Managing the Downturn Presentation to ABAF Paris, 10
Introduction Chuck Evans Partner PwC Paris Business Restructuring Services UK chartered accountant specialised in corporate recovery based in Paris for over 10 years. Assist international and local lenders with French corporates in difficulty and advise on restructuring and/or exit strategies in France Authority in use if European insolvency regulation Leader of 4 Himalayan climbing expeditions 5bn technology group 1bn auto parts distributor Representing Administrators of Lehman Brothers and MG Rover in France IBR of Alstom at the time of its restructuring Multi sector experience. Auto, property Page 2
Where are we now (1)? All major industrialized nations are in recession. The crisis is global and simultaneous and still getting worse? Pays Country T2 Q2 2008 T3 Q3 2008 T4 Q4 2008 T1 Q1 2009 Germany -0,4-0,5-2,1-3.5 USA 0,7-0,1-1,6-1.5 UK 0,0-0,7-1,5-1,9 (steepest drop in 30 years) Japan -0,4-0,5-3,3 N.a. Eurozone -0,6-0,5-1,5-1,9 Spain -0,2-0,2-1,0-1.8 (unprecedented since 1945) France -0,3 +0,1-1.1-1.5 *** (2 e plus (2nd forte steepest baisse drop depuis since 1974) 1974) Page 3
Where are we now (2)? with an unprecedented volatility of key economic factors Oil shocks: ups and downs Page 4
Where are we now (3)? Crisis mainly impacting industrial sector : 12 years growth lost over a few months Evolution of industrial production* in France (100 : 2005) 110 The drop started before the stock exchange crisis 105 100 95 90 85 80 75 Feb. 2009 : 88.1 70 janv-90 juil-90 janv-91 juil-91 janv-92 juil-92 janv-93 juil-93 janv-94 juil-94 janv-95 juil-95 janv-96 juil-96 janv-97 juil-97 janv-98 juil-98 janv-99 juil-99 janv-00 juil-00 janv-01 juil-01 janv-02 juil-02 janv-03 juil-03 janv-04 juil-04 janv-05 juil-05 janv-06 juil-06 janv-07 juil-07 janv-08 juil-08 janv-09 Note : (*) all industries data adjusted for seasonality Page 5
Where we now (4)? Largest quarterly drop in GDP since 1974 Page 6
Where are we now (5)? Household confidence at an all-time low in July 2008 and now bumping along the bottom? Page 7
Where are we now (6)? What is happening to employment? Page 8
Where are we now (7)? Key issues raised by the global crisis Strong contraction of demand (-20%, -30%, -40%...-80%/-90%!) General decrease in profits and cash generation Risks on / deterioration of working capital High debt gearing (including for companies under LBO structures) Lack of financing resources Unknown duration and depth of the crisis Coupled to : Increasingly stringent environmental regulations Other regulatory changes (IFRS, «LME» law in France, etc.) Page 9
Why we are here (1) Page 10
Why we are here (2) Page 11
Why we are here (3) Page 12
Why we are here (4) (%) 60 B- & Below (left axis) Europe HY Default Rate (right axis) (%) 14 50 12 40 10 8 30 6 20 4 10 2 0 2000 2001 2002 2003 2004 2005 2006 2007 0 Page 13
Why we are here (5) Increasing debt multiples 6.0x Total leverage hits record 5.7x ebitda in Mar 06 5.0x 4.0x 3.0x 2.0x 1.0x Page 14 Jul-04 May-04 Mar-04 Jan-04 Nov-03 Sep-03 Jul-03 May-03 Mar-03 Jan-0 3 Nov-02 Sep-02 Jul-02 May-02 Mar-02 Jan-02 Nov-01 Sep-01 Jul-01 May-01 Mar-01 Jan-0 1 Nov-00 Sep-00 Jul-00 May-00 Mar-00 Jan-00 Nov-99 Sep-99 Jul-99 May-99 Mar-99 Jan-99 Nov-98 Sep-98 Jul-98 May-98 Mar-98 Jan-98 May-06 Mar-06 Jan-06 Nov-05 Sep-05 Jul-05 May-05 Mar-05 Jan-0 5 Nov-04 Sep-04 Jan-0 7 Nov-06 Sep-06 Jul-06 Sr Debt/EBITDA Other Debt/EBITDA
Why we are here (6) ARRANGER LBO 1 LBO 2 CDO FUND THIRD PARTY INVESTORS Rated notes Class A (AAA) Principal, margin paid down through the structure LBO 3 LBO 4 LBO 5 Participation Eur400m Eur400m SPV - issuer of notes Income Eur400m Class B (AA) Class C (A) Class D (BBB) Class E (BB-) LBO 6 LBO 7 LBO 8 Equity (not rated) Losses, incurred up through the structure The search for yield appears to have led to investors taking more financial risk than that implied by the default risk rating on the instrument Page 15
Why we are here (7) How has this been possible? Do investors really know what they are buying? Page 16
What happened last time? (1) In the last recession, consumer spending declined by 3.5% in real terms, and took a total of 13 quarters to recover to pre-recession levels Real Consumer Spending - 1990s Recession Real Consumer Spending - 1970s Recession 130 128 126 bn 88 86 84 82 80 78 76 74 72 70 12 quarters to recover to pre-recession levels 124 1972 Q1 1972 Q3 1973 Q1 1973 Q3 1974 Q1 1974 Q3 1975 Q1 1975 Q3 1976 Q1 1976 Q3 1977 Q1 1977 Q3 1978 Q1 bn 122 120 3.5% decline Real Consumer Spending - 1980s Recession 118 116 114 7 quarters to decline to bottom of cycle 6 quarters to recover to prerecession levels bn 96 94 92 90 88 86 84 82 80 17 quarters to recover to pre-recession levels 1989 Q1 1989 Q3 1990 Q1 1990 Q3 1991 Q1 1991 Q3 1992 Q1 1992 Q3 1993 Q1 1993 Q3 1994 Q1 1994 Q3 1995 Q1 1978 Q1 1978 Q3 1979 Q1 1979 Q3 1980 Q1 1980 Q3 1981 Q1 1981 Q3 1982 Q1 1982 Q3 1983 Q1 1983 Q3 1984 Q1 Page 17 Source: ONS, PwC Analysis
What happened last time? (2) While consumers started spending relatively quickly following the early 1990s recession, overall consumer sentiment took a lot longer to recover Consumer spending vs Consumer confidence Real change in consumer spending Consumer confidence index Consumer confidence index 40 35 30 25 20 15 10-5 (5) (10) (15) (20) (25) (30) (35) Consumer confidence negative, despite recovery in spending Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% Change in consumer spending Source: ONS, GfK, PwC Analysis 7 quarters from peak to trough but 7 years for consumer confidence to recover to pre-recession levels Page 18
What happened last time? (3) Last time around, big ticket and discretionary items were harder hit Length of decline (quarters) More prolonged decline Depth of 0% decline (% spending) -10% -20% Garments 5 10 15 20 Food Hotel accommodation Non-air Small travel electricals Furniture Housing and utilities Restaurants and cafes Air Travel Clothing accessories Recreational and sporting services Jewellery, clocks and watches Major appliances -30% Vehicle sales Deeper decline Page 19
What happened last time? (4) and started to decline 2 years before the recession. Decline in smaller ticket items were more delayed Timeline of when categories started to real decline Total consumer expenditure starts to decline Technical Recession Major appliances Air Travel Non-air travel Garments '88 Q3 '88 Q4 '89 Q1 '89 Q2 '89 Q3 '89 Q4 '90 Q1 '90 Q2 '90 Q3 '90 Q4 '91 Q1 '91 Q2 '91 Q3 '91 Q4 Furniture Vehicle sales Jewellery, clocks and watches Restaurants and cafes Hotel accommodation Small electricals How will this time line compress due to the high levels of borrowing? Source: ONS, PwC Analysis Recreational and sporting services Page 20
What you can do? 10 fundamental priorities 1 Take a closer look 2 Act decisively 3 Cash is king 4 Focus on what really matters 5 Manage your cost base Working with you to protect your business and help you to survive the downturn 6 Reliable information is key 7 Plan for different scenarios 8 Recognise value of your people 9 Take stakeholders with you 10 Take advantage of the opportunities Page 21
Facing the global crisis General decrease of profits and cash availability Adapt the product and service offering to propose BIQEs : Basic Is Quite Enough Lack of financing Contraction of demand Unknown duration and depth of the crisis Increasingly stringent environmental regulations Save money by improving cost structure Help customers finance their purchases Lower the break-even point Cash is king : generate cash, including through Working capital management Risks or opportunities? Page 22
What we see our clients are doing Survival mode internal focus: Optimize and mobilize all working capital components : receivables, stocks, payables, all cash tied up in operations Adapt capacity; cut cost; lower the break-even point (e.g.: short work) Improve monitoring tools focused on cash generation / forecasts Redraw business plans focusing on cash in order to anticipate difficulties (e.g. breach of covenants, liquidity crisis) Anticipate impact of regulatory changes on working capital ( LME ) Survival mode external focus: Try to take advantage of the national recovery packages available (Oseo, Public credit insurance, Mediateur du crédit, fiscal incentives eg. CIR, carry back -, etc.) Seek sources of financing (in debt and equity, private & public) Page 23
What we see our clients are doing (Cont d) Survival mode external focus (Cont d): Negotiate with creditors in order to refinance / adjust the debt, preventively or in emergency (banks, state, suppliers) + M&A options : Try to attract investors, in particular sovereign funds (e.g. FSI / FMEA in France) + Starting to rethink the business models and the product and service offerings, like today! Page 24
A deep change of logic Before Customer requests Internal processes Working capital requirement Investment needs Financing need Now Financing availability Working capital and investment potential Customer requests Internal processes Page 25
How to secure financing: a few key questions What do I have to finance? Can I reduce my financing needs, given lower demand? Can I get through 2009 in a worst case scenario? Can I confirm the adequacy of my debt package with my cash flows? Can I improve alignment between my financing and my activities? How can I finance what I need to finance? Are my banks & creditors behind me? How to (re)establish trust? Can I find new sources of financing, from financial or operational partners? From private and public sources? How can I lower the actual & perceived risk of my business? What guarantees am I able and willing to give? Page 26
Restructuring strategy Stabilise Analyse Improve to sell Options Implement Turnaround Progressive closure Sell as is Page 27
Beware green shoots April is the cruelest month.. Thank you Chuck Evans Chuck.mc.evans@fr.pwc.com +33 1 56 57 85 23 +33 6 82 58 57 67 2005 AG/SA. All rights reserved. AG/SA refers to the Swiss firm of AG/SA and the other member firms of International Limited, each of which is a separate and independent legal entity.