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By Ivan Uttley: Senior Rescue Practitioner

By Ivan Uttley: Senior Rescue Practitioner. This is a pre-packaged insolvency proposal for Company-x and is a document forming the basis of creditor approval discussions.

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By Ivan Uttley: Senior Rescue Practitioner

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  1. By Ivan Uttley: Senior Rescue Practitioner This is a pre-packaged insolvency proposal for Company-x and is a document forming the basis of creditor approval discussions This is a SUMMMARY document for presentation and discussion purposes, and should not be used without first understanding the mechanics of the economic engine spreadsheet which is merely summarized here.

  2. Document Structure & Contents - (1 of 2 pages) • Section 1: Legal Standing and motivations for embarking on a pre-pack. • Summary of Lines of Business and Industries Served • Relevant Historic Milestones & Events • Current legal & operational status of the business • Informal Workout vs Formal Business Rescue • Risks that form part of the planning considerations • Section 2: Summary review of our Pre-Pack Scope. • Our Pre-Pack work-streams • Our Communications to Stakeholders so far • Summary view and status of work-stream progress • Section 3: Delivery and Uplift Detail • Restoring the Economic Engine • Cost of Goods Sold • Operational Expenses • Inventory Holding Days • Receivable Days • Days Payable

  3. Document Structure & Contents – (2 of 2 pages) • Continued - Section 3: Delivery and Uplift Detail • Regaining focus on our Core Business • Value Chain Rationalization & Re-vitalisation • Divesting newly defined non-core assets & Balance Sheet Clean-up • Renegotiated and Consolidated Outsourcing arrangements and Strategic Relationships • Financial Restructuring & Debt Refinancing • Short-term < 3months, • Medium 3-9months • Longer term> 9months • Section 4: Governance and Reporting, Appendixes & Supporting documentation • Monthly Reporting to Creditors • Tracking of Benefits • Affected Parties & Stakeholder matrix • Communication Plan

  4. Section 1 – Description of the Debtor’s Business • We operate primarily within the domestic piping system industry (also referred to as liquid and gas transfer), but we are expanded into markets further afield (Europe, Australia). We are a key supplier to Heavy Industry (ie Mining), Agriculture and the Building industry. There are no dominant players, and the Cr3 and Cr10 stats point towards a healthy competitive market with no room for predatory pricing. There are also very competitive 2ndary markets that provide specialist services, (high pressure, toxic gas) and our attempted diversification into these markets was meant to be a risk diversification tactic. • We employ 1700 people • NUMSA is a key stakeholder representing 900 of our people • Our footprint covers all of the republic and Namibia • 25% of our revenue is derived from Europe and Asia • Our last audited Public Interest score was 1852 • Our current weak balance sheet, and insipid income statement are not reflected in our historical performance nor indicative of a potentially strong income statement and healthy cash flows. • We wish to provide you with compelling plans that will see us achieve this, with minimal risk to the bank, no impairments and considerably better outcomes for all stakeholders compared to a potential insolvency.

  5. Section 1 – Our History 1977 – xxxxx Pipe Systems founded – part of yyyyy SA group ( A sociétéanonyme ) 2007 – yyyy remains privately held and becomes a dominant global player controlling 22% of global market @ annual revenues of over Euro 3 Billion 2008 – Financial Crisis hits key competitor zzzzz, whose local SA business we acquired opportunistically, with support from our parent. 2009 – Internal family succession problems and the untimely death of the family patriarch cause internal friction throughout the business 2009 – sustained adverse economic pressures and leadership issues lead to the unexpected breakup of the group. 2010 – the local business is partly acquired by PE fund – dddd, with a 5 year exit strategy and a minority stake is acquired by existing management through an MBO 2015 – dddd exits, and we are listed on the Alt-x, in the midst of implementing our secondary markets strategy, which centered on the acquisition of a business. This transaction was partially funded by shareholders and debt ( Bank ttttt) 2016 - depleted reserves, a downturn in the economy, a fall in the Alt-x, and integration problems with the new acquisition have led to this temporary crisis.

  6. Section 1 – Debtor’s circumstances and possible outcomes • The outcomes the business faces are as follows: • Stay the course with our acquisition, remediate the issues we are facing and make the deal work. • Stay the course with our acquisition fail to remediate the issues we are facing and enter insolvency • Cut our loses, divest the acquisition immediately and return to core business. • Return to core business, but restructure our business and avoid disadvantage of a fire-sale • Our proposal and planning has led us to believe (and which we will now substantiate) that • Option 1 is very unlikely and will lead to Option 2 • Option 3 will result in unnecessary but very predictable & considerable loses to both creditors and debtor • Option 4 is the least risky and will impact far fewer stakeholders and allow us to emerge a stronger business • Implications of Option 4 • We will face severe working capital constraints and not be able to service our operations, change in working capital required to maintain operations through infrastructure replacement as well as our debt servicing obligations • The negotiation of terms with the bank, on an equivalent NPV basis

  7. Section 1 – Risks to delivery of our Goals • This is a working capital crisis of a business that is at core a viable one with great potential. Mistakes have been made especially with regard to our market strategy but also regarding the short-term investment and financing of the business. This pre-packaged rescue plan addresses these mistakes and is aimed at: • Ensuring all debt obligations are met in full • Restoring adequate cash flow to operations • Self-funding future growth

  8. Section 1 – Informal Workout vs. Formal Rescue • This is an important consideration, and reluctantly we are forced to follow the formal rescue process instead of the informal debt workout, this is as a result of: • Ensuring all debt obligations are met in full • Restoring adequate cash flow to operations • Self-funding future growth

  9. Document Structure & Contents • The document is structured in three sections with accompanying attachments • Section 1: Legal Standing and motivations for embarking on a pre-pack. • Section 2: Summary review of our Pre-Pack Planning Scope. • Our Pre-Pack Planning work-streams • Our Communications to Stakeholders so far • Summary view and status of work-stream progress • Section 3: Delivery and Uplift Detail • Cost of Goods Sold • Opex • Inventory Holding Days • Receivable Days • Days Payable • Assessing BRiL (Better Return than in Liquidation (S128(1)iii) • Quantifying the need for PCF (Post Commencement Finance (funding) • Section 4: Appendixes & Supporting documentation

  10. Section 2- A Synopsis of Pre-Pack Plan which is comprehensive in scope Pre-Packaged Rescue Plan – High Level work streams and Timing Validate IS line Accountabilities Plug revenue leakage. Stabilize the business. Implement Full Expense Austerity? Apply LEAN survival to Opex & overheads. VBM - Waste & Value Destroyer Removal. Cash Acceleration Process Efficiency Gains. Supplier Consolidation? Can we minimize PCF? Can we be self-funding? Clean-up balance sheet Non-core asset disposal Will we be able to Negotiate Financial Restructuring? Value Chain Rationalization. Will there be Opportunities for Debt Refinancing? Return to core competency. New Outsourcing Consolidation. Refine Operational Scaling. LBO. MBO, merger possibilities? Restructured Non-core asset disposal.

  11. Reassurance has been key and our Communication kept simple so far. Never done properly, often seniority equates to entitlement and budgets are considered at best targets at worst allowances. Expect range of 3-5% impact on bottom Line Implement transparent and unambiguous stakeholder management plan, retain supporters, nurture converts, win-over skeptics or remove vociferous obstructers . No direct bottom-line benefit but has massive impact on both stability & ongoing support. Always an issue. Any cost that is not directly related to production is targeted. Test is simple: if the customer has an invoice with EVERY cost itemized on it, what would they reasonable refuse to pay? Executive catering? Time-share at Kruger? Membership of golf-club? Conflict resolution training? Newspapers? Expect range of 3-8% impact on bottom line. First cull of non-performers, obstructers, and culturally misaligned. Propose (reversible) working hours reduction to fit capacity of production and sales. – share the pain! Implement people-plan. Expect impact on bottom line of >20% Focus on Current and Long term assets – Debate core-assets, Assess Lease vs. Own Non-Core Asset Disposal Factoring & Debtor Invoicing Loan Recall, query bonus provisions Review Intangible Goodwill – Replace with equity using Texas style auction with majority shareholders who object – Expect positive impact on Cash and then reduced liabilities, but can have a negative impact Remove emotional barriers, show respect, treat as partners, manage expectations, get plan approval Assess cost allocation methodology Generate Whale curves by: Product, Customer, Branch, Channel, Region, Sales Exec. Retain, Reposition, Re-price & Remove of Value Destroyers. For every ZAR 1 of delinquent revenue removed, costs MUST be removed too. Address CCC. Expect uplift of 20-40% on bottom line.

  12. We would like to be as transparent as possible as this detail demonstrates • The document provides detail which is listed in order of business priority here: • Continued Business Stabilization • Austerity Measures and LEAN application • Tactical self-funding initiatives • Strategic Review • Operational Restructuring • Company Restructuring • Financial Restructuring • Debt Refinancing Which takes an immediate timeline focus and demonstrates tangible bottom line impact and an implicit measure of intent and goodwill in meeting our obligations to the bank Which takes a medium term view on the key enablers of a business restructure and the serious with which we taking remedial action. Which address our desire to reach a non value destroying compromise with the bank, and future possible possibilities for the bank to unload this lending asset.

  13. Section 1 – Pre-pack Planning Sections

  14. Section 1 – Pre-pack Planning Sections

  15. Section 1 – Pre-pack Planning Outcomes and Proposals

  16. Document Structure & Contents • The document is structured in three sections with accompanying attachments • Section 1: Legal Standing and motivations for embarking on a pre-pack. • Section 2: Summary review of our Pre-Pack Planning Scope. • Our Pre-Pack Planning work-streams • Our Communications to Stakeholders so far • Summary view and status of work-stream progress • Section 3: Delivery and Uplift Detail • Current outlook • Cost of Goods Sold • Opex • Inventory Holding Days • Receivable Days • Days Payable • Assessing BRiL (Better Return than in Liquidation (S128(1)iii) • Quantifying the need for PCF (Post Commencement Finance (funding) • Section 4: Appendixes & Supporting documentation

  17. Quantitative Current Outlook – Audited Financials perspective Immediate insolvency would still incur risk and this is time line as well as WACC dependent.. Estimates, depending on 3-6 &12 month time horizons value the outcome at 63-76 cents on each Rand of outstanding debt.(capital + remaining interest, using discount rate of prime + 5, higher WACCS are obviously penalized.) The latest Audited Financials confirm the financial distress, and the YTD actual vs. Forecast is misaligned. On the current trend the business will become financially distressed . Some concerns are obvious (OpEx as % of Rev,) and the PBIT of just under 1.5% and COGS on an historical trend has increased disproportionately with revenue.

  18. Quantitative Current Outlook – YTD perspective The YTD actuals bear testimony to the crisis which worsened at the beginning of the year but which is clerly showing improvement

  19. Current Economic Engine Outlook – using latest audited financials The current performance can barely self-fund growth to keep abreast of inflation (remember the costs are inflated before the income is generated! And if we consider the stated change in Working Capital that must be funded as well as servicing debt then we have a business that meets every definition of financial distress

  20. Current Economic Engine Outlook – YTD actuals The current performance can barely self-fund growth to keep abreast of inflation (remember the costs are inflated before the income is generated! And if we consider the stated change in Working Capital that must be funded as well as servicing debt then we have a business that meets every definition of financial distress

  21. Quantitative Prospect review – What is hidden The pre-pack rescue does two things which have a resulting non-linear impact. First we make sure that we address the income statement, and show how for every unit of revenue generated, we are reducing the Opex and COGS. When then make sure that every unit of spend can be cycled through the business with a higher frequency.

  22. Quantitative Planned Outcome – The what-if Economic Engine The potential theoretically, and indeed quite practically, as we do not consider any Revenue uplift as a benefit in this analysis, is quite clear, although previously disguised. We will now generate over 9 cents per ZAR of revenue, a 7 fold increase, and moreover each rand we have will be cycled more frequently through the business acting as a multiplier on this 7 fold increase.

  23. Document Structure & Contents • The document is structured in three sections with accompanying attachments • Section 1: Legal Standing and motivations for embarking on a pre-pack. • Section 2: - Quantitative review of Financials and Rescue prospects. • Assessing BRiL (Better Return than in Liquidation (S128(1)iii) • Quantifying the need for PCF (Post Commencement Finance (funding) • Section 3 – Delivery and Uplift Detail • Cost of Goods Sold • Opex • Inventory Holding Days • Receivable Days • Days Payable • Section 4 – Appendixes : Supporting documentation

  24. Company-X Value Chain If we walk through the Value Chain of Company X you will agree that certain domains can be considered “non-core”, i.e. they are better managed and will profit from economies of scale as well as core competency focus, within these domains are secondary considerations, such as Marketing, HR, Office Management etc, which will also be considered as part of the Value Chain rationalization and will inform the Company Restructuring discussions.

  25. Reasonable Prospects: Reporting Quantitative Part for each line of IS/BS Risk unmanaged Obstacles Overcome 100% Certainty 3 2 • Risks that materialise • Risk 1 • Risk 2 • etc • Obstacle or Assumption 1 • Obstacle or Assumption 2 • Obstacle or Assumption 3 • etc Conditional Target (But all risks are managed) 4 High Confidence Target Stretch Target ( requires some luck and full co-operation and no distractions) Outcome Likelihood/Expectation 1 Rescue plan a failure A range for the Reported Financial metric (OpEx or COGS Days Receivable, Inventory Holding Days etc) 0% Certainty Key Shaded area 1 – Shows unmanaged or unavoidable risk hampered delivery of the expected result. Shared area 2 – Very confident of meeting at least this target Shaded area 3 – Conditional Target, which requires certain conditions Shaded area 4 - Stretch Target – but not beyond the realms of the impossible – we will strive for this. R - Documented Risks/Issues that will prevent us reaching this benefit O - Documented Obstacles that we must overcome to get the Stretch The range of expected results for appropriate level of IS or BS

  26. Reasonable Prospects: Opex Uplift – Actual Reporting and Commitment Risk unmanaged Obstacles Overcome 100% Certainty 3 2 • No overtime needed • Taking Leave does not disrupt • Union co-operation • Time-keeping systems not working • Training Providers not to impose penalties • Booked airfares to be fully refunded Conditional Target (But all risks are managed) 4 High Confidence Target Stretch Target ( requires some luck and full co-operation and no distractions) Outcome Likelihood/Expectation 1 Rescue plan a failure Opex Reduction 0% Certainty The range of conditional results for expense removal Tracking/Reporting on Delivery Key Shaded area 1 – Shows managed risk dealt with is 15% reduction – bank on this. Shared area 2 – We should reduce expenses 18% – no reason to miss this target. Shaded area 3 – We could reduce expenses by 23%, but this requires A & B to happen Shaded area 4 – We are aiming for 31%, but this requires C, D & E to happen Unlikely At risk Bank it

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