Central Europe Trust
Budapest International Business Center Conference
Management Consulting
22 March 2013
Financial Advisory
Alternative Investments
www.cet.co.uk
Central Europe Trust Company Limited
London - Bucharest - Budapest - Kiev - Moscow - Prague - Warsaw - Zagreb
Introduction to Central Europe Trust (CET)
•Founded in 1989 as one of the first independent advisory firms in Emerging Europe (CEE) by:
• Lord Lawson (UK/Latvian descent): Member House of Lords, Formerly Chancellor of the Exchequer, Secretary of State for
Energy, Financial Secretary to the Treasury and Member of Parliament.
Author: The View from No.11: Memoirs of a Tory Radical (Bantam).
• Charles Jonscher (UK/Polish): President. Formerly head of Booz Allen TMT practice in Europe; co-founder, CSP (acquired by
Booz Allen); research, BT Labs and IBM Labs and co-director, Telecom Research, MIT.
Author: The Evolution of Wired Life -- How Information Technologies Change Our World (Wiley).
• Tom Lampl (UK/Czech): Managing Director. Formerly JP Morgan (London), SG Warburg (London), American Express Bank
(Athens, acquired RIB) and Rothschild Intercontinental Bank (London).
•Three business lines
• Management consulting: 650+ engagements
• Strategic: market entry (into and within Emerging Europe), development and implementation
• Operational: Cost optimization, business process optimization, and post-M&A integration and consolidation
• Corporate restructuring: Pre- / post-privatization and privately-owned underperforming/operationally distressed firms
• Transaction advisory: 135+ transactions throughout Emerging Europe with exceptionally closure rate of
• M&A: Mergers & acquisitions, sales & dispositions, joint ventures & franchise agreements: strategy, structuring,, execution & closing
• Corporate finance: preparation, structuring and placing public and private equity and debt as well as project finance
• Transaction services: Due diligence, financial modeling and valuation
• Alternative investments: $550m via 4 advised/co-managed institutional funds and 1 in-house PE program
• Funds: New Europe Fund, Slovak Post-Privatisation Fund, National Investment Fund 14, East European Food Fund, CET Capital
• Planned New Fund: rescue & recovery investment in stressed & distressed firms operational HQ in Budapest
www.cet.co.uk
P1
CET Network: Eight Offices and 40+ Staff
Unique positioning
• World-class expertise
• Leading consulting firms,
investment banks and
universities
• Bi-cultural executive
team together since
1989
• Avg of 17+ years at CET
Prague, Czech
Republic
• Established 1990
• Also covers Slovakia
• Staff: 3
Warsaw, Poland
• Established 1989
• Also covers the Baltics
• Staff: 20
London, UK
Established 1989
• Secretariat
• Staff: 2
Budapest, Hungary
• Established 1989
• Staff: 2
• Local knowledge,
presence & insight:
Kiev, Ukraine
• Established
2002
• Staff: 2
• Embedded in business,
finance and policy
communities with contact
network developed since
1989
• Integrity & commitment
to our clients
• Relationship-driven approach
based on mutual respect,
honesty and trust
www.cet.co.uk
Moscow, Russia
• Established 1991
• Covers FSU
• Staff: 5
Zagreb, Croatia
• Established 2002
• Also covers
Slovenia, Bosnia &
Herzegovina, Serbia
• Staff: 2
P2
Bucharest, Romania
• Established 1995
• Also covers Bulgaria
• Staff: 4
CET: Selected Multinational Clients
www.cet.co.uk
P3
CET: Selected CEE Clients
www.cet.co.uk
P4
CET Alternative Investments: $550m 4 PE Funds & 1 In-house Program
www.cet.co.uk
P5
CEE: Deepest Recessions of all Emerging Markets During 2008/9 Crisis
13 of 15 deepest recessions in CEE
hSource: UBS
www.cet.co.uk
P6
CEE: Fastest Private-sector Credit Growth of all EMs in Run-up to Crisis
• Supply side
•Demand side
• Driven by foreign banks: Austrian, German, French,
•Local firms overleveraged before crisis: debt-based growth
Nordic, Portuguese, Italian, Irish, Greek and Spanish
–Poor risk management: first debt-driven crisis in memory
–Increased competition in CEE: eroded lending standards
–Inappropriate capital structures
–Foreign bank funding: partially via wholesale markets
–asset/liability mismatch, debt maturity schedules
–Foreign currency-denominated loans: forex risk
–Overreliance on banks: capital markets underdeveloped
hSource: UBS
www.cet.co.uk
P7
CEE Banks/Corporates Highly Mutually-Reliant vs Western Europe/US
Source: UniCredit
www.cet.co.uk
P8
International Ownership of Banking Assets by Country of Assets
Averages - CIS & Turkey: c. 22%, Central & Southeast Europe: c. 80%
Source: Raiffeisen Bank., Unicredit,. Date for Emerging Europe banks as of 31 Dec 2011. Data for France, Germany, OECD, UK, US, Africa and Latin America as of 31 Dec 2009.
P9
www.cet.co.uk
Deleveraging: Vicious Circle
www.cet.co.uk
P10
Foreign Banks Have Continued to Withdraw Funds from CEE
External positions of BIS reporting banks: 2011Q4-2012Q3 (change as % of full-year 2012 GDP)
Vis-à-vis all sectors, gross
Source: BIS.
www.cet.co.uk
P11
Decomposition of Cross-border Bank Flows to Emerging Markets (Q-on-Q %)
Decline primarily due to:
2009: host country (CEE) factors: lower borrower demand
2011/12: home country (Western Europe) factors: eurozone crisis, deleveraging, home bias, etc
Source: BIS
www.cet.co.uk
P12
CEE Credit Growth Likely to be Capped by Deposit Growth
Due to deleveraging in general and lower use of wholesale financing
Source: UniCredit
www.cet.co.uk
P13
Total Net Private Capital Flows to CEE
•FDI: after a substantial declines in 2009 and 2010, FDI stabilized and is projected to grow in 2013
•Portfolio: after turning negative in 2008 and net zero and 2009, portfolio flows rebounded in 2010 and remain positive
•Other (Bank, Private Individuals): after significant growth 2004 -2007, reversed dramatically in 2008 - 2009 and remains negative
Source: International Monetary Fund World Economic Outlook September 2012
www.cet.co.uk
P14
Non-performing Loans
Trend in CE & SEE: stable to higher
Trend in Baltics, CIS & TK: stable to lower
Source: IMF
www.cet.co.uk
P15
Default Risk: Generally Increases to the South and East
• CEE lags Western Europe in terms of credit, liquidity and solvency conditions.
• Corporate default probability in most CEE countries is Significant, High or Very High
Corporate Default Probability
Very Low, Low, Acceptable, Quite Acceptable
(Ratings A1 to A4)
Significant
(Rating B)
High
(Rating C)
Very High
(Rating D)
Emerging Europe:
Emerging Europe:
Emerging Europe:
Emerging Europe:
Czech Republic Slovakia
Estonia
Slovenia
Lithuania
Turkey
Poland
Developed Europe:
Austria
Belgium
Denmark
Finland
France
Germany
Iceland
Ireland
Luxembourg
Malta
Netherlands
Norway
Sweden
Switzerland
United Kingdom
Bulgaria
Hungary
Kazakhstan
Latvia
Romania
Russia
Developed Europe:
Croatia
Italy
Portugal
Spain
Moldova
Belarus
Tajikistan
Bosnia
Herzegovina
Turkmenistan
Ukraine
Kyrgyzstan
Uzbekistan
Developed Europe:
Greece
Cyprus
Source: Coface, January 2013.
www.cet.co.uk
Albania
Armenia
Montenegro
Azerbaijan
Serbia
Georgia
Macedonia
16
Developed Europe:
-
Opportunity: “Good Company, Bad Balance Sheet”
Companies having a fundamentally sound business model (ie, generate economic value) but in financial trouble
• Typically cash generative (after servicing capital structure) in normalized operating environment
• Generally cash generative (before servicing capital structure) in current environment
Stressed or distressed due to inappropriate capital structure (overleveraged) and/or external factors such as:
• Unable to access capital from customary sources due to tighter credit standards, deleveraging or home bias
–Particularly for mid-market and independent (not multinational subsidiary having links to home country banks)
• Working capital squeeze due to supplier debt knock-on effects throughout economy
• Overcapacity due to expansion/capital expenditure programs put in place prior to crisis
• Government policy, labor action, court ruling/fine, environmental liabilities, accounting improprieties, etc
• Key supplier/customer issues (stress/distress or bankruptcy)
• Change in market demand/cyclicality (declining revenue, operating income and cash flow)
• Increasing input prices and/or exchange rate volatility
• Increase in competition: macro (Asian manufacturing, internet) or micro (new entrant, sector consolidation)
• Internal conflicts between existing shareholders and/or creditors or motivated/forced sellers
Financial restructuring immediately unlocks value and is the catalytic event that sparks return to growth mode
• Partnership with management to add value by implementing best practice and drive organic/acquisitive growth
• Distinct from deep operational turnarounds where the business model itself requires transformation
www.cet.co.uk
17
Opportunity: Little Competition, New Money & Consensual
• Very few rescue & restructuring investors active in CEE
• Alternative capital sources (banks, mezzanine firms, PE firms, hedge funds) unable or unwilling to consider
• Rescue lending-led approach: new to CEE
• “One-stop shop”: ability to provide BOTH debt and/or equity enables expedited process, higher certainty of completion
• Transactions requiring restructuring of old debt AND new money (generally the catalyst to a deal)
• Banks/owners unlikely to provide new money alone (but may maintain/increase exposure in externally-driven process)
• Banks and other stakeholders generally lack internal resources to manage restructurings and own/operate companies
• Not reliant on bank “fire sales” of assets at steep discounts
• Creative “win-win” solutions that align interests and motivate creditors, shareholders and stakeholders to consent
• All parties better off than status quo via “shared pain”
• Consensual out-or-court deals
• Not dependent on local bankruptcy law/courts, which are underdeveloped and less reliable than in the West
• Relevant local legislation the same as for PE/mezzanine firms
• Restructuring enables proper capitalization, operational rejuvenation and avoids low-recovery liquidation
• Add-on acquisition in a consolidation play where incremental assets can be integrated into existing platform
• Particularly compelling special situations having clear and highly certain legal path to emergence from administration
www.cet.co.uk
18
Opportunity: Illustrative Situation Range
Stressed
Distressed
Capital Constraint
Liquidity Constraint
Illiquid
Insolvent
Problem
Unable to access capital
Problem
Unable to service debt comfortably
Problem
Temporarily unable to service debt
Problem
Indefinitely unable to service debt
Causes
Tightening credit standards
Causes
Tightening credit standards
Business cycle, overcapacity
Causes
Tightening credit standards
Business cycle
Peak in debt maturities
Causes
Tightening credit standards
Business cycle
Peak in debt maturities
Overleveraged
Consequences
Unable to pursue growth
Capacity utilization threatened
Consequences
Unable to pursue growth
Unable to operate at capacity
Liquidity threatened
Consequences
Unable to pursue growth
Unable to operate at capacity
Illiquid
Solvency threatened
Consequences
Unable to pursue growth
Unable to operate at capacity
Illiquid
Insolvent
Solution
New debt
Solution
Partial refinancing
New equity (negative controls)
Solution
Refinancing
Write-down/purchase at discount
New equity (blocking minority)
Solution
Write-down/purchase at discount
Debt-equity swap
New equity (control)
Instruments
Working capital with warrants
Instruments
Debt with warrants
Equity
Instruments
Debt with warrants
Equity
Instruments
Debt with warrants
Equity
Elements of return
Coupon
Warrants
Elements of return
Coupon
Warrants
Equity upside
Elements of return
Coupon
Significant warrants
Equity upside
Elements of return
Coupon
Significant warrants
Significant equity upside
www.cet.co.uk
19
Opportunity: Downside Protection, Upside Potential
• Flexibility to invest throughout capital structure and develop bespoke solutions
• Typically both debt and equity-type exposure in each portfolio company
Potential instruments and characteristics
Debt
Downside protection: Exit 3-5 years by amortization or refinancing (reduced exit risk)
Senior secured
Cash coupon, amortization/refinance, documentation, covenants, asset coverage, perfection
Senior unsecured
Cash coupon, amortization/refinance, documentation, covenants, asset coverage
Working capital
Cash coupon, revolving, documentation, covenants, asset coverage
Subordinated
Cash coupon, amortization/refinance, documentation, limited covenants
Hybrid
Enables performance-related adjustment during holding period
Convertibles
Cash coupon/dividend, liquidation preference
Equity
Upside potential: Exit 4-6 years by trade sale, IPO, secondary or MBO
Preferred
Dividend, redemption, liquidation preference
Warrants/options
Equity kicker attached to subordinated debt
Common
Alignment of interests, board presence, shareholders agreement, minority protection
www.cet.co.uk
20
Stressed/Distressed Investment Advice
• Interviewer: When do you know it’s time to buy?
• Lord Rothschild: When there’s blood in the streets.
Even if it’s your own.
www.cet.co.uk
P21