass
• detlef.hass_at_lovells.com

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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)

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()

• 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

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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/debtorinposses
  sionfinancing.asp

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• 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

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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

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()

• 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

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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

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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

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()

• 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

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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

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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

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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

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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 gt
  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

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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.

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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