1. Indebtedness and Deleveraging of Slovenian Enterprises Jolanta Gabriel, Head of Office, Slovenia

2. September 2013 Agenda: Extent of corporate indebtedness How to address the corporate indebtedness EBRD’s role in restructuring and deleveraging © EBRD 2014, all rights reserved

3. Corporate debt overhang Debt piling up after 2004 – reasons: -Access to cheap bank credit, mainly short term bilateral, collateral based (rather than cash-flow based) -Too aggressive investment in non-core assets, expansion without proper cost return analysis; -Management buy-outs with no cash equity at risk, financed by bank debt -Weak financial management, reporting, ownership control -Weak early warning systems within banking 3

4. Lessons Learnt from the Region Restructuring projects face several obstacles: Inappropriate recognition of the situation – hence delayed reaction by the management, shareholders and lenders; Lack of precedents – lenders are not experienced; many jurisdictions favour equity holders and require new bankruptcy legislation; Poor financial management within companies in restructuring and lack of local restructuring expertise; Most companies face tight liquidity with a large volume of unpaid payables, leading to pressure also from suppliers which normally escalates the situation fast. 4

5. Net debt and number of firms (2010-2012; bn. €) Net debt ≈ 70% of GDP Increasing number of firms with net debt Net debt = Debt – (cash + liq.ass.)

6. Magnitude of financial leverage (2012) Leverage = Net debt / EBITDA

7. Excessive debt highly concentrated (2012; bn. €) 1/3 of exc. debt held by Top 10 debtor firms; 1/2 of exc. debt held by Top 50 debtor firms ; 70 % of exc. debt held by Top 300 debtor firms

8. Key: Financial soundness is essential for day-to-day operations and growth Firms facing excessive debt experience liquidity problems - normal operations become more difficult (WC, and essential capex) Excessive debt becomes self-perpetuating firms are unable to deleverage due to falling revenues in the wake of recession, while recessions is protracted due to debt overhang Solutions are needed 8

9. Steps to support restructuring Legal framework improved: Adoption of amendments to the Insolvency Law in November 2013 Adoption of Slovenian Principles of Debt Restructuring in March 2014 – key step in strengthening out-of-court restructurings in support of viable enterprises. Creation of BAMC and NPL transfer of NLB and NKBM in January 2014: BAMC focus on restructuring of viable companies with sound underlying core business – operational and financial – process continue to be coordinated with debt holders and shareholders Privatisation process – good start with 15 companies, but more comprehensive strategy for state assets is needed soon (SDH) 9

10. Steps to support restructuring Banks – more coordinated approach ‒Fair burden sharing between banks and shareholders through D-E swaps & debt write off or rescheduling ‒Insisting on strengthening management (role of CRO) and corporate governance ‒Restructuring debt with better security sharing arrangements, alignment of terms and covenants; ‒Strengthening monitoring of implementation of restructuring Provision of new debt or terms to allow new necessary liquidity for WC and investment needs to be unlocked Further sale of NPL portfolios to private investors as complementary solution to BAMC efforts 10

11. EBRD – Strategy for Slovenia  New strategy for Slovenia for years 2014-2017– due for EBRD’s Board approval on 26 February  One of the key pillars of the new strategy for Slovenia is EBRD’s engagement in corporate restructuring alongside expanding the role of private sector and promoting good corporate governance  Clear need for intensifying efforts in restructuring of corporates in Slovenia to support recovery and stimulate growth  The EBRD’s strategy supports and complements Slovenia’s National Reform Programme  EBRD can act as a catalyst for balance sheet restructurings by providing new money on the basis of sound banking principles

12. EBRD Objectives and Focus in Restructuring Restructurings are challenging due to much higher risk profile. New money has to benefit from appropriate structuring:  Requires higher margins (sometimes equity upside)  Robust security packages and super-seniority - “last in-first out” structures EBRD works on selective cases to ensure a higher success rate of restructuring transactions EBRD focus:  Viable operating business cases leading to recovery in profitability  Balance sheet and/or operational restructuring required  Existing lenders developed or willing to develop sound restructuring proposals and follow best practices in restructuring  Fair burden sharing between lenders and shareholders and recognition of real equity value  EBRD doesn’t rescue existing shareholders or lenders but helps saving viable operating businesses  Focus on long term solutions and not quick temporary fixes 12

13. Timing factor is key - Lenders and Management recognition of problems before too late Extensive due diligence process is necessary up front: market review, legal due diligence, financial due diligence preferably by one of big 4, Recognition of problems and true equity value of the company Execution Complexity –financial, operational and organisational restructuring at the same time is challenging and requires strong management as well as external consultants Agreeing new strategy and restructuring plan focused on optimisation of core business which has to follow very specific benchmarks and timeframe – execution has to be supported by the management; sale of non-core assets The fundamental value of the business is key Clarification of roles of board vs. role of executive management Independent CFO is invaluable in all cases Restructuring processes are heavy and risky. In absence of committed shareholders they may require new investors ready to be actively involved in the turnaround of the company. Common Lessons Learnt 13

14. Thank you for your attention! 18/04/2015