SACEs procedures

in case of default.
Debt recovery and restructuring

Rome, 20 November 2008

Valerio Ranciaro

11

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina case study

22

Claims and Collections:

short term vs. medium-long term
Short term

Medium-long term

Small amounts (30-50K or less)

Huge volumes per year
Process much faster
Need standardization
In-house collection more effective

Big amounts
Small volumes per year
Process slower
Files management is customized
depending on debtor
Often a problem for different ECAs
Complex restructurings

33

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina case study

44

Claims: historical data

SACEs indemnified claims shown a decreasing trend. Recoveries have also improved
Claims(mln)

Premiums + Recoveries Claims (mln)

2.500m

5.500m
4.500m

2.000m

3.500m
2.500m

1.500m

1.500m
1.000m

500m
(500)m

500m

(1.500)m
0m

mln

2004

2005

2006

mln

2004

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

(2.500)m

2005

2006

17.1

19.1

Recoveries

Claims

Commercial Risk

15.2

Commercial Risk

27.2

25.7

5.6

Political Risk

55.7

21.0

11.9

Political Risk

978.2

3,168.0

5,198.9

Total

82.9

46.7

17.4

Totale

993.4

3,185.1

5,218.0

55

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina case study

66

Claims and recovery process

overview
Claims Process

Recovery Process
Commercial
Commercial
Credit
Credit Recovery
Recovery

Claim
Claim
notification
notification

Claim
Claim
Assessment
Assessment

Indemnity
Indemnity
Payment
Payment

Credit
Credit
Recovery
Recovery

Recovery
Recovery
Sharing
Sharing
between
between SACE
SACE
and
and Creditors
Creditors

Recovery
Recovery
Repayment
Repayment

Sovereign
Sovereign
Credit
Credit Recovery
Recovery

77

Claims macro-process

File
File Registration
Registration

Policyholder
notifies claim

Claim
Claim Assessment
Assessment
Cover
Cover Analysis
Analysis

Customer
Customer
Relationship
Relationship

Settlement
Settlement
(Repay
(Repay Indemnity)
Indemnity)

Assess the claim

Check cover limit
Enter liability

Pass
Pass the
the file
file

Who

Pass the file to

Collections

Claim officer

Reserving
Reserving

Make a financial reserve for claim

Reserve 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

Collection
Officer
Collection
Correspondent
Debtor
Creditor

88

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina case study

99

Recoveries macro-process

Claim
File

Open
Open aa
collection
collection file
file

Pass
Pass the
the
collection
collection file
file

Manage
Manage aa file
file

Collection
Order

Recover
Recover with
with
pre-legal
pre-legal actions
actions

Claim officer
Collection
Officer
Collection
Correspondent

Follow
Follow up
up
insolvency
insolvency
procedure
procedure

Recover
Recover with
with
legal
legal actions
actions

Phone collection (in-house) Legal action

Enter replies
Local correspondents

Fill in the proof of claim

Choose, register and follow the
payment plan (depending on
law)

Manage
Manage the
the
costs
costs

Manage
Manage recoveries
recoveries

Debtor
Creditor

Produce
Produce statistics
statistics
and
and reports
reports

Follow up the recovery

repayment

Repay
Repay recovery
recovery
to
to creditor
creditor

Settle the costs:

pre-legal, legal

Send the repayments to clients

10
10

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina case study

11
11

Meaning of the term restructuring

Typically, restructuring is limited to mean a restructuring of the debtors financial

obligations in response to a change in economic conditions.
A restructuring usually takes the form of a rescheduling, compromise, conversion of
debt into equity or a combination of all three.
Restructuring Turnaround: Restructuring should be distinguished from the term
turnaround which is a more pervasive reorganization of both the debtors financial
obligations and operational processes.
In emerging markets where creditors rights are usually impaired, a turnaround is almost
always unachievable unless there is a willingness by the borrower to do so.

12
12

Restructuring process overview

Phase 1

Phase 2

Financial Due Diligence

and Cash flow Projections

Assess
Assess
Financial
Financial
Models
Models

Standstill
Standstill

Assist
Assist toto
implement
implement
standstill
standstill so
so
management
management
can
focus
on
can focus on
managing
managingthe
the
business
businessand
and
solutions
solutionscan
can
be
bedeveloped
developed

Step 1

High level negotiation &

Implementation

Critique
Critique
business
businessand
and
industry
industry
position
position

Identify
Identifyand
and
assist
assist
creditor
creditortoto
select
selectaa
restructuring
restructuring
solution
solution

Assess
future
Assess
future
cash
flows

Negotiate
Negotiate
selected
selected
restructure
restructure
solution
solution

Timeframe
depends
on the co operation
between all
parties
involved

Implement
Implement
restructure
restructure
and
andmonitor
monitor
performance
performance

Timeframe
depends
on requirements
of
restructuring

Step 2
Commercial Strategies and Fallback Scenarios

Negotiate/
Negotiate/
prepare
preparefor
for
fallback
fallback
scenarios
scenarios

Implement
Implement
fallback
fallback
scenarios
scenarios

13
13

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 the
circumstances.

14
14

1. Due Diligence

Legal and financial review

The legal due diligence 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 due diligence is necessary to gain a full understanding of:
The current financial and organisational positions
Future cashflow position
Strengths and weaknesses

15
15

1. Due Diligence (continues)

The financial due diligence 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.

16
16

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 creditor
action.
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 the
creditors to not enforce their rights, and to preserve the parties respective
positions for a period of time.

17
17

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 the
creditors legal rights and the debtors operational performance

18
18

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.

19
19

Business Plan

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.

FINANCIAL CONSTRAINTS

20
20

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

21
21

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.

22
22

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)
Excess cash sweep
Subordinated debt
Dividends

23
23

Commercial restructurings
Over the past few years SACE has successfully restructured some large corporate defaults. Some of the
most notable examples are
Country

Company

Date

Exposure

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

24
24

Debt sale on secondary market

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

An example:
Restructured amount USD 23,3 mln.

Indonesia
Tranche A: 11%

maturity 2014

Tranche B: 29%

maturity 2017

Tranche C: 59%

maturity 2026

25
25

Debt sale on secondary market

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

An example:
Restructured amount USD 23,3 mln.

Indonesia
Tranche A: 11%

maturity 2014

Tranche B: 29%

maturity 2017

Tranche C: 59%

maturity 2026

NPV = 33 /$

26
26

Debt sale on secondary market

Question: was it possible to obtain better results?

27
27

Debt sale on secondary market

Question: was it possible to obtain better results?

NO!

28
28

Debt sale on secondary market

Question: was it possible to obtain better results?

NO!

Indonesia
APP Indonesia is the largest corporate defaulter in
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
SACE
EKF
EKN
KB
EULER HERMES
CESCE
COFACE
Finnvera
Total

(Millions USD Equiv.)

23,3
3,3
78,7
66,8
254,7
11,9
3,6
79,1
521,4

29
29

Debt sale on secondary market

One of the post-restructuring alternatives consists in the sale of the debt on the
distressed loans secondary market

30
30

1.

Introduction

2.

Claims historical data

3.

Claims macro-process

4.

Recoveries macro-process

5.

Restructurings

6.

Telecom Argentina case study

31
31

Telecom Argentina
-case study-

32
32

The SACE policies

Policy A
Guaranteed amount
SACE cover
Outstanding principal

USD 58,4
80%
USD 21,8

Policy B
Guaranteed amount
SACE cover
Outstanding principal

USD 8,4
90%
USD 4,6

Total paid claims

USD 22,7

Total outstanding principal

USD 26,5

Total ECAss claims

USD 244

33
33

History of a default
April 2002 Telecom Argentina (TA) announces the suspension of the
debt 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 unsecured
indebtness, via the filing of an APE (Acuerdo Preventivo
Extrajudicial, binding if approved by 66,6% of the creditors). This
proposal was not acceptable as well: negotiations continued.
May 2004 Final restructuring proposal: APE.

34
34

The APE proposal

Creditors received, for every 1.058 unit of nominal value of the debt (amount
determined including capitalized interests):
OPTION A (100% nominal value) - 10 years "step up" notes (after 15/10/2008
interest 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 dutch
auction".

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

35
35

NPV analysis

NPV
12%

13,50%

15%

Option A

82,5

77,2

72,5

Option B

96,5

92,3

88,4

Option C

79,7

78,9

78,3

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

36
36

NPV analysis

NPV
12%

13,50%

15%

Option A

82,5

77,2

72,5

Option B

96,5

92,3

88,4

Option C

79,7

78,9

78,3

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

37
37

NPV analysis with prorationing

The following table shows how Option B NPV changed according to the prorationing
into Option C or into both Options A and C.

Option B
Best case scenario
No prorationing

Expected scenario
Prorationing on Option C

Worst case scenario

Prorationing on both A and C

12%

NPV
13,50%

15%

96,5

92,3

88,4

90,2

87,3

84,6

89,5

86,5

83,6

According to this scenario, the final one, 37,5% of the credits which elected to
receive Option B consideration were prorated into Option C.

38
38

Results of the restructuring (mln.)

Policy 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 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

39
39

How to contact us
HEADQUARTER
Roma
Piazza Poli, 37/42 00187 Roma
Tel. +39 06 67361
Fax +39 06 6736225

REGIONAL OFFICES
Milano
Via A.de Togni, 2 - 20123 Milano
Tel. +39 02 434499701,Fax +39 02 434499749
Modena
Via Elsa Morante, 71 - 41100 Modena
Tel. +39 059 331201, Fax +39 059 820832
Torino
c/o ICE - Via Bogino 13 - 10100 Torino
Tel. +39 011 836128 - Fax +39 011 836425
Venezia-Mestre
Viale Ancona 26 - 30172 Venezia - Mestre
Tel. +39 041 2905111 - Fax +39 041 2905103

REPRESENTATIVE OVERSEAS
Moscow
Krasnopresnenskaja Naberejnaja, 12
123610 Moscow Office n.1202
Tel 007 4952582155 Fax 007 4952582156
Hong Kong
40/f Suite 4001 Wanchai, Hong Kong
Central Plaza 18, Harbour Road
Tel. +852 3620 2323 Fax +852 36210227
Johannesburg
c/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, 1971
3 - 4 andar
So Paulo SP
Brasile 01311 - 300
Tel: +55 11 21487250 Fax: + 55 1132664051

SACE BT: Piazza Poli, 37/42 00187 Roma

Tel. +39 06 6976971 Fax +39 06 697697725

SACE Surety: Via A. de Togni, 2 - 20123 Milano

Tel. +39 02 480411 Fax +39 02 8041292

www.sace.it

40
40

Contacts

Thank you for your attention

Valerio Ranciaro
Head of Claims and
Corporate Recoveries
Tel. +39 06.6736266
v.ranciaro@sace.it

Tel. +39 06.6736264 - 267

sace.tarining-advisory@sace.it

41
41

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 any
insurance/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 be
incorrect and, accordingly, SACE does not represent or warrant that the information is
accurate and complete.

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