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A L A W F I R M S E R V I N G G L O B A L C L I E N T S

KIRKLAND & ELLIS INTERNATIONAL LLPA L A W F I R M S E R V I N G G L O B A L C L I E N T S

CHICAGO HONG KONG LONDON LOS ANGELES MUNICH NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI WASHINGTON, D.C.

90389651.1

Leo Plank – Partner – Kirkland & Ellis International LLP

Bucharest, 30 May 2013

Recent Trends in Financial Restructurings:How to Avoid a Value Destructive Insolvency




Introduction to LBO Restructurings – How the Financial Creditors Set Up Structures to avoid an Insolvency

Klöckner Pentaplast Case Study

Rodenstock Case Study

Issues Presented




Introduction to LBO Restructurings – How the Financial Creditors Set Up Structures to avoid an Insolvency




Intercreditor AgreementAll Debt Tranches are

Party

Set Up of a Typical LBO StructureAim is to create efficient contractual and structural subordination and a clean enforcement structure to avoid value destructive insolvencies

Investor

HoldCo

HoldCoD/Lux

OpCo

OpCoT2

OpCoT3

Share pledge

Investor Debt

Mezzanine/2ndLien Debt

Senior Debt

0%

20%

40%

60%

80%

100%

Equity Mezz

2nd Lien SeniorOpCo

T1

Value Break Considerations

Value

Time

EV Value / Trading Value of debt over time




Restructuring Solutions

Consensual out-of-court restructuring

Usually unrealistic for a debtor facing severe financial and operational difficulties.

Particularly time-intensive.

Diverse constituent groups generally assert often conflicting interests.

Minority investors and shareholders likely to obstruct process unless bought off (hold out, free rider dilemma).

Enforcement of share pledge(s) / Use Release Powers under the Intercreditor Agreement

Involves assuming control of operating entities by creditor holding share pledge.

Use the powers granted to the Security Agent under the Intercreditor Agreement to release debt and force creditors to take a haircut.

May involve new investment.

Newly-formed Special Purpose Vehicle purchases entity whose shares have been pledged through sale of enforced shares.




Controlled (pre-arranged/negotiated) coercive process (Scheme of Arrangement / COMI Shift, Chapter 11, Local Bankruptcy)

Necessary when the Intercreditor Agreement is defective / does not work as intended.

May also be necessary when operational issues (leases, bilateral debt at the operating companies etc) must be addressed.

Restructuring Solutions (cont/ . . .)




Obtaining ControlShare Pledge Enforcement in Luxembourg

Investor

HoldCo

HoldCo Lux

OpCo

OpCoT1

OpCoT2

OpCoT3

Share Pledge Enforcement




Key Steps Pledge of shares in accordance with Luxembourg law. The Security Agent can acquire the shares itself (in the context of a

private sale at fair market value). Certain “fair dealing” rules apply and the Security Agent will be

required to conduct a market valuation prior to sale and transfer. Due Diligence must be commenced prior to enforcement, as the sale

will occur nearly immediately after the Security Agent calls the loan. Credit bidding also is possible.

Obtaining ControlShare Pledge Enforcement in Luxembourg (cont’d)




Necessary Steps

Missed payment or nonpayments, causing an “event of default” under various loan covenants.

Restructuring or “lock up” agreement negotiated and executed with participating lenders. Generally, 2/3 majority under applicable credit agreements necessary.

All or a portion of the debtor’s available credit is called; guarantees (if any) triggered. Actual insolvency (and obligation to file for bankruptcy) avoided through

standstill. Security Agent commences share pledge enforcement.

Intensive negotiations necessary due to legal and practical difficulties. Lender-controlled and -financed NewCo entity formed; bids on the shares in a

controlled sale subsequent to share pledge enforcement. Payment in cash or as a “credit bid,” pursuant to § 1239 of the German Civil

Code. Payment distributed to remaining creditors pursuant to Intercreditor Agreement.

Obtaining ControlShare Pledge Enforcement




Risk regarding improper sale process. Change of control issues. Approval requirements in credit agreements. Security Agent risks, including willingness to follow through and

indemnification issues. Antitrust challenge issues. Shareholders or prior sponsors seek to undermine the enforcement

and transfer to the SPV. In particular, insolvency risks must be considered and

comprehensively analyzed.

Obtaining ControlShare Pledge Enforcement Risks




Klöckner Pentaplast Case Study




KLEOPATRA LUX 1S.À.R.L.


KP GROUP(see structure chart in

appendix)Newco

SVP and Participating 2nd Lien/Mezz Lenders

Senior Lenders

2nd Lien/Mezz Lenders

Ordinary Shares/PECs/TPECs

Senior Facility

2nd Lien FacilityMezzanine Facility

PRE-RESTRUCTURING POSITION

Newco

2nd Lien and Mezz Transferred to Newco

Equity/Newco PIK-TPECs

POSITION POST-RESTRUCTURING


KP GROUP(see structure chart in

appendix)

KP Germany Erste GmbH(Germany)

Kleopatra Acquisition Corp.(USA)

Second Lien NotesSecond Lien Notes: €255m

Klöckner Pentaplast German Holding GmbH & Co. KG

(Germany)

Senior Secured Credit FacilityRCF: $65mTerm Loan B: $435m

Participating 2nd Lien/Mezz Lenders




Description of the Transaction

EUR 822.2 million outstanding under pre-restructuring First Lien Facilities and EUR 369.9 million outstanding under our pre-restructuring Junior Facilities (2L and Mezz).

Total consolidated debt as of March 31, 2012 was EUR 1,219.9 million, which was 8.5 x our Adjusted EBITDA for the twelve months ended March 31, 2012.

Leverage ratio covenant breach for the period ended December 31, 2011. Company obtained a waiver of this breach until June 22, 2012 from pre-restructuring Senior Lenders.

On June 21, 2012, KP was recapitalized and the equity of one of the Luxembourg holding companies was purchased by way of a private enforcement sale by an entity financed by certain of former Junior Lenders, including funds affiliated with SVP.

As part of the transaction EUR 904.8 million was paid in cash to repay in full the liabilities under our pre-restructuring First Lien Facilities (including accrued interest and cash paid to settle outstanding interest rate hedge agreements).

Recovery by holders of the group’s liabilities under the pre-restructuring Junior Facilities was effected through the equitization of their claims.




Implementation Alternatives Available

Scheme plus pledge enforcement

Intercreditor buy-out plus pledge enforcement

Contractual amendment plus pledge enforcement

Scheme would be proposed to deal with tax issues in the absence of clearance from German tax authorities

Requires senior acceleration to trigger

Intercreditor amendment required to deal with tax issues

Timing issues given waiver timetable and new money commitments

Only implementation route that could be implemented unilaterally but impractical due to drafting

Specific intercreditor amendment provisions helpful

Requires company consent Useful leverage points Absent buy-out the senior pre-payment requires company consent

Also requires a scheme or contractual amendment to deal with tax issues

Transaction documentation contained an ability to release or “flip-up” debt, security and guarantees on enforcement but did not allow for transfer or warehousing of old debt. This resulted in significant tax challenges for both competing proposals.




Rodenstock Case Study




The Rodenstock Group

The Scheme Company: Rodenstock GmbH (“Rodenstock”) German limited liability company with its headquarters in Munich. German and foreign subsidiaries and a German parent but ultimately owned by a

private equity sponsor (the “Sponsor”).The Rodenstock business

Europe’s fourth largest manufacturer and distributor of frames and spectacle lenses.

Maintained around 40 sales offices across the globe and major production facilities in Europe and Thailand.

The financial situation Rodenstock GmbH (“Rodenstock”) was main operating company in the Group with

a turnover of approximately EUR 258.3 million. Rodenstock Group’s aggregate annual turnover was approximately EUR 361.5 million.

Outstanding senior debt of approximately EUR 305,335,000 secured by a market standard collateral package.

The syndicate primarily consisted of major banks. Only very few CLOs and hedge funds were present in the lending group.




Restructuring Process

Deterioration of the business During the 2008-2009 global financial crisis Rodenstock suffered a deterioration in

its business. The deterioration led to a breach of certain financial covenants under the existing

senior facilities agreement.

Restructuring attempt In mid-2009 the senior lenders formed a senior coordinating committee but lender

group was fractioned and did not appear to act as a homogenous group with aligned interests.

Not able to agree on a straightforward transaction with another private equity sponsor initiated by Sponsor.

Scheme in light of imminent threat of insolvency Rodenstock and the senior coordinating committee took charge of the process in

light of the imminent threat of insolvency proceedings. Ultimately, the parties chose to pursue a restructuring by way of an English

Scheme of Arrangement to preserve the going concern value of the Group.




Restructuring Agreement and Scheme

Restructuring Agreement Rodenstock, members of the senior coordinating committee and

certain other seniors entered into a Restructuring Agreement providing the framework for the proposed restructuring.

The framework contemplated implementation by means of a Scheme in case the restructuring could not be implemented consensually or by way of any other method.

The only other alternative option available seemed to involve a share pledge enforcement.




Scheme Jurisdiction

Re Rodenstock [2011] EWHC 1104 (Ch)

Jurisdiction: “liable to be wound up under the Insolvency Act 1986” Section 895 (2) (b) of the Companies Act 2006 is designed simply to identify the types

of companies which may be subject to the Scheme jurisdiction . Insolvency Act 1986 confers jurisdiction to wind up both insolvent and solvent

unregistered companies with no express jurisdictional restriction to the company's place of incorporation, centre of main interest or establishment.

Nothing in either Judgments Regulation or the Insolvency Regulation (both came into force far later than the provisions on the court's jurisdiction to sanction Schemes) was intended to, and in fact does, restrict the scope of the “liable to be wound up” touchstone of jurisdiction, i.e. a company being eligible for the application of a Scheme of Arrangement.

However, Briggs J. left open whether and to what extent the Scheme Creditors must satisfy jurisdiction pursuant to Chapter II of the Judgments Regulation.

Unnecessary to resolve this issue because more than 50 percent (by value) of the Scheme Creditors, i.e. Rodenstock’s senior lenders, were domiciled in England.




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leo plank – partner – kirkland & ellis international llp

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