Concurrent Session 2 - FEI Canada Conference St...Concurrent Session 2 Stream B: Availability of SME...

Concurrent Session 2Stream B:

Availability of SME financingTim Zahavich, CFO, St. Joseph’s Communications & Chair, FEI Canada’s Private Company Committee (Moderator)Christine Wheaton, Manager, Commercial Banking, CIBCBrian Allard, Senior Vice President, Transaction Advisory Services, Ernst & YoungTyrone Cotie, Treasurer, Clearwater Seafood Incorporated & Chair, FEI Canada’s Treasury & Capital Markets

Considerations for Credit

Establishing a Risk Profile

Christine WheatonManager, Commercial Banking

Presented by:

FEI Canada 2012 – June 7th, 2012

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Agenda

Financing Options

Key Considerations from an FI Perspective

Risk Rating

Probability of Default

Loss Given Default

Covenants

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Financing Options

Commercial Bank FinancingConventional financing of working capital, revolvers and term lending for equipment, real estate, etc.

Asset-Based LendingCustomized loan placements secured by accounts receivable, inventories and fixed assetsThese asset-focused structures provide greater flexibility than typical credit models for collateral rich companies and/or turnaround or higher leverage businesses

Leverage based financingTypically large and often driven by one-time events in the corporate lifecycle (i.e., a leveraged buy-out or succession opportunity)Solutions range from highly structured senior debt to bridge financing solutions to mezzanine debt and/or quasi-equity placements

Mid–Market Investment BankingFocused on specific financial and advisory needs of mid-market companies valued between $10 - $100 million Assistance to sell their business, grow through acquisition, or raise equity capital and secure debt financing

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Financing Options

The landscape of Canadian financial services has matured with a proliferation of financial instruments aimed at more appropriately pricing financial risk along the Balance Sheet.

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Key Considerations from FI perspective

Reputational and Legal RiskCredit requests must be initially cleared to avoid money laundering activity, prohibited transactions, conflicts of interest, or unacceptable levels of unmitigated riskNon-negotiable show stoppers

Probability of DefaultAn assessment of the likelihood that the borrower will be unable to repay the financing during the normal course of business, in accordance with the terms of the agreementAssessment of the business, the industry, the transaction structure and the risks and mitigating factors associated with the ability to repay

Loss Given DefaultThe assessment of the collateral provided as security to the transaction, and the coverage its liquidation would provide should the security be perfectedCollateral is typically valued by the bank at a discount to appraised or book value, depending on the asset, based on historical experiences on realization value

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Risk Ratings

Probability of Default and Loss Given Default drive the assignment of a Risk Rating that quantifies the risk associated with individual credit relationships.

Provide common understanding of risk levelsProvide the basis for economic risk and capital charges and are major inputs into regulatory capital Play a role in establishing provisions for lossesForm the basis for appropriate pricing to risk

Where available, internally derived ratings are compared to external benchmarksDebt rating agenciesA KMV probability of default calculation based on the market value of a company’s share price, in comparison to book value and, the volatility of the share values

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Probability of Default Considerations: Industry & Business Assessment

Industry Assessment Consider key success factors and risks inherent to industrySignificant technological, regulatory or structural changes

Competitive AssessmentCompetitors, relative market positions and trends with respect to market share - how will the overall competitive environment affect financial performance?Business strategy - Does the company’s strategy mitigate the industry risks it faces?Key product lines, businesses and overall strategy - How appropriate and achievable are these objectives?Key financial strategies - Are they supported by the business objectives?

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Probability of Default Considerations: Industry & Business Assessment

OwnershipComplexity of structure, level of inter-company transactions, effects of structure on transparency

Strength of ManagementCompany and industry experience; competence; track record; depth, balance and compatibility; appropriateness for size and nature of the business; stability; compensation and incentives; succession planning; attitude toward risk - Will management be able to develop and execute the business and financial strategies?

GovernanceStrength and appropriateness of governance practices considering the size/scope of the company’s operations – the importance of governance and oversight only grow with the size of the firm

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Probability of Default Considerations: Financial Assessment

Historical Financial PerformanceThree years of financials demonstrating past performance relative to projectionsCash flow and balance sheet leverageRatio analysis

Projected Financial PerformanceDetailed projections to assist with the analysis of the transaction/renewal credit facilities, to ensure that the assumptions made are realistic, the impact on the client is reasonable, and the scheduled repayment is likely to occur.

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Loss Given Default Considerations

Sources of RepaymentKey variables affecting ability to repay credit facilities as scheduled

Primary Source: Sufficiency of historical and projected future cash flows to meet debt servicing and operational needsSecondary sources: Sale of all or part of the business as a going concern, refinancing, realization on collateral, support from a guarantor/sponsor, ability to access capital markets

Key considerationsDebt levels under stress scenarioCollateral supportLevel of bank’s control or ability to obtain control over pledged collateral and other assets when required, and time/expense to convert items to cashUnderwriting criteria of lenders projected to provide refinancingHistory of refinancing or obtaining additional equity under stressed circumstancesHistory and expected capacity/willingness of providers of support to pay if called upon

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Loss Given Default Considerations: Collateral Borrowing Base

When collateral is requiredDepends on strength of the borrower and the structure of the credit transaction, however secured lending is the norm for Commercial clients

TypesOperating/Business Assets: Accounts receivable, inventory, fixed assets Financial Assets: Cash and equivalents, shares, marketable securitiesReal Estate“All Assets”

ValuationCollateral must be valued conservatively, considering many factors in case of liquidation:

Obsolescence CollectabilityCorrelation of value to occurrence of defaultEnvironmental riskCurrency risk

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Collateral Valuation

Collateral valuation may differ from the perceived “real-time” price or value of the asset. It must account for the marketability at the time of liquidation.

Accounts receivable - Age and quality, contractual or performance obligations, acting as agents, priority claims, government receivables

Inventory - Marketability and value stability (perishability, obsolescence)

Fixed Assets - Require initial appraisal for condition and marketability and Independently confirmed value

Financial assets - Apply a borrowing base with a loan value to be established against each financial asset type, based on standard margins

Personal Guarantees - Demonstrate the individual’s confidence in the business− Independent Legal Advice may be required in some cases

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Covenants

Written stipulations which set out the terms and agreements that allow the bank to monitor performance. Non-compliance will lead to reassessment of financial performance and risk rating and may trigger an event of default.

Examples of financial covenantsTotal Liabilities to Tangible Net Worth ratio must not exceed a specified ratioInterest Coverage ratio must exceed a specified ratioSenior Debt to EBITDA ratio must not exceed a specified ratioDebt service ratio must exceed a specified ratioWorking Capital must exceed a specified amount

Examples of negative covenants to constrain activitiesThe client will not make capital expenditures exceeding a stated amount during any fiscal yearThe client will not create, incur, assume or permit to exist any debt, except for the amounts owed under the terms of the relevant credit agreement

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Summary

As prudent lenders, Banks assess risk by focusing in on:The likelihood of repayment; and,The probable loss should repayment not occur

To do this, we rely on:Financial analysis based on historical financial information and financial projectionsAssessment of managementIndustry and competitive analysisOutside appraisals and market valuationsExternal benchmarks for valueQuality of reporting, financial statements and MIS

While the process we undertake is involved, it is our best insight into the operation of your business and ability to take on credit, and key to managing our business as well.

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“Companies are taking the view that they need to negotiate the financing when it’savailable, not necessarily when they need it. There’s an old investment bankingadage, ‘If the duck is quacking, you feed it.’ In other words, if you can get thefinancing done, get it done…”


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FEI Canada’s 2012 Annual ConferenceSt. John’s, Newfoundland and Labrador

June 7, 2012

42

Yesterday - June 6th news release

CLEARWATER COMPLETES SUBSTANTIAL IMPROVEMENTS TO CAPITAL STRUCTURE

HALIFAX, June 6, 2012 /CNW/ - (TSX: CLR, CLR.DB.B, CLR.DB.A):

•Closes approximately $264 million in new debt facilities

•Redeems $43.4 million aggregate principal amount of 10.5% convertible unsecured debentures

•New capital structure sets stage to execute growth plan

•Reduces overall cost of capital and annual interest costs

•Significantly strengthens liquidity

Today, Clearwater Seafoods Incorporated ("Clearwater")reported that, it has successfully completed substantialimprovements to its’ capital structure.

These improvements include the following changes to its debtstructure…………………………………………

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Company Overview

North America’s largest vertically integrated harvester, processor, and distributor of premium shellfish

o ~72 million pounds sold in 2011

o Key species include: lobster, scallops, clams, coldwater shrimp and crab

o Recognized for quality, eco-harvesting practices and reliable delivery

Largest holder of shellfish quotas in Canada

o Operations in offshore Canada and Argentina

At-sea processing

o Company-owned state-of-the-art factory vessels

o Advanced onshore processing, storage and distribution capabilities

Global sales, marketing and distribution platform

o Diverse customer base with local sales forces

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Favorable Industry Dynamics Create Pricing Power

Global demand for seafood is outstripping supply, creating favorable market dynamics

Demand has been driven by:

o Growing worldwide population

o Shifting consumer tastes

o Rising incomes and purchasing power of middle class consumers in emerging economies

The supply of seafood is limited and is expected to lag the growing demand in the industry

The amount of wild fish caught has remained relatively stable due to increased regulation

Supply-demand imbalance creates pricing power

o Purchasers of seafood pay a premium to suppliers that can provide consistent quality, wide diversity

and reliable delivery of seafood

Clearwater is well positioned to take advantage of this opportunity because of its licenses, premium

quality, wide diversity and year-round delivery capability

4545

Credit summary

Diverse Customer Base and Product Offering

Attractive Industry Profile

Largest and Most Diversified Holder of Shellfish Licenses

Significant Barriers to Entry

Highly Experienced Management Team

Significant Underlying Collateral Value

Recent Events

2011 sales growth of 5.5% from $315.5 million to $332.8 million

Consistently grew adjusted EBITDA in a sustainable manner over the past threeyears from less than $35.0 million in 2008 to $53.7 million in 2011

Consistent sales and EBITDA growth

Management has increased its focus on generating free cash flow through strongcash earnings, working capital management, selling non-core assets andcarefully planning and managing the Company’s capital expenditure program

Focus on free cash flow

Clearwater has reduced its net debt leverage as a multiple of EBITDA to less than 4.0x and has set and communicated future net leverage targets. The Company expects net leverage to be below 3.0x by 2014

Lowered leverage

Management completed the conversion of the public entity from a trust to a corporation in 4Q 2011

Improved corporate structure

Clearwater settled ongoing disputes with Glitnir for $14.5 million, removinguncertainty by bringing closure to potentially lengthy legal proceedings andresulting in a gain of $12.4 million

Settled legal disputes

Further improvements to management, sales and marketing capabilitiesStrengthened management team

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Benefits of the New Financing

Further improves short-term liquidity position and better enables the Company to achieve its targets

o Removes near-term maturities by refinancing the 2013 convertible debentures

Reduces the overall cost of capital by replacing second lien debt with more cost effective first lien debt

Provides flexibility to reduce debt, decrease leverage and address 2014 convertible debentures at or prior to maturity

Better enables the Company to execute its 5-year plan

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Key Financial GoalsClearwater has publicly committed to the key financial targets outlined below:

1 2010 based on 100% consolidation of an entity previously reported proportionately consolidated.2 Target to be accomplished over several years. Return on assets is calculated as (EBIT / Total Assets).3 Target to be accomplished over several years. Net leverage is calculated as (Total Debt - Cash) / EBITDA.

2010 Actual 2011 Actual Target Comment

Sales Growth 2.5% 5.5% 5.0% Strong annual sales increase as a result of improved prices for all major species

EBITDA Margin1 16.1% 18.1% 15.0%

Clearwater increased EBITDA margin in each of the last 2 years. This positive momentum is expected to continue. The Company's 15% target is the minimum target to remain in the top quarter of its peer group

Return on Assets2 9.7% 10.3% 12.0%Return on assets has improved from 9.7% in FY 2010 to 10.3% in FY 2011. The target of 12.0% is expected to be accomplished over the next several years

Net Leverage3 4.4x 3.9x 3.0xNet leverage improved from 4.43x in FY 2010 to 3.85x in FY 2011. The Company targets net leverage of 3.0x by FY 2014

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Financial PoliciesOver the past year, Clearwater has formalized a number of treasury policies to further support its liquidity and credit metrics including:

o Net leverage - target 3.0x by end of FY 2014

o Liquidity targets - the Company aims to maintain strong liquidity in the form of cash balances plus unused ABL availability:

� 5 weeks or approximately $25 million plus MTM on FX contracts covered ($10 - $15 million) taking into account value at risk with hedging instruments

� Liquidity needs factor in the seasonal peak-to-trough net working capital swings, which customarily range from $10 - $15 million

� Developed through the review of weekly 6-week forecasts over the past 3 years and external benchmarking

o Covenant cushions - maintain 20% - 25% cushions at all times

o Foreign exchange management - up to 75% of net exposure for up to 18 months with a focus on next 12 months (as per written and board approved hedging policy)

o Capital expenditure management - adopted best practice capital expenditure project management. Fleet is moving to reliability centered maintenance model. Manage with focus on maintaining strong free cash flow and fixed charge ratio

o Free cash flow – target a level that first supports delevering and then allows payment of a sustainable dividend

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Enterprise Risk Management

Diversified sales internationally which reduces the impact of any country-specific economic riskson its business

Limited the amount of long-term sales contracts

Executed on pricing strategies so as to offset the impact of exchange rates

Maintained foreign exchange hedging program and used conservative exchange rate estimates inbusiness plans

Foreign Exchange

Maintain a policy of repatriating Clearwater’s share of the earnings from Argentina throughdividends which are declared as needed

Continue to have 20% equity partner in Argentina to assist in managing the business

Do not carry financial assets in pesos

Political

Strict adherence to government policies and regulations related to fishing in Canada andArgentina

Invest in science and technology, which enables Clearwater to better understand the species thatit harvests

Diversification across species

Resource Supply

Maintain treasury policies and goals to promote strong liquidity and continued access to capital tofund growth

Policies include leverage, liquidity, covenant cushions, foreign exchange, capital expendituremanagement and free cash flow

Capital Availability and Liquidity

Clearwater has increased its focus on key enterprise risksRisk Mitigant

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Financing – some good practicesTake the money - unless you are investment grade, credit availability comes and goes,.

Have a strategy - without a strategy the focus is invariably on getting the lowest interest rate, theresulting debt agreements may not tie to needs or meet requirements for flexibility. Have plan B/ planC.

Obtain alignment - Ensure CEO, CFO, Board and major shareholders are aligned to strategy upfront.

Understand “market norms” for your industry – ex. leverage, know who lends to your industry, role of rating agencies (if any). Use that info to help target those lenders who play in your area,don’t waste time targeting those that don’t.

Get up to speed on “market” – talk to a variety of potential lenders and ask them to providemarket updates, check newsletters, Bloomberg screen, internet sites, etc.

Develop and nurture relationships – seed and develop over time before funds are needed.Understand EDC, BDC rules and where they play. Consider the role of industry lenders, domesticand foreign lenders as well and the number of lenders you want to have.

Tell your storey the way you want it to be told - Make sure potential lenders, rating agencies,etc understand your industry including your company, peer group, strategy for next 12 months, 3-5years (typical term of short-term loans), governance (treasury policies) and management team.

Communicate what the funds are needed for - tie into your policies, 1, 3 and 5 year plans (useof funds for capex, etc)

Working capital financings/asset backed loans are easy to obtain, require more work toservice – examples, inventories for countries such as China.

Negotiate flexibility in debt agreements – low amortization combined with cash sweeps,accordions, baskets and buckets, pre-approved transactions, pro-forma clauses.

Consider the need for an advisor – advisors can provide HR as well as additional knowledge.

Concurrent Session 2 - FEI Canada Conference St...Concurrent Session 2 Stream B: Availability of SME...

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