AmCham Business Breakfast and conference, Tuesday, June 16, 2015, Hotel Slon, Ljubljana

Guests at this AmCham Business Breakfast, organized in cooperation with PwC, were:

Dr. Dušan Mramor, Minister of Finance of the Republic of Slovenia.

Dr. Imre Balogh, President of the Management Board Probanka, non executive director BAMC.

Martin Machoň, Chairman of APS Holding Board of Directors and CEO.

Hana Mitkovová, advisor in banking, former head of collection and valuation department at Komercni banka (SG Group).

Jonathan Wheatley, PwC, Director, European Portfolio Advisory Group – CEE.

Torbjörn Månsson, Executive Director, Bank Asset Management Company (BAMC).

Nevenka Črešnar Pergar, NP Consulting, moderated and confronted different views and opinions.

In his address, Finance minister dr. Dušan Mramor highlighted: “I would firstly like to give an important message, namely; Slovenia is no longer leveraged in the business sector. Some may find that hard to understand, but the data collected so far indicates that this is indeed the case. I believe this is a result of successful restructuring with the assistance of the Government of Slovenia, Bank of Slovenia, the newly established coordination committee and other contributing institutions. Our business sector is thus less burdened than the European average. I would highlight the incorrect measurement of indicators, as debt divided by equity shows old results, which is why we prefer to use other indicators. In terms of the other two indicators, Slovenia is well below the European average. However, we do not want to be average and therefore must determine which sector is lagging behind. I believe we must first face the problems of SMEs.”

Finance minister Mramor continued: »My second message regarding Slovenia is the timing of the restructuring. We started with the restructuring much too late and when the process actually started, too many things happened at once. When we came to power in October last year, we only continued the process started by the previous government. The first thing we had to deal with was budget revision. Our goal for 2015 was to achieve a deficit below 3% and the current data indicates that we will succeed.”

»It is also important that we managed to conclude a social agreement, which includes improving the business environment and tax legislation, which we are currently trying to implement. I believe our work so far has been very successful, as shown by the assessments of rating agencies. We hope that the deficit in the future will be below 2.4%. Therefore I believe that we are on track, however, this should not mislead us. Now is not the time to relax with the thought that everything has already been settled. The year 2016 will certainly be a very demanding one. The ways in which this year’s corporate earnings will be spent in the future, will be crucial. With 2016, we are entering into a new financial perspective, while 2015 was the final year of the previous financial perspective. Therefore our next year’s absorption of funds will be reduced by approximately 30%. Therefore it is important to make smart investments in order to maintain the current growth. The lenders will probably increase their activities as well. The next thing is Junker’s program. It will allow the private sector to enter into the investment program. The IMF is offering us support as well. We are furthermore aiming at increasing the efficiency of public spending. According to some data, the ratio between invested assets and investment revenue was 0.7 EUR in Slovenia, while the average EU ratio is 2.5 EUR,” added Mr. Mramor.

»Generally, I believe that we are on the right path and our expectations are high as well. We are striving towards long-term employability and I hope that we can expect increased household consumption. Because of the crisis and skepticism, households were more prone to saving and were spending less, so I think there is still a lot of potential here,” summarized Finance minister Mramor.

Finance minister Mramor also spoke about the risks: “As far as potential risks are concerned, Greece is in the first place here. The so-called spillover effect is noticeable, since investors to some extent still associate the events in Greece with other countries, including Slovenia. This topic will soon be discussed at the European level in Luxembourg. I also see some risk in how the U.S. will manage the quantitative easing termination, as the stock markets fell significantly at the forecast of a possible reduction. There is indeed a possibility of a bubble formation, if the quantitative easing is continued, which again leaves us with several open questions.”

Finance minister Mramor on the Government’s plans: “The government did adopt a new set of program reforms, with all of the actions primarily related to the GDP rise. A new legislative package on the tax reform process is entering the parliament as well. We are furthermore expecting improvements in the area of environmental licenses and construction permits as well as in the improvements of the judicial system, above all in the business sector.”

»We are currently one of the most fiscally exposed countries as far as pensions are concerned, so this area will require reforms. However, this also includes the education system as Slovenia has the longest-studying scholars in Europe, while at the same time, our workers retire among the youngest. We should extend the working period; I personally fulfilled the retirement conditions three years ago. My long-term goal is also reducing the structural deficit to 0.” Concluded Finance minister Mramor.

Jonathan Wheatley on restructuring bad loans: “Of greatest importance is a healthy investment demand. We hope to see a lot of it in the future. It is also important that investors, their wishes and interests, are understood. So the question is how to satisfy this healthy appetite. The bank must act as a salesman, clearly indicating what it wants to achieve by selling bad loans. Not all administrations and governing boards agree on the best strategy. As we have several different goals that the banks can follow, we always advise on further actions based on what they are aiming to achieve. The expected price is of course crucial too, to avoid possible negative surprises.”

Wheatley on significant differences in valuations between sellers and buyers: “I would not agree that there are always large differences. I have worked on several transaction and they were all successfully completed in the end. If the banks fully understand the value of the portfolio and work with an advisor, who gives them an estimated valuation, then the differences are usually not large.”

Hana Mitkovova on whether it is possible to distinguish between poor business decisions and misuse: “This is a difficult question to answer. It is about negligence and intentional misuse. My opinion is that even cases of negligence should be treated as signals of abuse. The banks will always try to use the “bad business decision” argument, but this is still a signal that something is wrong. In the banking environment, it is necessary to have large scale analyses in the field of lending operations and to closely monitor the situations.”

»Above all else, time is very important. The longer we wait, the smaller the chances are for success. What does the term immediate action even mean? This does not mean that the banks are waiting until the debtor is no longer able to pay the loan – this should be identified in advance, therefore good monitoring is needed. The problems must be identified before they materialize, which requires qualified personnel. Another problem is that the same people who are granting loans are also those involved in rescuing those companies.” Added Mitkovova, with regards to the key to successful restructuring.

Torbjorn Mansson on the biggest success in the management of the bad bank: “Everything we do is temporary until the very end. If we look at our path so far, in 2014 our foremost concern was establishing the bad bank, which we are in my opinion leading very well. We are indeed a highly professionalized organization. This was success by itself, but an insignificant one, unless we manage to achieve good results. We have established a bad-loans market, a good precedent, which will be followed by financial restructuring.”

Mansson on the obstacles and the need for additional capital: “We are trying to do everything as quickly as possible. In reality, we must follow the legal system and work on certain things for a longer period of time in order to get accustomed. This is a learning curve that can be achieved with sufficient repetitions, which is what we are doing now. Regarding the funds, the global market currently has a lot of capital. Our task is to channel those investments toward us.”

»I am a very positive person. The hotel sector is operating are below average. But there is great potential in this area. Our task is wider than merely attempting to acquire loans. Therefore we tried to speed up the process with shares. The court did not agree with us, however, we learned something from this.” Further added Mansson regarding the Sava Group.

AmCham Business Breakfast, organized in cooperation with PwC

Best practices in restructuring from Slovenia and abroad:

NLB, represented by Janko Medja, CEO, chairman of the Board NLB,

Laško Brewery, represented by Mirjam Hočevar, Member of the Management Board, Pivovarna Laško & Andrej Lasič, Executive Director of Large Corporate Division, NLB, Ljubljana, Slovenia,

Tatra – out-of-court restructuring, represented by Petr Smutny, Partner at PwC,

Bank restructuring, represented by Edward Macnamara, Partner at PwC UK,

A comparison of Slovenian and international legal aspects of restructuring, represented by Loren Richards, partner, Clifford Chance,

Local legal specifics of financial restructuring and payment of debt claims, represented by Aleš Rojs, Managing partner at Odvetniška družba Rojs, Peljhan, Prelesnik & Partners.

Janko Medja: »The shortest description of the situation in 2012 would be: extremely poor results. We have been recording a decline in the profitability of the bank since 2008. A relatively negative public image followed accordingly. Similarly, there have been losses in subsidiaries. In terms of capital, the bank was very inadequate, the numbers necessary for an improved capital adequacy differed, I myself made a mistake in the assessment. People in the bank were depressed as well. The most frequent comment was that nothing could be done. Administrative bureaucracy was more important than common sense. There was no trust in the previous administration and I was not fooling myself by thinking that there was any trust in the new administration either. We were on the European market, where good competitors were constantly stealing our customers. Public perception of the bank was pessimistic. The final part of the problem was the management board, which was entirely new at the time. Therefore our beginnings really didn’t look too good. However, we had a vision and believed that things could be changed. We had enough knowledge and strengths, above all a lot of very specialized knowledge in certain areas. I pointed out then that things will get bad before they get better and that there are still a few skeletons in the closet. We simultaneously attacked several of the bank’s problems at once.”

“We later started to reorganize the business. It was no longer enough to have a program and vision, it was necessary to also implement them on a daily basis. Consequently, the current capital adequacy was no longer a problem – we even increased the capital due to profits. We also increased our market share, which was a surprise even for me. NLB is currently considered one of the region’s leading banks. In two years, we dramatically reversed confidence levels, which are now on a par with the bank’s largest competitors. In general I can say that the results of the last two years have improved by a third. This was also the first year after 2008 in which NLB was profitable,” concluded Mr. Medja.

Mirjam Hočevar, Pivovarna Laško and Andrej Lasič, NLB

Operational and financial restructuring of the Pivovarna Laško Group

Mirjam Hočevar: “Both brands Laško and Union are good brands with exceptionally loyal customers. We have managed to maintain the market share and increase exports for over 5 years. However, ever since Laško started experiencing difficulties, the road has been tough. I am proud to have been a part of the restructuring story. The biggest problem was the loans policy, which accumulated to over 100 million EUR. As a consequence, it was extremely difficult to operate in 2013. The situation was made even worse by false media reporting on imminent bankruptcy of the Pivovarna Laško Group. Therefore we can truly be grateful to our suppliers for not giving up and for continuing to supply materials necessary for production.”

Andrej Lasič: “We wish to introduce what is in my opinion the most successful restructuring story in Slovenia. We decided to give a joint presentation, to show that we can only achieve successes if we work together. As Mirjam mentioned, the Group was heavily leveraged, which made it impossible to continue leading the company, especially given its liquidity problems. Beer brewing is a profitable business, so the question is what went wrong? The debt vs. equity factor was 4 in 2007, which is not low, but not critical either. However, the factor rose to 20 in 2009, mostly due to the managerial takeover and investment in secondary transactions, unrelated to the core business. Therefore Laško was left with no cash flow with which to finance its core business. Moreover, the relations between lenders and owners were complicated, as Hypo, for example, was at the same time the lender and the owner. The famous marketing campaign “Laško ima novo flaško (Laško has a new bottle)” was the last major investment in the primary activity and is an investment that is now over 10 years old.”

“The restructuring itself had to be done very quickly. The core of it all was our disinvestment strategy, while the lack of trust also played an important role. We had 17 different strategies ready and many meetings and conferences took place. The entire concept was coordinated in around 6 months, but it took an additional month to arrange the details with all stakeholders. The final three banks gave their approval on the final day, so you can imagine under how much stress we were then. The sale of Mercator was crucial, so were the payments received by selling the non-essential assets. All of them, with the exception of Delo, have been successfully finalized. The last restructuring stage is increasing the capital, which was finalized with Heineken’s signature. I believe we can say, with satisfaction, that Laško and Union are back in its core business of brewing.” Concluded Ms. Hočevar.

Petr Smutny, PwC

Restructuring of TATRA

Petr Smutny: “Tatra is a company mainly engaged in manufacturing heavy trucks. It is one of the oldest car producers in the world that has endured several financial restructurings and divestitures. In 2009, its business went so well that its only problem was the lack of capacity to fulfill all orders. Demand was so great it was difficult to meet. What followed is known to all; the crisis occurred, Tatra suddenly had all its assets related to inventory, in 400 trucks parked in the warehouse. During the crisis, the demand was low and nobody would buy the vehicles. Therefore the banks hired us. We started with short-term stabilization agreements with the banks, because we knew that we would, at a later date, be able to sell the trucks. The second step was financial and operational restructuring. We were able to significantly reduce costs. Based on that, Tatra managed to continue to operate on a relatively small scale. Another problem was that Tatra always produced all the components itself, which was extremely wasteful. The trucks were made in a garage, but the company wanted to compete with the prices of mass-produced vehicles. Therefore, it was a considerable task to persuade the board members not to produce everything themselves, but to instead focus on what they are good at. Consequently, they decided to join forces with a good partner, DAF.«

»Together with its new partner, Tatra developed a new truck, which was extremely well received among its clients. The company also needed fresh capital, which the main shareholder could not provide, as he was imprisoned in India. The shareholders were therefore entirely paralyzed and could not support the company, which again upset the banks. The banks consequently sold its debt claims to an investor, who invested another 10 million into the company. At the moment, Tatra only has one owner and has successfully repaid its past debts. It also has sufficient operating funds and is again in a situation of excessive demand for its vehicles.”

Edward Macnamara commented on the best practices: “I have worked in restructuring for the past 20 years and in banking for the last 7. The administration and the board members like to consider their companies to be their children. That is why they are unhappy to hear that the company does not look good. Particularly when you do not have a clear plan for a plastic surgery to fix the “ugliness”. Partnerships with banks for capital are important as well. My advice would be to always look for capital investors that have the same approach and ambitions as you. There are funds that are seeking short-term gains and are not entering the company with the same ambition as you. On the other hand, there is a lot of capital that the operators are willing to invest, given the right opportunity.”

You can find the photo gallery of the AmCham Business Breakfast and Conference HERE