FI_Debt Recovery and Restructuring_SACE

8/9/2019 FI_Debt Recovery and Restructuring_SACE

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Rome, 20 November 2008 Valerio Ranciaro

SACEs proceduresin case of default.

Debt recovery and restructuring


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1.1. IntroductionIntroduction

2.2. Claims historical dataClaims historical data

3.3. Claims macroClaims macro--processprocess

4.4. Recoveries macroRecoveries macro--processprocess

5.5. RestructuringsRestructurings

6.6. Telecom ArgentinaTelecom Argentina case studycase study


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Claims and Collections:short term vs. medium-long term

Short termShort term

Small amounts (30-50K or less)

Huge volumes per year

Process much faster

Need standardization

In-house collection more effective

MediumMedium--long termlong term

Big amounts

Small volumes per year

Process slower

Files management is customizeddepending on debtor

Often a problem for different ECAs

Complex restructurings


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SACEs indemnified claims shown a decreasing trend. Recoveries have also improved

Claims(mln) Premiums + Recoveries Claims (mln)

0m

500m

1.000m

1.500m

2.000m

2.500m

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

(2.500)m

(1.500)m

(500)m

500m

1.500m

2.500m

3.500m

4.500m

5.500m

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

mln 2004 2005 2006

Claims

Commercial Risk 27.2 25.7 5.6

Political Risk 55.7 21.0 11.9

Total 82.9 46.7 17.4

Recoveries

Commercial Risk 15.2 17.1 19.1

Political Risk 978.2 3,168.0 5,198.9

Totale 993.4 3,185.1 5,218.0

mln 2004 2005 2006

Claims: historical data


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Claims and recovery processoverview

Claimnotification

Claim

notificationClaim

Assessment

Claim

AssessmentIndemnityPayment

Indemnity

PaymentCredit

Recovery

Credit

Recovery

Claims Process Recovery Process

CommercialCredit Recovery

CommercialCredit Recovery

RecoverySharing

between SACEand Creditors

RecoverySharing

between SACEand Creditors

RecoveryRepayment

Recovery

Repayment

Sovereign

Credit Recovery

Sovereign

Credit Recovery


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Claims macro-process

ReservingReserving

Pass the filePass the file

File RegistrationFile RegistrationClaim Assessment

Cover Analysis

Claim AssessmentCover Analysis

CustomerRelationship

CustomerRelationship

Settlement(Repay Indemnity)

Settlement(Repay Indemnity)

Assess the claimCheck cover limit

Enter liability

Pass the file toCollections

Make a financial reserve for claimReserve 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

Policyholder

notifies claim

Who

Claim officer

Collection

Officer

Collection

Correspondent

Debtor

Creditor


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Recoveries macro-process

Manage recoveriesManage recoveries

Produce statisticsand reports

Produce statisticsand reports

Manage thecostsManage thecosts

Repay recoveryto creditor

Repay recoveryto creditor

Pass thecollection file

Pass thecollection file Manage a file

Manage a fileOpen acollection file

Open acollection file

Fill in the proof of claim

Choose, register and follow thepayment plan (depending onlaw)

Legal action

Enter replies

ClaimFile

Collection

Order

Settle the costs:pre-legal, legal

Send the repayments to clients

Follow up the recoveryrepayment

Recover withpre-legal actions

Recover withpre-legal actions

Follow upinsolvencyprocedure

Follow upinsolvencyprocedure

Recover withlegal actions

Recover withlegal actions

Claim officer

Collection

Officer

Collection

Correspondent

Debtor

Creditor

Claim officer

Collection

Officer

Collection

Correspondent

Debtor

Creditor

Phone collection (in-house)

Local correspondents


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Meaning of the term restructuring

Typically, restructuring is limited to mean a restructuring of the debtors financialobligations in response to a change in economic conditions.

A restructuring usually takes the form of a rescheduling, compromise, conversion ofdebt into equity or a combination of all three.

RestructuringTurnaround: Restructuring should be distinguished from the termturnaround which is a more pervasive reorganization of both the debtors financialobligations and operational processes.

In emerging markets where creditors rights are usually impaired, a turnaround is almostalways unachievable unless there is a willingness by the borrower to do so.


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Restructuring process overview

Phase 1 Phase 2

AssessFinancialModels

AssessFinancialModels

Financial Due Diligenceand Cash flow Projections

High level negotiation &

Implementation

Assess futureAssess futurecash flows

Identify andassist

creditor toselect a

restructuringsolution

Identify andassist

creditor toselect a

restructuringsolution

Negotiateselected

restructure

solution

Negotiateselected

restructure

solution

Implementrestructureand monitor

performance

Implementrestructureand monitor

performance

Timeframedependson the co-operationbetween allpartiesinvolved

Timeframedependson requirementsofrestructuring

Critiquebusiness and

industry

position

Critiquebusiness and

industry

position

Standstill

Assist toimplement

standstill somanagement

can focus onmanaging thebusiness andsolutions canbe developed

Standstill

Assist toimplement

standstill somanagement

can focus onmanaging thebusiness andsolutions canbe developed

Step 1

Step 2

Commercial Strategies and Fallback Scenarios

Negotiate/

prepare forfallback

scenarios

Negotiate/

prepare forfallback

scenarios

Implementfallback

scenarios

Implementfallback

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 thecircumstances.


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1. Due Diligence

Legal and financial reviewLegal and financial review

The legal duelegal due diligencediligence is necessary to:

Determine whether any creditors claim is legally impaired.

Ascertain the steps necessary to preserve the creditors rights.

Determine legal options available to creditors to enforce their claims in the event

that a consensual approach fails.

The financial duefinancial due diligencediligence 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 duefinancial due diligencediligence 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 creditoraction.

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 thecreditors 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 thecreditors legal rights and the debtors 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

FINANCIAL CONSTRAINTS

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.


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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)

Subordinated debt

Excess cash sweep

Dividends


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Commercial restructurings

Over the past few years SACE has successfully restructured some large corporate defaults. Some of themost notable examples are

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

Country Company Date Exposure


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Restructuring usually involves long periods and - sometimes - poor results in terms of

NPV.

An example:

Indonesia

Restructured amount USD 23,3 mln.

Tranche A: 11% maturity 2014

Tranche B: 29% maturity 2017

Tranche C: 59% maturity 2026

Debt sale on secondary market


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Restructuring usually involves long periods and - sometimes - poor results in terms of

NPV.

An example:

Indonesia

Restructured amount USD 23,3 mln.

Tranche A: 11% maturity 2014

Tranche B: 29% maturity 2017

Tranche C: 59% maturity 2026


NPV = 33 /$

D bt l d k t


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Question: was it possible to obtain better results?

D bt l d k t


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NO!

D bt l d k t


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NO!

Indonesia

APP Indonesia is the largest corporate defaulterin

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(Millions USD Equiv.)

SACE 23,3

EKF 3,3

EKN 78,7

KB 66,8

EULER HERMES 254,7

CESCE 11,9

COFACE 3,6

Finnvera 79,1Total 521,4



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One of the post-restructuring alternatives consists in the sale of the debt on the

distressed loans secondary market



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Telecom Argentina

-case study-

The SACE policies


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The SACE policies

Policy APolicy A

Guaranteed amount USD 58,4

SACE cover 80%

Outstanding principal USD 21,8

Policy BPolicy B

Guaranteed amount USD 8,4

SACE cover 90%Outstanding principal USD 4,6

Total paid claims USD 22,7

Total outstanding principal USD 26,5

Total ECAss claims USD 244

History of a default


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History of a default

April 2002 Telecom Argentina (TA) announces the suspension of thedebt 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 unsecuredindebtness, via the filing of an APE (Acuerdo PreventivoExtrajudicial, binding if approved by 66,6% of the creditors). Thisproposal was not acceptable as well: negotiations continued.

May 2004 Final restructuring proposal: APE.

The APE proposal


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The APE proposal

Creditors received, for every 1.058 unit of nominal value of the debt (amountdetermined including capitalized interests):

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 latterwas entirely subscribed; therefore Option B was mixed with Option C.

OPTION A (100% nominal value) - 10 years "step up" notes (after 15/10/2008interest 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 dutchauction".

NPV analysis


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NPV analysis

Option B in spite of the 5,5% principal forgiveness had an higher NPV thanks tothe 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).

12% 13,50% 15%

Option A 82,5 77,2 72,5Option B 96,5 92,3 88,4

Option C 79,7 78,9 78,3

NPV

NPV analysis


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NPV analysis

Option B in spite of the 5,5% principal forgiveness had an higher NPV thanks tothe 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

12% 13,50% 15%

Option A 82,5 77,2 72,5Option B 96,5 92,3 88,4

Option C 79,7 78,9 78,3

NPV

NPV analysis with prorationing


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NPV analysis with prorationing

According to this scenario, the final one, 37,5% of the credits which elected to

receive Option B consideration were prorated into Option C.

The following table shows how Option B NPV changed according to the prorationing

into Option C or into both Options A and C.

12% 13,50% 15%Best case scenario

No prorationing

Expected scenarioProrationing on Option C

Worst case scenario

Prorationing on both A and C

Option B

90,2 87,3 84,6

89,5 86,5 83,6

NPV

96,5 92,3 88,4

Results of the restructuring (mln.)


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Results of the restructuring (mln.)

Policy APolicy 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 BPolicy 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

How to contact us


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Torinoc/o ICE - Via Bogino 13 - 10100 Torino

Tel. +39 011 836128 - Fax +39 011 836425

Venezia-MestreViale Ancona 26 - 30172 Venezia - Mestre

Tel. +39 041 2905111 - Fax +39 041 2905103

REPRESENTATIVE OVERSEAS

SACE BT: Piazza Poli, 37/42 00187 Roma

Tel. +39 06 6976971 Fax +39 06 697697725

HEADQUARTER

RomaPiazza Poli, 37/42 00187 Roma

Tel. +39 06 67361

Fax +39 06 6736225

REGIONAL OFFICES

MilanoVia A.de Togni, 2 - 20123 Milano

Tel. +39 02 434499701,Fax +39 02 434499749

ModenaVia Elsa Morante, 71 - 41100 Modena

Tel. +39 059 331201, Fax +39 059 820832

SACE Surety: Via A. de Togni, 2 - 20123 MilanoTel. +39 02 480411 Fax +39 02 8041292

www.sace.it

Moscow

Krasnopresnenskaja Naberejnaja, 12123610 Moscow Office n.1202

Tel 007 4952582155 Fax 007 4952582156

Hong Kong40/f Suite 4001 Wanchai, Hong Kong

Central Plaza 18, Harbour Road

Tel. +852 3620 2323 Fax +852 36210227

Johannesburgc/o ICE 42, Chester Road

2193 Parkwood Johannesburg

P.O. Box 1261 2121 Parklands

Tel: +27 118808383 Fax: +27 118809040/8809041

So Paulo

c/o ICE - Avenida Paulista, 19713 - 4 andar

So Paulo SP

Brasile 01311 - 300

Tel: +55 11 21487250 Fax: + 55 1132664051

Contacts


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Thank you for your attentionThank you for your attention

Tel. +39 06.6736264 - 267

[email protected]

Contacts

Valerio RanciaroHead of Claims and

Corporate RecoveriesTel. +39 [email protected]

Disclaimer


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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 anyinsurance/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 beincorrect and, accordingly, SACE does not represent or warrant that the information is

accurate and complete.

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