Effective, No Nonsense Debt Compliance

Effective, No Nonsense Risk-Based Debt Compliance

Understand Integrate Collaborate Mitigate Manage

§ Executive summary § How debt agreements are structured § Categorizing covenants by objective and risk § Writing concise yes/no questions § Using better tools than Excel § Q&A § About Debt Compliance Services

Developing an effective, efficient debt compliance process requires: § Understanding how to read debt agreements § A non-legal approach for categorizing covenants by objective, type and risk § Developing a covenant checklist and questions initially requires only understanding the covenant’s required or prohibited action § Minimizing respondent interpretations by writing questions that simply ask about what happened to the covenant’s required or prohibited action § Minimizing the respondent burden by asking about covenants based on 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 to manage the process

§ With few tools and little corporate-wide support, debt compliance is the worst job in Treasury § It’s demoralizing to have the responsibility for mistakes that can have grave consequences to the company and your career that you can do little to prevent or manage § Transition risk to a new manager is high, so compliance managers are stuck with the job § An insufficient process is a wasted opportunity for teaching staff debt compliance, a critical skill for negotiating successful debt agreements

§ Executive summary § How debt agreements are structured § Categorizing covenants by objective and risk § Writing concise yes/no questions § Using better tools § Q&A § About Debt Compliance Services

A covenant is any specified action whose failure to do or not to do is an event of default (EoD) and will have many, if not all, of these elements:

The agreement’s covenants are referenced in first four to six Events of Default:

Event of Default Category Cure Period 1. Reps & Warranties and incorrect reports, certificates, financial 0 Days statements and other documents furnished 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, 0-5 Days negative, reporting and notifications 6. All other covenants in a catch-all phrasing 30 – 60 Days § Cure periods reflect the importance the lenders attach to each category – If a cure period is not given, then it is zero days

Other Events of Defaults The next EoDs are requirements not appearing elsewhere in the agreement that must be included in the covenant listing: § Cross-default § Judgments § Cross acceleration § Cancellation of Material Contracts § Guarantors’ default § ERISA Events § Voluntary/involuntary § Governmental Actions bankruptcy/insolvency § Revocation of Licenses § Change of Control

Cure Periods – Varies by specific default event, typically 0-5/10, sometimes 30 days

§ Managing default risk § How debt agreements are structured § Categorizing covenants by objective and risk § Writing concise yes/no questions § Using better tools than Excel § Q&A § About Debt Compliance Services

§ Write broad, open-ended questions in a yes or no format asking whether the covenant’s prohibited or required action happened or not – Encourage false positives rather than false negatives § Do not ask respondents to make materiality judgments: “Was there an asset sale?” not “Was there a material asset sale?” § To be precise and concise, it is often best to use the covenant’s defined terms with initial caps in the questions – Provide respondents access to these defined terms § It is the Compliance Team’s responsibility to – Ensure the responses are accurate and complete and – Evaluate the response against the covenant text to determine what course of action the response requires

Edited Covenant Text example (over 600 words in total): Each Loan Party covenants … that… the Loan Parties … and …their Restricted Subsidiaries [will not] to do any of the following: • Enter into or permit to exist any encumbrance or restriction that (a) limits the ability (i) …to make Restricted Payments …, (ii) … to guarantee .. or (iii)… to incur ... Liens …. • provided, that, ….. Or provided that, ….this Section shall not prohibit (i) restrictions … in any agreement… (A) (1) …..permitted by clause (1) …. so long as… • the restrictions … in clause (a) or (b) that are contained in such agreement or (B) … (i)…, (ii) …, (iii) …, (iv) …, (v) … under clause (r) of the definition … Liens …., (vi) …, (vii) …, or (viii)…

1. Identify the party or parties governed by the covenant 2. Identify only the restrictions, ignoring pre-conditions, exceptions, post-conditions, etc. 3. Write broad questions whether the parties violated the restrictions § Do any of the Loan Parties or the Restricted Subsidiaries have any encumbrance or restriction that limits their ability to make Restricted Payments? § Do any of the Loan Parties or their Restricted Subsidiaries have any encumbrance or restriction that limits their ability to guarantee the Indebtedness of any Loan Party? 4. If the response indicates an issue, the Compliance Team evaluates the facts against the full covenant text to determine what needs to be done

Using Excel as § A multi-agreement covenant checklist and questions quickly becomes cumbersome, then unmanageable, and always subject to errors § As a questionnaire often results in incomplete answers and always difficulties in aggregating and then evaluating answers from multiple respondents § Any Excel summaries of the covenants are an unreliable source to ascertain compliance issues § As a debt calendar risks corruption when rolled over to next year and often has no explicit management oversight of the upcoming tasks to be done

Instead, it is more effective to develop a web debt compliance database structure that allows: § Developing the covenants and questions using an intelligent form § Web questionnaires that require full and complete answers § Web reporting to evaluate responses linked to the covenant text generating the questions § Effective, efficient interpretation of covenant issues with hyperlinked debt agreement webpages with multi-agreement contextual searching § A web calendar process for ensuring that all debt deliverables and payments are done on the required business day

§ 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

§ 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 9th 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

23 © 2017 Debt Compliance Services LLC DCS Clients We have over 30 clients, ranging from large public to private middle market companies: • A power generator with • Two water company utilities $25B in debt and over 40 with holding company and sub project financings company debt • A utility with $21B in debt • A $6B pharmaceutical with with 8 project financings $10B in debt • RES Americas, a renewable • Henry Schein, an $8B global energy company with 3 multinational project financings • PolyOne, a $4B industrial • A midWest utility with $8.5B manufacturer in debt with three separate • Church & Dwight, a $3.3 holding companies debt billion consumer products • Municipal Authority of company Georgia, with $6B in debt • Hyster-Yale, a $2B industrial • A Big 4 audit firm

“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.

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

§ For more information, please contact:

Jim Simpson (203) 329-7491 [email protected] Jeff Wallace (303) 442-4433 [email protected]

§ Visit our website at www.debtcompliance.com