HOW TO TURNAROUND DISTRESSED COMPANIES THROUGH EFFECTIVE AND COMPREHENSIVE CORPORATE RESTRUCTURING

A one-day seminar
HOW TO TURNAROUND DISTRESSED
COMPANIES THROUGH EFFECTIVE AND
COMPREHENSIVE CORPORATE
RESTRUCTURING
Ljubljana, 23rd of April 2014
partner
Today´s Agenda
Section
Overview
1
Understanding the problem
1
2
Restructuring process
7
2.1
Independent Business Review as an option analysis
9
2.2
Restructuring options
19
2.3
Implementation
26
3
Estimation of creditors´ recovery in insolvency
32
4
Turnaround case studies
48
4.1
Case study 1 – Complex restructuring of Czech chemical producer
49
4.2
Case study 2 – Restructuring of a large Slovenian conglomerate
63
5
Major conclusions
Page
80
Speakers introduction
Petr Smutný
Karel Štefulík
LukaVesnaver
Partner
Senior Manager
Director
Business recovery services
Business recovery services
Deals
Phone: +420 251 151 215
Phone: +420 251 152 023
Phone: +386 1 5836000
Mobile: +420 602 648 602
Mobile: +420 602 484 992
Mobile: +386 41 279890
Email: petr.smutny@cz.pwc.com
Email:
karel.stefulik@cz.pwc.com
Email:
luka.vesnaver@si.pwc.com
April 2014
PwC
PwC restructuring team has functional expertise across various industries
– major restructuring cases in the CEE region
BRS EXPERTS
BUSINESS RECOVERY SERVICES
Petr Smutný
Partner, CEE BRS Leader
CEE
•
Stephen Oldfield
Partner
•
Donald Bruce
Director
•
Muthiah Arunachalam
Senior Manager
Poland
•
Piotr Zdrojewski
Director
•
Michal Lewczuk
Manager
Czech Republic
•
Karel Štefulík
Senior Manager
•
Radim Baše
Senior Manager
Bulgaria
•
Bojidar Neytchev
Partner
TERRITORY COVERAGE
Hungary
•
Miklos Fekete
Partner
•
Jeno Arva
Manager
Slovenia/Croatia
•
Luka Vesnaver
Director
Romania
•
Cristian Ravasila
Senior Manager
•
Marius Cidu
Manager
•
Independent business review
•
Turnaround
•
Debt advisory and refinancing
•
Corporate insolvency
•
Distressed sale/optimized exit
•
Working capital optimization
PwC
restructuring
services
SELECTED CASES
Steel
Construction
Forging
Lottery
Automotive
Glass production
April 2014
PwC
Understanding the problem
April 2014
PwC
Section 1 – Understanding the problem
Early identification of oncoming crisis is crucial, yet the companies often
react late
MIN
Corporate crisis curve
Strategic crisis
Insolvency
risk
The company is not
fully aware of the
issues
(management ignores
reality)
The problem appears on the:
Income Statement
The problem is addressed by:
Management
Restructuring activity:
No activity
Profitability
crisis
The Company is
aware of the
issues
Liquidity
crisis
Loss of
control
Balance Sheet
Cash Flow
Shareholders
Creditors
Management
restructuring plan
Advisor is involved
MAX
70%
COMPANIES
SEEKING
SOLUTION
PwC
WESTERN
EUROPE
30%
60%
CEE REGION
30%
45%
10%
70%
25%
April 2014
2
Section 1 – Understanding the problem
Even though reasons for crisis can be various – the underlying reason is
inappropriate management of the company
Reasons for crisis
Internal factors
A
Strategic
•
•
•
•
•
B
Operational
•
•
•
•
•
C
Unbalanced company portfolio
Changes in competitive position
Growth is too fast, more emphasis on sales than
profit and cash
Too many investments and acquisitions
Technological lag
Low productivity
Poor cost structure, low contribution margin
Poor liquidity and WC management
Parts of the company are loss making
Inefficient processes
Structural
•
•
•
•
Corporate structure is too complex
Unutilized synergies between divisions and
companies
A lack of controlling and relevant KPI’s for
monitoring
Ineffective incentive and management systems
Ownership in management
85%
Poor management
84%
Unsucsessful acquisitions
72%
Inadequate financial control
60%
High costs in comparison with competitors
56%
Large investment projects
20%
Low marketing effort
20%
External factors
Changes on market (incl. regulation)
68%
Stronger competitiors
D
•
•
•
•
•
PwC
44%
Cultural
Resistance to innovation
Ineffective internal and external communication
Divisional kingdoms
Poor integration of acquired companies
A lack of accountability among the employees
Changes in inputs prices
20%
Source: PwC Survey
April 2014
3
Section 1 – Understanding the problem
Arising financial difficulties can be detected in advance via appropriate
financial ratios – quantified warning signals
Qualitative
Quantitative
Warning signals
•
•
•
•
•
•
•
•
•
•
•
•
•
Altman Z-score implying risk zone
Decreasing capacity utilization
Decreasing CM (absolute and relative)
Decreasing equity and increasing debt
Decreasing headroom
Decreasing or low order backlog
Decreasing productivity
Decreasing profitability or increasing losses
Decreasing sales
Increasing number of financing banks
Increasing number of suppliers
Worsening ageing structure – primarily A/P, DPO2)
Cash flow = liquidity issues
•
•
•
•
•
•
•
•
•
•
Breaching bank covenants
Cross and double pledges
Financial plan including hockey sticks
Frequent management changes
Change in accounting principles – revaluation
Missing 13-week direct Cash Flow plan
No KPIs for the management
No sales and CM breakdown
Sudden change in strategy – business model, product portfolio
Lack of communication (management/owners)
Selected ratios
Popular financial covenants applied by banks in red
PwC
Altman Z-score 1)
0,717*T1+ 0,847*T2 + 3,107*T3 +
0,420*T4 + 0,998*T5
Current ratio
Current assets / current liabilities
Debt-equity ratio
Financial debt/equity
DPO2) (CCC3) ratios)
Trade payables/daily sales
EBITDA margin
EBITDA/sales
ROCE4)
EBIT/(total assets-current liabilities)
Debt service cover (DSCR)
Available CF/principal and
interest repayment
EBITDA interest cover
EBITDA/interest expenses
Fixed-charge coverage
ratio
(EBIT + fixed charge)/
(fixed charge + interest)
Leverage ratio
Gearing ratio
1)
2)
3)
4)
Formula
Net debt/EBITDA
Debt/(total assets – liabilities –
intangible assets)
T1 – (current assets-current liabilities)/total assets, T2 – retained earnings/total assets, T3 –
EBIT/total assets, T4 – equity/total liabilities, T5 – sales/total assets
Days payables outstanding
Cash conversion cycle
Return on capital employed
April 2014
4
Section 1 – Understanding the problem
The Altman Z-score bankruptcy combines warning signals ratios and
confirms that companies are seeking help late
Altman Z score analysis
ALTMAN Z-SCORE OF 4 ADVISED COMPANIES BY PwC
3,5
3,0
Financially
sound
• All restructuring projects and appointment of
an external advisor were initiated by the
financing banks when the companies were
mostly in difficulties
“Grey zone”
• For all cases, PwC has been appointed at the
moment when the companies displayed
severe warning signals (Altman Z-score zone
of likelihood of bankruptcy)
2,5
2,0
1,5
• Company with the worse Altman Z-score
(company nr 2) went into formal
restructuring process (insolvency), the other
companies were subject to informal
restructuring
Company 3
1,0
Company 1
Company 5
0,5
Company 4
Likelihood of
bankruptcy
0,0
Engagement of PwC
-0,5
-1,0
Company 2
-4,0
2010
PwC
2011
2012
2013e
Note: Altman Z score calculated as Z = 0,717 X1 + 0,847 X2 +
3,107 X3 +0,42 X4 + 0,998 X5, where
T1 = (Current Assets − Current Liabilities) / Total Assets
T2 = Retained Earnings / Total Assets
T3 = Earnings Before Interest and Taxes / Total Assets
T4 = Book Value of Equity / Total Liabilities
T5 = Sales/ Total Assets
April 2014
5
Section 1 – Understanding the problem
Besides the warning signals the debt capacity assessment is a main driver
avoiding risk of indebtedness
Debt capacity quantification
Net debt/EBITDA
<4.0x
Debt service coverage
ratio (DSCR)
>1.2x
Company capacity to service the debt
Net debt / EBITDA = (interest bearing
liabilities - cash) / EBITDA
DSCR = net operating income / total debt services
Interest coverage = EBIT / interest expense
LLCR = NPV of Cash flow Available for Debt
Service ("CFADS") / Outstanding Debt
Interest
coverage
>3.0x
Debt
capacity
Loan Life coverage ratio
(LLCR)
1.25x
–2.5x1)
Collateral - value (valuation report, NBV, GBV),
type ( current / non-current asset), characteristics
(liquidity of the collateral), defined x undefined
(building x WIP)
LTV (Loan-to-Value) – loan value to appraised
value of the property
Bank´s acceptance of available debt security
1) The ratio can range from 1.25 in a highly geared infrastructure company to 2.5 or higher in an oil and gas firms.
PwC
April 2014
6
Restructuring process
April 2014
PwC