texpro best practices in debt compliance · developing a best practices debt compliance process...

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


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

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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


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

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A Default Would be the Worst 6‐8 Weeks of Your Treasury Career


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.

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Debt Compliance Policy Objectives & Means



Executive summary





Q&A


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How Debt Agreements are Structured


How to Read a Debt Agreement

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Cross‐Default Clauses Connect All Agreements


Breaches of Ancillary Documents are EoDs

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A covenant is any specified action whose failure to do or not to do is an event of default (EoD):

How Covenants Work


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

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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


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

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Executive summary





Q&A



This classification makes covenant management more understandable and facilitates accurately identifying like covenants across multiple agreements

Classify Covenants by Lender Objective

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Evaluate Covenant Risk by Cure Periods


Categorizing Covenant Types by RiskDrives the Frequency of Compliance Review

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Managing default risk



Writing concise yes/no questions


Q&A



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

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Executive summary





Q&A



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

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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



Managing default risk


Categorizing covenants by objective and risk

Writing concise yes/no questions

Automate the debt compliance

Q&A


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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



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

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The DCS Covenant Manager℠Web Solution


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

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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.


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

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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]

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