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
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1.
Introduction
2.
Claims historical data
3.
Claims macro-process
4.
Recoveries macro-process
5.
Restructurings
6.
Telecom Argentina – case study
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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.
Claims historical data
3.
Claims macro-process
4.
Recoveries macro-process
5.
Restructurings
6.
Telecom Argentina – case study
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
Claims macro-process
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.
Claims historical data
3.
Claims macro-process
4.
Recoveries macro-process
5.
Restructurings
6.
Telecom Argentina – case study
99
Recoveries macro-process
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.
Claims historical data
3.
Claims macro-process
4.
Recoveries macro-process
5.
Restructurings
6.
Telecom Argentina – case study
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.
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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
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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.
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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
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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.
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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.
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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
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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.
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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
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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
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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.
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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
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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
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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
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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
NPV = 33 ¢/$
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Debt sale on secondary market
Question: was it possible to obtain better results?
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Debt sale on secondary market
Question: was it possible to obtain better results? NO!
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Debt sale on secondary market
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
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Debt sale on secondary market
One of the post-restructuring alternatives consists in the sale of the debt on the distressed loans secondary market
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1.
Introduction
2.
Claims historical data
3.
Claims macro-process
4.
Recoveries macro-process
5.
Restructurings
6.
Telecom Argentina – case study
31 31
Telecom Argentina -case study-
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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
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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.
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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).
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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
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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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