Role of Private Equity In Successful Debt-to-Equity Conversion [Ted Cominos]. Ted Cominos is an attorney specializing in corporate law. He earned his law degree from the Monterey College of Law.

1. Role of Private Equity
In Successful Debt-to-Equity Conversion
Ted Cominos

2. Considering a conversion of debt-to-equity, BUT…
►What to do with it?
►Reputational concerns!
►Management concerns!
►What’s the recovery plan?
►How to fund new capital needs?
►Clear path to exit/upside?

3. Role that private equity can play…
►Core business
►Reputationally strong
►Strong management
►Business and recovery planning
►New capital contributions/management
►Maximize value & exit prospects
Turnaround
Management
Growth
Capital
Value
and Exit
Enhancement
Business
Planning and
Development
Operational
Streamlining

4. Role that IFI’s can play…
►Private capital for SEE funds is very tight
►Take LP stakes in new breed of SPF’s
►Promote corporate recovery
►Promote elimination of NPLs
Development banks committed
to economic recovery

5. Establish special purpose funds…
Banks
Limited Partners
IFI’s
Limited Partners
€150m In-Kind Contributions
of Converted Equity Stakes
€150m of Cash
Commitments
Romanian Corporate Recovery Fund No.1
Special Purpose Private Equity Fund
Limited Partnership
See Private Equity Management Team
General Partner
Portfolio Company
No.1
Portfolio Company
No.2
Portfolio Company
No.3
Portfolio Company
No.4
Portfolio Company
No.6
Portfolio Company
No.5
Portfolio Company
No.7

6. A few of the benefits…
►Upside prospects…offset certain losses
►Additional exit prospects via LP secondary market
►Recovery of certain potentially viable corporates/customers
►Macro-employment prospects enhanced
►Replacement of certain NPLs with PLs

7. Accounting treatment under IFRS…
► Accounting treatment for the bank under IFRS of a debt for equity swap between a
corporate and the bank where equity instruments issued by the corporate to the
bank are immediately contributed to a PE fund in exchange of shares of the PE fund;
► The extinguished debt of the corporate is derecognised by the bank at book value;
► The equity instruments (shares) received from the PE fund in exchange of equity
instruments issued by the corporate as compensation paid for the extinguishment of
existing financial debt should be accounted at fair value;
► The difference between the book value of the extinguished debt and the fair value of
the equity instruments received from the PE fund should be recognised through
profit and loss;
► Past provisions eventually made against the extinguished debt are reversed through
profit and loss;
► The PE equity instruments should be classified as available for sale investment with
subsequent revaluation gains or losses accounted through equity;

8. Accounting treatment under IFRS (cont’d)…
► Accounting treatment for the corporate under IFRS (IFRIC 19) of a debt for equity
swap
► Equity instruments issued to a creditor to extinguish a financial liability are
“consideration paid” in accordance with paragraph 41 of IAS 39. As a result, the
financial liability is derecognised and the equity instruments issued are treated as
consideration paid to extinguish that financial liability;
► IFRIC 19 states that equity Instruments issued in a debt for equity swap should be
measured at the fair value of the equity instruments issued, if this can be determined
reliably. If the fair value of the equity instruments issued is not reliably determinable,
the equity instruments should be measured by reference to the fair value of the
financial liability extinguished as of the date of extinguishment;
► Any difference between the carrying amount of the financial liability that is
extinguished and the fair value of the equity instruments issued is recognised
immediately in profit or loss. The resulting gain or loss is disclosed separately on the
statement of comprehensive income, or the separate income statement (if
presented), or in the notes.

9. Working example…
Corporate A Bank A
Total equity EUR 10 million Loan book value (NPL) EUR 20 million
Total financial debt EUR 20 million Loan provision EUR 5 million
Corporate fair value EUR 5 million Loan net book value EUR 15 million
Financial impact of debt for equity swap of EUR 8 million
Corporate A Bank A
Total equity EUR 18 million Loan book value (Performing) EUR 12 million
Total financial debt EUR 12 million Provision EUR 0
Extinguished debt fair value EUR 9 million Equity investment EUR 9 million
Corporate fair value EUR 14 million Pre tax profit and loss
transaction impact (IFRS):
Debt extinguishment
Equity investment
Provision reversal
Net profit/(loss)
EUR (8) million
EUR 9 million
EUR 5 million
EUR 6 million