3W Power S.A. Société Anonyme Registered office: 19, Rue Eugène Ruppert L-2453 Luxembourg R.C.S. Luxembourg: B (the "Company")

Transcription

1 3W Power S.A. Société Anonyme Registered office: 19, Rue Eugène Ruppert L-2453 Luxembourg R.C.S. Luxembourg: B (the "Company") Special Report of the board of directors of the Company (the "Board") to the general meeting of shareholders of the Company for the purpose of the extraordinary general meeting of the shareholders of the Company that will be held on 17 April 2018 (the "Report") 1. INTRODUCTION This Report together with a recommendation thereto has been prepared by the Board of the Company, as the holding company of AEG Power Solutions Group ( AEG PS ), in accordance with the Luxembourg Act of 10 August 1915 on commercial companies ( Companies Act ). The Board proposes to the extraordinary general meeting of shareholders of the Company ( EGM ) to be held on 17 April 2018 before a Luxembourg civil law notary to approve, and aims at presenting explanations as to the reasons for, (i) the share capital reduction to zero euro and subsequently the increase of the share capital, while preferential subscription rights shall be excluded upon the share capital increase in accordance with the provisions of article (5) of the Companies Act; and (ii) the increase of the authorized capital and the circumstances in which the Board shall be empowered to issue new shares in accordance with the provisions of article (5) of the Companies Act and/or shall be able to waive/limit the preferential subscription rights as part of the remedy to the financial situation of the Company (as further specified below in Section 5 of this Report, the Share Capital Measures ). The Share Capital Measures are an indispensable part of the holistic balance sheet restructuring of the Company currently ongoing and materially affecting not only the shareholders but also all the creditor groups of the Company (as further specified in Section 2 of this Report, the Restructuring ). The Company has negotiated the details of the Restructuring and the restructuring contributions with major stakeholders representing: (i) 100% of the Super Senior Loan; (ii) 75% of the Convertible Bond; and (iii) 36% of the Senior Bond (all as defined below in Section 2.1 of this Report). The implementation of the Restructuring is a pre-requisite for the continued existence and therefore the going concern of the Company and AEG PS and forms the basis for a third-party restructuring opinion commissioned by the Company and finalised by Struktur Management Partner GmbH, Köln (the Restructuring Expert ) on 29 November 2017 (the Restructuring Opinion ). 2. OUTLINE OF THE RESTRUCTURING 2.1 The current debt and equity structure of the Company can be summarized as follows:

2 2.1.1 AEG PS has received operational financing in the amount of EUR 20 million (the Super Senior Loan ). The Super Senior Loan is secured with various assets of AEG PS, bears an interest of 9.5% p.a. and has a term until 31 December 2018 except for the bridge facility tranche granted to AEG PS in the amount of EUR 5 million to bridge the time until the finalisation of the Restructuring Opinion and accordingly having a shorter term until 10 December 2017 (currently subject to a standstill arrangement) (the Bridge Facility ) The Company issued bearer bonds 2014/2019 (ISIN: DE000A1ZJZB9 / WKN: A1ZJZB) with a currently outstanding principal in the amount of EUR 45,279,500 (plus accrued PIK-interest of approx. EUR 7.3 million) (the Senior Bond ) The Company issued convertible bearer notes 2015/2020 (ISIN: DE000A1Z9U50 / WKN: A1Z9U5) in the total amount of EUR 14 million (plus accrued PIK-interest of approx. EUR 1.5 million) (the Convertible Bond ) The Company s existing share capital amounts to EUR 837, divided into 83,703,703 shares each of a nominal value of EUR 0.01 and listed at the Frankfurt Stock Exchange (the Existing Shares ), (jointly the Stakeholder Groups ). 2.2 The key components and ideas of the Restructuring and restructuring contributions of the Stakeholder Groups can be summarized as follows: The ranking together with the intrinsic value of the Stakeholder Groups (in the order set out above in Section 2.1) is strictly taken into account and within each Stakeholder Group each member is treated equally The Stakeholder Groups to waive (substantially) all of their stakes: a. Senior Bond: waiver of 99% principal and 100% of accrued PIK-interest b. Convertible Bond: waiver of 99.9% principal and 100% of accrued PIK-interest c. Existing Shares: reduction to zero (100% waiver ) The reduction to zero leads to a delisting of the Company and the Existing Shares and the New Shares (as defined below) are not to be listed at any market The share capital is increased by way of cash increase from zero to EUR 7,970,787 (the Cash Increase ) by issuance of up to 7,970,787 registered shares with a nominal amount of EUR 1 each (the New Shares ), while preferential subscription rights of shareholders shall be excluded. Option rights to the New Shares shall be vested to the Stakeholder Groups (except the Super Senior Loan) with an option price of EUR 1 per New Share and based on the priority ranking of the Stakeholder Groups in the following numbers and percentages: a. Senior Bond: 6,610,807 New Shares (82.94% - rounded)

3 b. Convertible Bond: 959,980 New Shares (12.04% - rounded) c. Existing Shares: 400,000 New Shares (5.02% - rounded) with minimum investment commitment of EUR 100,000 (see in more detail in Section 5 of this Report below) The proceeds from the Cash Increase are used for (i) the repayment of the Bridge Facility in the amount of EUR 5 million; (ii) the payment of transaction costs; and (iii) to finance new projects. The Cash Increase is fully back-stopped by a non-exclusive commitment of institutional investors The Super Senior Loan, after repayment of the Bridge Facility amounting to EUR 15 million, is amended as follows: (i) term is extended until January 2021; (ii) interest rate is reduced to a EURIBOR rate plus margin of 450 base points; (iii) flexibility for borrower to PIK/defer such interest payables (pay as you can). 3. NEED FOR RESTRUCTURING AND RESTRUCTURING ABILITY 3.1 The concept and details of the Restructuring form the basis for the Restructuring Opinion, which, in particular subject to the implementation of the Restructuring, confirms the positive going-concern prognosis of the Company and AEG PS. Upon request and signing of a release letter, shareholders will be provided with a copy of the Restructuring Opinion (in English language) provided that they prove their status as shareholder of the Company. 3.2 According to the Restructuring Opinion, the main events and developments which led to the need for the Restructuring are the following: Until 2012, AEG PS achieved a remarkable growth up to EUR 400 million revenue within core business segments (Industrial UPS, UPS for Data / IT and Services) and non-core business segments (Solar, Grid & Storage). AEG PS non-core business was largely dependent on the subsidized solar market and heat transfer regulation market (with Grid & Storage). When both markets collapsed, AEG PS decided to exit its non-core segments, which led to a significant revenue drop in these segments from EUR 163 million (in 2012) to EUR 10 million (in 2016) In addition to AEG PS' exit of its non-core segments, AEG PS' core segments declined from EUR 175 million of sales in 2014 to EUR 155 million in During the same time, the markets for UPS and large data centres have been growing on average by approx. 5%, which means that AEG PS must have lost considerable market share during this time. According to management, key reasons are adverse side effects of the ongoing restructuring and insecurities considering AEG PS' financial position, which lead to reduced market trust as well as higher cash requirements due to higher collaterals and prepayment requirements. The Restructuring Expert assumes additional other market related reasons such as a strong decline in the oil and gas market, partly outdated product generations as well as over-engineered product designs and complex group structures which lead to above market pricing As a reaction to the decline in sales, AEG PS' management implemented various restructuring

4 measures and reduced AEG PS' cost base which improved operating income by EUR 13.2 million between 2014 and 2017FC. Nevertheless, due to the continuing decline in revenues, break-even is still not achieved (2014: -EUR 22.9 million, 2015: -EUR 8.2 million, 2016: - EUR 7.5 million, 2017FC: -EUR 9.7 million) and net income (2014: EUR 7.5 million, 2015: - EUR 41.6 million, 2016: -EUR 23.2 million, 2017FC: -EUR 23.6 million). In 2014 restructuring gains worth EUR 42 million positively impacted net income In November 2016, the German subsidiary, AEG Power Solutions GmbH, which generated more than 40% of the consolidated group s revenue in 2016, had to enter into German protective shield proceedings. Although the protective shield restructuring was successfully completed in May 2017, negative side-effects impacted revenues, working capital requirements (increasing cash collaterals up to 100% for bank guarantees, prepayment requirements, etc.) and net income in Following the long period of losses, the group s consolidated equity is negative (2016: -EUR 17.4 million, 2017FC: -EUR 32.6 million). This fragile capitalization and ripple effects from the German protective shield proceedings have reduced client confidence in AEG PS' long term stability, partly leading to lost business (AEG PS red flagged by several international customers) and increased customer relation activities Although AEG PS is the third largest provider in the Industrial UPS segment today, AEG PS' competitiveness is strained, among others, by the ongoing restructuring process and the accompanying reduction of customer confidence. The weak financial position harms AEG PS' capability to finance large projects To reach profitability, a significant recovery of market trust and sales, a sustainable balance sheet restructuring and the implementation of additional restructuring measures are necessary. In particular a successful balance sheet restructuring after implementation of the Restructuring shall lead to significant market trust recovery and growth in sales. In line with the further cost savings, this creates the capability to restore the group s profitability and realize the operational turnaround In October 2017, AEG PS has received further liquidity in the amount of EUR 5 million by way of the Bridge Facility to finance working capital needs. The Bridge Facility is due and payable since 10 December In light of the pending Restructuring and the envisaged repayment of the Bridge Facility from the proceeds of the Cash Increase, however, AEG PS and the lenders under the Bridge Facility have entered into a standstill arrangement. 3.3 The Restructuring Opinion confirms a positive going concern prognosis and therefore the ability of the Company to be restructured and to regain sustainable profitability and competitiveness, but only subject to, inter alia, a substantial balance sheet restructuring including the following key elements: Substantial de-leveraging through (i) waiver of Convertible Bond and Senior Bond; and (ii) repayment of Bridge Facility.

5 3.3.2 Strengthening of equity (i) through the envisaged capital increase measures in the amount of at least EUR 5 million with the result that for the repayment of the Bridge Facility no leakage of any cash-flow generated from own operations occurs; and (ii) from an extraordinary profit resulting from the aforementioned waiver of the two corporate bonds Extension of the term of the remaining EUR 15m Super Senior Loan so that in the prognosis period no leakage of cash-flow generated from own operations occurs Reduction of interest payables under the Super Senior Loan (from 9.5% p.a.) to an EURIBOR rate plus margin of 450 base points p.a. and flexibility to PIK/defer such interest payables. 4. STATUS OF RESTRUCTURING The approval of the proposed Share Capital Measures is basically the final and decisive step to formally approve the Restructuring and to achieve transaction security. Beyond, the current status and main developments to reach such status can be summarized as follows: 4.1 In September 2017, the Company has signed a non-binding memorandum of understanding with key stakeholders setting forth key elements and next steps of an envisaged balance-sheet restructuring and pre-requisites to provide additional capital. 4.2 Shortly thereafter, the Company engaged the Restructuring Expert to draft the Restructuring Opinion and obtained the Bridge Facility in October 2017 to bridge the time until such Restructuring Opinion s finalization. 4.3 Until 11 December 2017, the Company negotiated the details of the Restructuring and related restructuring contributions with major stakeholders representing: (i) 100% of the Super Senior Loan; (ii) 75% of the Convertible Bond; and (iii) 36% of the Senior Bond. The stakeholders consented to the Restructuring under the following conditions: Senior Bond and Convertible Bond: a. Restructuring Opinion confirms restructuring ability; b. share capital reduction to zero; c. issuance and subscription of new shares against cash payment only and pro rata to the involved capital groups taking into account their ranking and intrinsic value (Senior Bond (83%) prior to Convertible Bond (12%) prior to Existing Shares (5%)) Super Senior Loan: a. Restructuring Opinion confirms restructuring ability; b. Company implements debt and equity restructuring measures presupposed in the Restructuring Opinion; c. share capital of the Company is increased by at least EUR 5 million; d. Bridge Facility is repaid; e. shareholder structure is restructured so that a 100% sale to a potential third-party (fi-

6 nancial or strategic) investor becomes possible going forward, including inter alia a requirement for existing shareholders to commit to a minimum investment of EUR 100,000 when subscribing to New Shares. 4.4 Around the same date, approx. 30% (as of now increased to approx. 38%) of the existing shareholders of the Company committed to support the Restructuring. 4.5 The commitment of the lenders under the Super Senior Loan comprises inter alia of a standstill arrangement until the Restructuring s conclusive implementation subject to a long-stop date as well as an automatic termination if the Restructuring fails. 4.6 On 25 January 2018, noteholders of both, the Senior Bond and the Convertible Bond formally approved the Restructuring with the required majorities. 4.7 Consequently and as of now, all Stakeholder Groups but the existing shareholders of the Company have committed to and approved the Restructuring in a binding and formal manner. Taking into account the ranking and potential intrinsic value, all such consenting Stakeholder Groups rank ahead of the Existing Shares. 5. PROPOSED SHARE CAPITAL MEASURES As integral part of the Restructuring the Board proposes the following Share Capital Measures to the shareholders of the Company: 5.1 It is intended to reduce the existing share capital of the Company in the amount of EUR 837, divided into 83,703,703 shares each of a nominal value of EUR 0.01 to zero (the "Capital Reduction") by way of absorption of certain losses of the Company in an equivalent amount to the Capital Reduction. The Capital Reduction will result in the expropriation of the existing shareholders of the Company and in a cold delisting of the Company and its shares ipso iure. 5.2 Subsequently, it is intended to increase the share capital of the Company by way of a cash increase in several tranches up to an amount of EUR 7,970,787 by issuance of up to 7,970,787 registered shares with a nominal amount of EUR 1 each, while preferential subscription rights of shareholders shall be excluded (the "Suppression of Preferential Subscription Right"). Option rights to participate in the cash increase (the "Capital Increases") will be vested in noteholders of the Senior Bond (up to 6,610,807 new shares; equals 82.94% (rounded)) and Convertible Bond (up to 959,980 new shares; equals 12.04% (rounded)) as well as - with a minimum investment commitment threshold of EUR 100,000 per investor - to shareholders (up to 400,000 new shares; equals 5.02% (rounded)). The share capital increase up to EUR 400,000 will be decided immediately after the Capital Reduction by the EGM (the "First Capital Increase") while the further capital increases (the "Further Capital Increases") will be decided by the Board within the limits of the Amended Authorized Capital (as defined below in Section 5.6 of this Report). 5.3 The New Shares will not be listed on any market (whether regulated, open or other). In addi-

7 tion, the New Shares shall be issued in registered form and their nominal value shall be amended from currently EUR 0.01 to EUR 1 per New Share. Each transfer of a New Share need to be registered in the Company s share register to be valid and enforceable against the Company. If a Shareholder intends to sell its New Shares to a third party (intra-group transfers excluded), other shareholders have a right of first refusal pro rata their shareholdings. New shareholders have drag and tag along rights to ensure and allow a 100% sale if shareholders jointly exceeding 50% intent to enter into a share purchase agreement with a thirdparty buyer. Further details will be set out in a draft of amended articles of association accessible on the website of the Company. 5.4 In connection with the First Capital Increase and in order to ensure a stable shareholding base, facilitate corporate governance of the Company and as requested by creditors as a precondition to their consenting to the Restructuring, the Board proposes to the EGM the Suppression of Preferential Subscription Rights: only the shareholders who commit to subscribe to 100,000 new shares or more and have transferred prior to the EGM the subscription price in full in relation to the new shares to be issued (the "Participating Shareholders") in accordance with the terms of subscription shall be admitted. 5.5 If following the offer to subscribe to the New Shares upon the First Capital Increase, the Company receives a number of subscription that is higher than the maximum of 400,000 New Shares (the "Subscription Pot"), the Board will allocate at its discretion, however, taking into account (and being bound by) the following criteria: the allocation of the Subscription Pot to the Participating Shareholders proportionally to the number of shares they held prior to the Capital Reduction on the aggregate number of shares of the Company held by the Participating Shareholders prior to the Capital Reduction the investor ranking and quality if more than 149 Participating Shareholders the absolute maximum number of 149 Participating Shareholders to subscribe for the New Shares. 5.6 For the purpose of implementing the Further Capital Increases, the Board proposes to increase the existing authorized share capital of the Company to seven million five hundred seventy thousand seven hundred eighty seven euros (EUR 7,570,787) consisting of seven million five hundred seventy thousand seven hundred eighty seven 7,570,787) shares of EUR 1 each and to authorize and empower the Board (i) to issue Shares, (ii) to grant options to subscribe for Shares, to such persons and on such terms as is foreseen in the terms and conditions of the two corporate bonds of the Company (EUR 50 million bond with ISIN: DE000A1ZJZB9 / WKN: A1ZJZB and EUR 14 million bond with ISIN: DE000A1Z9U50 / WKN: A1Z9U5) in each case as amended by bondholder resolutions dated 25 January 2018 and published in the German Federal Gazette on 29 January 2018, (iii) to issue new Shares following the exercise of the option rights granted in accordance with item (ii), and in each case within the limits of the authorised capital and specifically to proceed to such issue by suppressing or limiting the existing shareholder s preferential right to subscribe for the new Shares to be issued and (iv) in order to implement the authorized share capital, to conclude all agreements, carry out all

8 formalities and make all declarations with regard to all authorities and institutions and, generally, do all that is necessary for the execution of any decisions made in connection with this authorization (the "Amended Authorized Capital"). 5.7 The proposed Capital Reduction and Capital Increases with the Suppression of the Preferential Subscription Rights as well as the introduction of the Amended Authorized Capital are crucial steps to be implemented for the Company and core components for the restructuring of the balance sheet of the Company and stabilizing the revenue development of the Group. The losses of the Company have reached a level which have put the solvency and viability of the Company in jeopardy, absent any restructuring measures and the financially distressed situation of the Company would normally call for the Company to initiate formal liquidation proceedings, absent any restructuring measures. In such scenario, all equity holders would lose their initial equity contribution. Considering that the bondholders which rank ahead of shareholders undertook to waive their claims under the various debt instruments they hold as per the Restructuring, so that the Company can be restructured, then the Board believes that it is even more justified for the shareholders to do so. Consequently, the Capital Reduction resulting in the expropriation of the existing shareholders of the Company would be the next logical step in order to give a fresh start to the Company and is justified by the fact that the Company would be insolvent and no longer viable and said shareholders would be in an equal situation in a formal liquidation process or with the Capital Reduction, save that in the latter case, the Company would be saved as outlined in the Restructuring Opinion. Therefore, the Restructuring including the Capital Reduction resulting in the expropriation of the existing shareholders of the Company is therefore necessary for the purpose of ensuring the continuity of the Company and as such serves the general public interest. 6. CONCLUSION 6.1 As set forth in the Restructuring Opinion, the Company and AEG PS are in need to be restructured to regain sustainable profitability and competitiveness and therefore to confirm its positive going concern prognosis. 6.2 In case of non-approval of the Restructuring by the EGM, the Company and AEG PS would face an immediately due and payable Bridge Facility and additional events of defaults and, as the case may be, cross-defaults under at least the Super Senior Loan and the Convertible Bond. 6.3 This would lead to an imminent insolvency threat. Former discussions with investors clearly showed that no investor is interested to invest into the Company and AEG PS unless the latter were substantially deleveraged, delisted and the shareholder structure changed. 6.4 In an insolvency scenario, existing shareholders of the Company would face a total loss of their equity contribution given the existence of prior-ranking debt-positions of approx. EUR 88 million (Super Senior Loan, Senior Bond and Convertible Bond). 6.5 The Restructuring provides for the holistic balance-sheet restructuring required by the Com-

9 pany and AEG PS for a fresh start and solid basis to achieve the operational turnaround as well as future profits and positive equity as set forth in the Restructuring Opinion. 6.6 As a consequence, the approval of the Share Capital Measures by the EGM as integral part of the Restructuring is required to maintain the solvency and viability of the Company and AEG PS and therefore serves the public interest and the continued existence of the Company and AEG PS. 6.7 The Board considers the proposed Share Capital Measures to be in the best interest of the Company as a going concern and recommends that the EGM approve the Share Capital Measures by voting in favour of the agenda items in the EGM. 6.8 In connection with the Capital Reduction, the Board confirms that the current losses of the Company are at least equal to the amount of the Capital Reduction. Luxembourg, 13 March W Power S.A. - Board of Directors