0 © 2018 Debt Compliance Services LLC
Jeff Wallace Jim Simpson
Managing Director Managing Director
Debt Compliance Services Debt Compliance Services
Cutting the Clutter: Best Practices in Debt Compliance
© 2018 Debt Compliance Services LLC
www.debtcompliance.com
MitigateCollaborateIntegrateUnderstand Manage
1 © 2018 Debt Compliance Services LLC
Presentation Outline
Executive summary
How debt agreements are structured
Categorize covenants by objective and risk
Write concise yes/no questions
Use web tools, not Excel
Q&A
About Debt Compliance Services
0
1
2 © 2018 Debt Compliance Services LLC
Executive Summary
Developing a best practices debt compliance process requires understanding the true risks and costs of a default, which then justifies
A CFO‐approved policy with objectives and corporate‐wide responsibilities
Effectively categorizing covenants by objective, type and risk
Developing a covenant checklist with questions that minimize legalese by focusing only on the covenant’s required or prohibited action
Minimizing the respondent burden by asking about covenants based on risk: whether they need to be managed quarterly, annually, when triggered by events, or not at all
Having the Compliance Team responsible for ensuring the accuracy and completeness of the responses and then evaluating them against the Team’s interpretation of the full covenant text
Using better tools than Excel
3 © 2018 Debt Compliance Services LLC
Most Companies Decline & Die Over Time
Source: S&P’s 2018 Transition Analysis
Default = missed payment, distressed debt exchange, bankruptcy
Non‐rated occurs for mostly bad reasons if not acquired
BBB BB B
Upgraded 11% 14% 12%
Unchanged 52% 31% 25%
Non‐Rated 25% 35% 41%
Downgraded 10% 12% 3%
Defaulted 2% 8% 19%
0%10%20%30%40%50%60%70%80%90%
100%
Rating Transitions after 5 Years
Defaulted Downgraded Non‐Rated Unchanged Upgraded
3.4
4.0
5.2
0.0
1.0
2.0
3.0
4.0
5.0
6.0
BBB BB B
5 Year Ratio of Declining/Improving Credit Ratings
2
3
4 © 2018 Debt Compliance Services LLC
A Default Would be the Worst 6‐8 Weeks of Your Treasury Career
5 © 2018 Debt Compliance Services LLC
Where does Your Debt Compliance Need to Improve?
Component
Little
to None
Somewhat
Adequate Better Best‐in‐ClassCorporate
Controls
No debt compliance
policy, no written
procedures.
Written procedures. Treasury policy; some
SOX requirements, SOX
rep letter tested
Corporate policy with
objectives and assigned
responsibilitiesResponsibility 100% Treasury. 90% Treasury, some
Legal.
80% Treasury, 20%
others.
100% Corporate: Treasury,
Legal, Accounting, SMEs.
Managing
the Debt
Documents
Incomplete set of
debt agreements.
Many not analyzed.
Hard copies of
major debt agree‐
ments collected.
All agreements in one
location. Searching by
individual agreement.
All unique agreements are
web pages with commen‐
ting and multi‐agreement
contextual searching. Managing
Financial Ratios
Quarterly calculations Monthly & quarterly
calculations
Monthly/quarterly calcs
with stress testing.
Monthly/quarterly calcs,
stressing and forecasting.
Managing
Permitted
Baskets
What are permitted
baskets?
Basket list reviewed. Calculated monthly and
quarterly.
Monthly/quarterly calcs,
with controls on adding
new basket items.Identifying the
Non‐Financial
Covenants
No covenant
checklist. Sticky notes
and marked pages.
Checklist of the
senior debt's major
covenants.
Checklist of the major
covenants of the major
agreements.
Risk‐based covenant
checklist of all unique debt
agreements, with
controlling covenants
Managing the
Non‐Financial
Covenants
Undocumented
agreement review.
Undocumented
review of checklist
by Treasury.
Excel or Word
questionnaires.
Risk‐based, web question‐
naires and reporting
Required
Deliverables
No list of due dates. Personal Excel or
Outlook calendars.
Department calendar of
all deliverables.
Web calendar process with
tasks assigned to owners
and managers.
4
5
6 © 2018 Debt Compliance Services LLC
Debt Compliance Policy Objectives & Means
7 © 2018 Debt Compliance Services LLC
Presentation Outline
Executive summary
How debt agreements are structured
Categorize covenants by objective and risk
Write concise yes/no questions
Use web tools, not Excel
Q&A
About Debt Compliance Services
6
7
8 © 2018 Debt Compliance Services LLC
How Debt Agreements are Structured
9 © 2018 Debt Compliance Services LLC
How to Read a Debt Agreement
8
9
10 © 2018 Debt Compliance Services LLC
Cross‐Default Clauses Connect All Agreements
11 © 2018 Debt Compliance Services LLC
Breaches of Ancillary Documents are EoDs
10
11
12 © 2018 Debt Compliance Services LLC
A covenant is any specified action whose failure to do or not to do is an event of default (EoD):
How Covenants Work
13 © 2018 Debt Compliance Services LLC
The Critical Defined Terms
Permitted definitions: These definitions (Permitted Indebtedness, Liens, Investments, etc.) provide a list of exceptions to prohibited activities
Various Accounting Terms: EBITDA, Indebtedness, Net Income, etc. often include negotiated carve‐outs that may differ across agreements
Restricted Payments: This definition usually covers dividends, interco advances, fees and payments to subordinated indebtedness
Key Date Definitions: anticipated key event dates over the course of the agreement (e.g., end of construction), quarterly dates, payment dates, and business day definition
12
13
14 © 2018 Debt Compliance Services LLC
The Agreement Covenants are Assigned to Specific EoDs
The agreement’s covenants are referenced in first four to six Events of Default:
Cure periods reflect the importance the lenders attach to each category
– If a cure period is not given, then it is zero days
Event of Default Category Cure Period
1. Reps & Warranties and incorrect reports, certificates, financial statements and other documents furnished
0 Days
2. Validity, enforceability, etc. of Loan Documents 0 Days
3. Principal payments, including Mandatory Prepayments 0‐1 Days
4. Interest, fee and other required payments 0‐3 Days
5. Specifically identified covenants, such as maintenance, negative, reporting and notifications
0‐5 Days
6. All other covenants in a catch‐all phrasing 30 – 60 Days
15 © 2018 Debt Compliance Services LLC
Other Events of Defaults
The next EoDs are requirements not appearing elsewhere in the agreement that must be included in the covenant listing:
Cure Periods
– Varies by specific default event, typically 0‐5/10, sometimes 30 days
The Remaining EoDs are Stand‐Alone Covenants
Cross‐default
Cross acceleration
Guarantors’ default
Voluntary/involuntary bankruptcy/insolvency
Change of Control
Judgments
Cancellation of Material Contracts
ERISA Events
Governmental Actions
Revocation of Licenses
14
15
16 © 2018 Debt Compliance Services LLC
Presentation Outline
Executive summary
How debt agreements are structured
Categorize covenants by objective and risk
Write concise yes/no questions
Use web tools, not Excel
Q&A
About Debt Compliance Services
17 © 2018 Debt Compliance Services LLC
This classification makes covenant management more understandable and facilitates accurately identifying like covenants across multiple agreements
Classify Covenants by Lender Objective
16
17
18 © 2018 Debt Compliance Services LLC
Evaluate Covenant Risk by Cure Periods
19 © 2018 Debt Compliance Services LLC
Categorizing Covenant Types by RiskDrives the Frequency of Compliance Review
18
19
20 © 2018 Debt Compliance Services LLC
Presentation Outline
Managing default risk
How debt agreements are structured
Categorize covenants by objective and risk
Writing concise yes/no questions
Use web tools, not Excel
Q&A
About Debt Compliance Services
21 © 2018 Debt Compliance Services LLC
Ask for the Relevant Facts & Minimize Legalese
Minimize the compliance burden by:
– Not wasting respondent time by asking about covenants that will never happen or haven’t been triggered
– Not forcing respondents interpret covenant legalese
Don’t ask respondents to make materiality judgments: “Was there an asset sale?” not “Was there a material asset sale?”
Write simple yes/no questions about the covenant’s required or prohibited action that encourage false negatives
– What are the facts of what happened or didn’t happened?
– And would the facts change in the foreseeable future?
It’s then the Compliance Team’s responsibility to evaluate the facts against their interpretation of the covenant to determine how the facts should be managed, monitored or mitigated
20
21
22 © 2018 Debt Compliance Services LLC
Presentation Outline
Executive summary
How debt agreements are structured
Categorize covenants by objective and risk
Write concise yes/no questions
Use web tools, not Excel
Q&A
About Debt Compliance Services
23 © 2018 Debt Compliance Services LLC
Excel is an Inadequate Tool for Debt Compliance
Excel does great managing and creating numbers, but it doesn’t do text well and is a poor database. In Excel,
– Covenant checklist becomes cumbersome, then unmanageable, and always subject to errors
– Questionnaires is very difficult to aggregate and then evaluate answers from multiple respondents
– Debt calendar risks corruption when rolled over to next year and is a poor workflow process
A web database tool can provide:
– Web questionnaires that require full and complete answers
– Web reporting to evaluate responses that are linked to the covenant text generating the questions
– A web calendar work‐flow process with assigned tasks for ensuring that all debt deliverables and payments are done on the exact business day
22
23
24 © 2018 Debt Compliance Services LLC
Jeff Wallace Jim Simpson
Managing Director Managing Director
Debt Compliance Services Debt Compliance Services
Q&A
© 2018 Debt Compliance Services LLC
www.debtcompliance.com
MitigateCollaborateIntegrateUnderstand Manage
25 © 2018 Debt Compliance Services LLC
Presentation Outline
Managing default risk
How debt agreements are structured
Categorizing covenants by objective and risk
Writing concise yes/no questions
Automate the debt compliance
Q&A
About Debt Compliance Services
24
25
26 © 2018 Debt Compliance Services LLC
DCS’ Value Proposition
With its reputation, funding, GAAP, and SOX consequences, default risk is a significant business risk that requires a rigorous compliance process
We provide a comprehensive, best‐in‐class, risk‐based, automated debt compliance process in the cloud that minimizes default risk by:
– Identifying the at‐risk covenants that must be managed quarterly or annually or when triggered by events from the low and no risk covenants.
– Training and documenting compliance by SMEs outside of treasury on their truly‐at risk covenants in their areas responsibilities with our integrated, risk‐based, web questionnaires
– Researching covenant issues quickly, accurately and consistently with our multi‐agreement contextual search engine on hyperlinked debt agreement webpages with commenting and file uploading
– Ensuring all scheduled requirements are delivered on time with our web calendar process with assigned tasks and email notification
No company has the resources to duplicate our services – and the Big 4 support capitalizing our SaaS implementation fees
27 © 2018 Debt Compliance Services LLC
About Debt Compliance Services
Now in its 10th year, DCS is a joint venture between Greenwich Treasury Advisors (GTA) and Corporate Finance Solutions (CFS)
Jim Simpson, Managing Director, founded CFS in 2002
– A 35‐year career leading over $4 bn in convertibles, high yield bonds, revolvers, term loans, and ABLs
– CFO of Moore Medical (public, $300M sales) and CS Brooks (private, $200M sales), and Treasurer of Sandoz USA (now Novartis)
Jeff Wallace, Managing Director, founded GTA in 1992
– Recognized expert in risk management and international treasury
– VP‐International Treasury at American Express, AT at both Seagram and D&B, and a CPA at Price Waterhouse
Cindy Fryer, Senior Director, joined DCS earlier this year
– Recently Senior Director – Treasury at Endo Pharmaceuticals
– Progressively responsible finance & accounting positions at South Jersey Industries, JP Morgan, and Campbell Soup, and started as a CPA at PwC
26
27
28 © 2018 Debt Compliance Services LLC
The DCS Covenant Manager℠Web Solution
29 © 2018 Debt Compliance Services LLC
DCS Clients
We have over 30 clients, ranging from large public to private middle market companies:
• A power generator with $25B in debt and over 40 project financings
• A utility with $21B in debt with 8 project financings
• RES Americas, a renewable energy company with 3 project financings
• A midWest utility with $8.5B in debt with three separate holding companies debt
• Municipal Authority of Georgia, with $6B in debt
• Two water company utilities with holding company and sub company debt
• A $6B pharmaceutical with $10B in debt
• Henry Schein, an $8B global multinational
• PolyOne, a $4B industrial manufacturer
• Church & Dwight, a $3.3 billion consumer products company
• Hyster‐Yale, a $2B industrial• A Big 4 audit firm
28
29
30 © 2018 Debt Compliance Services LLC
Client Testimonials
“You have a best‐in‐class debt compliance process,” reported the lead manager of a Big 4 audit of the company’s debt compliance to the treasurer of a client that is one of the five largest US utilities.
“Actavis is one of the world’s leading generic pharmaceutical companies, operating in 50 countries across the globe. We chose Debt Compliance Services to assist us in designing a comprehensive debt compliance process to meet the reporting requirements of our complex external financing arrangements. We are impressed with the sophistication of their debt compliance services and the professionalism and responsiveness of their ongoing support. DCS’ unique global web questionnaire system has enabled our key business stakeholders to better understand our ongoing obligations and resulted in an efficient way to manage the substantial information flow generated by our large and complex business. We now have a clear overview of what is going on in the Group without having to spend too much time and resources in the attempt. We highly recommend DCS’ professionalism and services.”—Gudjon Gustafsson, Group Treasurer, Actavis Group
“Debt Compliance Services’ tools reduce my risk, save me and my team time and effort, and have made our compliance reporting easy. Gone are the days when we would have to pull out our old, worn loan documents to review all of the various covenants and restrictions before making critical strategic business decisions. With DCS, reviewing our agreements is literally done with a few clicks of the mouse.”—Christine Sacco, Chief Financial Officer & Treasurer, Smart Balance, Inc.
31 © 2018 Debt Compliance Services LLC
DCS Publications
1. “Up for Discussion: Negotiating Credit Agreements that Stand the test of time”, AFP Exchange, Fall 2017
2. “Cutting the Clutter: Developing a risk‐based covenant checklist”, AFP Exchange, August/September 2015
3. “No Doubt, FASB’s new rules forces firms to disclose going concern doubts”, AFP Exchange, October 2014
4. “Coming Due, Treasurers must be wary of today’s easy covenants”, AFP Exchange, September 2014
5. “Truth or Consequences: Understanding Default Risk and its Ramifications”, AFP Exchange, September 2013
6. “Pure Speculation: Treasurers of Non‐Investment Grade Companies Must Reduce Covenant Risk”, AFP Exchange, June 2013
7. In collaboration with the AFP, the AFP Debt Compliance Survey, January 2013
30
31
32 © 2018 Debt Compliance Services LLC
Contact Information
For more information, please contact:
Visit our website at www.debtcompliance.com
Jim Simpson (203) 329‐7491 [email protected]
Jeff Wallace (303) 442‐4433 [email protected]
32