Corporate Turnaround- looking beyond just banks and the debtor. Igor Zax, CFA Tenzor Ltd © Tenzor Ltd 2009 www.tenzor.co.uk

© Tenzor Ltd 2009 www.tenzor.co.uk Five “C” of Turnaround Control Creditor seeks to control assets and decision making Capability The team (existent, new or interim) need to be capable for the task Credibility Turnaround plan and the team need to have credibility with all stakeholders Clarity What is the company’s core business, how it fits with the industry structure and does the business model match it Co-operation Lending group are not the only stakeholders. Ongoing support from suppliers, customers, distributors and others are vital for survival © Tenzor Ltd 2009 www.tenzor.co.uk

© Tenzor Ltd 2009 www.tenzor.co.uk Why Turnaround? Insolvency may be an efficient solution if there are substantial assets in the business (based on actual liquidation value) and they can be easily secured. Otherwise, one needs to keep the company as going concern as the best way to recover- and this is not only lender’s decision. To do so, one needs to answer why the company exists and how is it linked to its environment. Bank lender makes a one-off decision to lend-supply chain partners making their decisions (including granting credit) every time © Tenzor Ltd 2009 www.tenzor.co.uk

Industry structure and Supply Chain Global industry structures changed massively Platform companies "Produces nowhere but sells everywhere... know where the clients are and what they want and where the producers are. Platform companies then simply organise the ordering by the clients and the delivery by the producers (and the placing of their logo on the product just before delivery).“- GaveKal Integrated and collaborative supply chains. Contract manufacturing, outsourcing, muli-tier distribution Changed structures are often ignored by analysts © Tenzor Ltd 2009 www.tenzor.co.uk

Supply Chain- Distribution of Risk and Reward Customers! Component Manufacturers Component Distributors Contract Manufacturers OEM Distributors VARs Understanding the supply chain is core to determining the future of the company. How is wealth and risk distributed? What is outsourced to whom? Who does financing- is the company a bank? Should it be? Is the issue overall health of the chain, distribution of rewards and risks at particular layer or just company specific issues? Who can “shortcut” the chain and what would be consequences? Who is going to loose the most if company disappear and what can they contribute to rescue? © Tenzor Ltd 2009 www.tenzor.co.uk

Credit Insurance and Receivables Financing Trade Receivables % Insured % Financed Europe 35 5 UK 30 6 US 4 In Europe, credit insurance is extremely important (including for export to Russia) The supplier may not be the one making decisions If cover is withdrawn, company can try to negotiate with insurer (to restore cover) and/or supplier (to continue sell uninsured) IF debt is current If the payments are overdue, supplier may not supply or risk the claim not being paid... Receivable financing is underutilised by suppliers-they paid for taking off the risk but did not use the financing available! © Tenzor Ltd 2009 www.tenzor.co.uk

Working Capital Management Loosing supplier credit is the major risk-do not provoke by late payment (but try to negotiate longer terms) and keep good communication Receivables are major asset- they need to be managed properly and financed were appropriate (particularly export receivables and receivables confirmed by the buyer as undisputed) Manage inventories Analyse the product mix not only from profitability standpoint, but also working capital effect –and go out of products you can not afford If the company is not right place for financing and risk, find one in the supply chain who can take it © Tenzor Ltd 2009 www.tenzor.co.uk

Redesigning the Model -Distribution example Credit Insurance? Factoring? Securitisation? What credit limit? Sell purchase Distributor Supplier Payment Risks: Distributor credit risk This risk may be highly concentrated Customer credit risk (if distributor has little capital) Product liability (any case) Provides: Marketing/Sales Logistics Service Working Capital Finance? Risk mitigation??? Diversified risk? Low concentrations? Single vs multi tier? How do you finance receivables in Russia? © Tenzor Ltd 2009 www.tenzor.co.uk

© Tenzor Ltd 2009 www.tenzor.co.uk Distribution example Credit Insurance-easier to obtain? Invoice discounting? Factoring? We are in Europe! Sell Supplier Provides: Marketing/Sales Logistics Service Collections? Performance risk mitigation? Distributor-now agent? Diversified risk? Low concentrations? Single vs. multi tier? No need to finance in Russia? Low working capital needs! © Tenzor Ltd 2009 www.tenzor.co.uk

Why Do You Need Working Capital-Business Model? Working Capital needs are related to structure, not necessarily value added Supplier’s upmost concern now is risk Variety of legal structures to mitigate risk, while reduce working capital needs Similar models can be applied to contract manufacturing, printing, material processing, etc. © Tenzor Ltd 2009 www.tenzor.co.uk

Supply Chain and Turnaround Financing The supplier (even a highly distressed) is a lender, providing next step in the chain (distributor, manufacturer, end user etc.) with credit through payment terms (sometimes they are the only or main source of credit). Buyer of the goods can effectively provide money to the seller through reduced payment terms without taking risk (providing supplier fulfilled the contract). This may provide a workable alternative to DIP (Debtor in Possession) financing, allowing in some cases to provide funds to distressed company without being affected by possible bankruptcy procedures © Tenzor Ltd 2009 www.tenzor.co.uk

Supply Chain-its importance to creditors and turnaround investors Company’s working capital needs depends from business model- and this can be changed (meaning less money needed to support the turnaround) Instead of distressed financing of troubled company, one can often finance healthy one (such as its distributor) with the same net effect but different cost and risk One needs to be aware of cross border differences- there are more solutions for financing sales to Russia from the West than for domestic financing. Sick companies in healthy chains have much higher chances of survival than in sick chains. © Tenzor Ltd 2009 www.tenzor.co.uk

Supply Chain-its importance to creditors and investors- cont. If there is no partner in the chain that have ability and wiliness to finance it shall be found or created. In Europe, receivables finance is relatively cheap and straightforward, while even export financing from Russia is difficult and expensive outside of large commodities players. Receivables financing may be either asset sale or secured debt (depending on a structure and accounting standards)-short payment terms are just short payment terms. © Tenzor Ltd 2009 www.tenzor.co.uk

Exit Strategies- Vertical Integration? Recent years show a global trend to “platformisation” This was driven by lower transaction costs, supply chain coordination and general low risk environment This is changing now, as risk is again high on the agenda, and transaction costs are up A “distressed” company may be in trouble as standalone case, but fit perfectly with the other vertical player Understanding the supply chain, needs and strategies of its players is the key for a successful exit! © Tenzor Ltd 2009 www.tenzor.co.uk

© Tenzor Ltd 2009 www.tenzor.co.uk Thank You and Good Luck! Igor Zax, CFA, Sloan Fellow (London Business School) Managing Director, Tenzor Ltd. (London) Tel: +447775708426 E-Mail: igor.zax@tenzor.co.uk Web site: www.tenzor.co.uk © Tenzor Ltd 2009 www.tenzor.co.uk