CVA's - A Lifeline for Problem Children?

This bullet point presentation demonstrates why we use the CVA product as a strong control technique for distressed but viable companies.

Viewing The CVA As A Corporate Finance Product

• Flexible but powerful technique
  • The CVA deal starts with a blank sheet of paper
    
  • We can build the deal for the maximum benefit for the client
    
  • Only 7 sections and 30 rules in the Insolvency Act 1986
    
  • This flexible framework allows control over
    • Tax creditors
      
    • Unsecured creditors
      
    • Secured creditors if bilateral concurrence
      
    • Unwanted staff / management can be removed with no cash impact
      
    • Unwanted leases, contracts and agreements can be terminated with no cash impact
• The body of creditors agree by voting on proposal
  
  • Many creditors do not take part in this process
    
  • Majority decision carries non-voting creditors
    
• Ensures deal is done in agreed time frame
  
  • No Round-Robin deal structuring, this can save huge amounts of time and cost
    
  • Majority decision of 75% needed to finalise deal
    
  • Control of voting initiated by KSA talking to all major creditors in advance of the meeting
    
• Only 50% members need agree
  
  • With well structured shareholders agreement this is usually straightforward
    
• Board initiates
  
  • KSA provides detailed report with recommendations including management changes required
    
  • If board agrees, board resolution agreed
    
  • Formal engagement process
    
• Inexpensive
  
  • Typically £8-40,000
    
  • Administration by comparison is expensive
    
  • Avoids asset meltdown of receivership and liquidation
    
• Quick
  
  • Typically 5-25 days construction
    
  • 14 days statutory notice period
    
  • Informal moratorium provided by case law
    
• Effective due diligence
  
  • CVA controls all known unsecured creditors.
    
  • Can be used for analysing potential new investment
    
• KSA uses the CVA to
  
  • Restructure:
    
    • Balance Sheet
      
    • Management
      
    • Business issues
      
  • Control liquidity in short-term
    
    • Stop all non-essential payments
      
    • Leverage creditors' debts
      
    • Use cash generated for pro-forma payments
      
  • Allows balance sheet adjustments
    
    • Stock write-off
      
    • Receivables adjustment
      
    • Inter-group positions - protection
      
    • Debt instruments
      
      • Write down
        
      • Defer
        
      • Convert preferential shares etc
        
  • "Safe" Introduction of new finance
    
    • Loanstock and equity
      
    • Not available to existing creditors
      
    • Leveraged by existing deferred debt
      
    • CVA provides liquidity
      
    • New money is used for growth

  
  
  

  The CVA As A Change Management Technique?

• After we are introduced, an initial report is provided by KSA
  
  • Recommend change essential via CVA
    
  • Appointment of KSA Client Services
    
  • Appointment of KSA NED
    
  • Relaunch of marketing
    
  • Improved financial information
    
• Board resolution
  
  • Agrees recommendations
    
• Engagement process
  
  • Agrees recommendations
    
• CVA Proposal
  
  • Describes failures of management
    
  • Proposes
    
    • Appointment of KSA Client Services
      
    • Appointment of KSA NED
      
    • Relaunch of marketing
      
    • Improved financial information
      
  • Contractually bound to allow changes
    
  • Supervisor can enforce
    
• Control over
  
  • Failed investments
    
  • Failed diversifications, acquisitions or mergers
    
  • Remove directors with negligible cash consequences
    
  • Install new management
  
  

  CVA - An Acquisition Tool?
  
  

• Use it to acquire and grow investees?
  
• Control technique for failing business
  
  • Acquire shares
    
  • Commence CVA immediately
    
  • Leverage creditors' debt
    
  • Remove cancerous elements
    
  • Apply KSA management change techniques
    
• Remove problem causes
  
  

Recent Good Example



• North East manufacturer
  
  • Sales £9.2m in 2001-2002, lost £400k
    
  • MBO in 1997 supported by large VC
    
  • VC chairman installed late 2001
    
  • Financial information poor
    
  • Management failure across the company
    
• What did we see?
  
  • Bank had provided £1.2m, now £300k
    
  • Loan repayments £37,500 per month
    
  • VC had provided £800,000 debt (non repaid)
    
  • VC had provided £111,000 equity
    
  • Revenue / VAT owed £426,000
    
  • 300 Trade creditors owed £1,917,000
    
  • Cash crisis
    
  • Directors at war with each other
    
• Our Solution?
  
  • Stop vicious spiral
    
  • CVA to contain creditors (tax and trade)
    
  • VC paid £100k to write off £800k debt
    
  • Removed 3 directors and 40 staff
    
  • Introduced KSA Client Services
    
  • Installed KS as NED
    
• CVA approved by 98% creditors
  
• KSA Client Services restructure
  
  • Restarted internal communication
    
  • Examined processes
    
  • Peace broke out!
    
  • Regained staff confidence
    
  • Recognised FD had other ideas
    
  • KSA FD installed
    
• KSA NED installed
  
  • Examine management
    
  • Improve reporting
    
  • Raised confidence in management
    
  • Strategic planning &
    
  • Corporate governance
    
  • Remove customer dependency
    
• NED's role
  
  • Examine management
    
  • Improve reporting
    
  • Raised confidence in management
    
  • Strategic planning
    
  • Corporate governance
    
• Where are we now?
  
  • 6 months later sales 30% less but now growing
    
  • Profit in last five months
    
  • Strong cashflow
    
  • Solvent balance sheet (£3m debt write down)
    
  • Rebuilding creditor confidence
    
  • Saved 130 jobs, value building
    
  • Squeezing out margin
    
  • Building marketing and sales approaches
    
    

  
  

  CVA - To Exit or to Remain?
  

• CVA can allow shelter
  
  • Revision of CVA in future if problems arise
    
  • Pay off preferential creditors in full
    
  • Debt discounting of unsecured?
    
• Buy out debts in full or part
  
  • Leave in CVA and repay under terms
    
  • Profit ratchets can kick in
    
  • Tax efficient
    
    

  CVA - A Powerful Technique
  

• We can help with problem children
  
• Call us if you have any questions