CREDIT RISK MANAGEMENT FOR BANKING AND

BUSINESS

FINDING LIQUIDITY

ATHENS

9 NOVEMBER 2012

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“At some point in time, nearly every

business requires some other form of

external financing – as an alternative

to full reliance on bank funding!”

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Why the liquidity problem ?

• Global trade continues to grow, but the capital needed to finance this growth does not seem to grow with it.

• The current economic environment & new banking regulations (Basel III) have changed the appetite of banks to fund SME trade finance. Also high bad debt & impairment provisions.

• Huge funding gap exists in all major economies – for trade finance.

• SMEs key critical to the success for economic growth – starved of the right type of funding / working capital.

• Highly lucrative niche market exists - well run companies in urgent need of alternative sources of funding to banks.

• Banks were previously undercapitalised; now going through a consolidation phase – even more cautious.

• Banks are closing their trade finance departments. More emphasis on lucrative ‘flamboyant’ banking i.e., Investment banking.

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The Greek Problem – Status Quo• Culture of exploitation and non-performance

Weak laws , regulations & unenforceability

Corruption & nepotism

Reactive versus proactive environment

Bloated public sector

No performance appraisal

• Unfriendly investor attraction – inhibiting bureaucracy.

• Exodus of young professionals & economically active people

• Exodus of large, medium and small enterprises to other ‘economically friendly‛ countries.

• 5 years of recession and progressing to the sixth one – Salary cuts, spending cuts, pension cuts, sharp tax increases etc.

• Social fabric of Greek society is being fragmented and stripped.

• No more funding from Europe and limited inward investment.

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A viable way forward – introducing the concept of ‚Finance Partners‛

SMEs are the backbone of every economy!• South Africa - an excellent case study.

The 1994 change of government resulted in the majority of public servants being retrenched. New, innovative and very successful business ventures were created, utilising retrenchment packages.

• A Public – Private Sector Partnership is absolutely necessary.

Government & EU backed funding ( e.g. National Strategic Reference Framework / ESPA) to provide funding guarantees or funding to vehicles to provide trade finance to SMEs.

• The formation of a Small Business Development Corporation (‘SBDC’) to provide support to SMEs , together in collaboration with the Finance Partners.

• The Finance Partners are independent finance providers who deal on an arm’s length basis with well run, owner managed businesses, with good upside potential.

• Involves other private and public sector entities e.g., Accounting firms, universities, credit agencies, credit insurers etc.

• A ‚Positive and Ethical Entrepreneurship‛ culture is promoted – led by the discipline and guidance of the Finance Partner .

• The right mix of funding is provided, generating cash, in the ‘real economy’.

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Advantages of Finance Partners• Providing much needed cash upfront and not after the sale event.• Being owner driven, the existing owner(s) does not want:

A dilution of shareholding To lose part of the capital growth if the business expands New investors possibly having different strategic goals & objectives

• Finance provided is over and above existing bank facilities.• No onerous collateral obligations.• By generating cash, entrepreneurs are financing growth internally and ‘organically’ or

through acquisitions.• Allow entrepreneurs to focus on their core business & competencies.• The ability to generate incremental profits that otherwise would not have been

earned without these facilities.

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Value Proposition for Entrepreneurs

• Unencumbered financial statements & simple IFRS disclosure.

• Incremental gross profit contributions exceed related cost of funding.

• Provides business growth opportunities in excess of normal banking facilities.

• Entrepreneurs are in a position to negotiate volume and price discounts with either suppliers or customers.

• Sustainability of the business improves due to incremental profit contribution and cash generation.

• Enhanced Return on Capital.

• Free cash flow available for business growth.

• Valuable working capital resources can be applied elsewhere.

• Cost of funding very beneficial. No hidden costs.

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Creating the environment for change

• A ‘Renaissance’ and ‘Business Culture Revolution’ – are needed to be the catalyst for success. A strong political will is absolutely crucial!

• Revise commercial, tax and other accompanying legislation – essential to create an environment conducive to trade Heavy fines & penalties for non-compliance Experienced & well-remunerated staff, regulators & inspectorates Alignment to international best-practice Changes to labour laws - to provide stability and enhance competitiveness Introduce ‘Special Income Tax Courts’ - solve tax issues immediately and prevent ‘haemorrhaging’

• Universities & colleges to offer part-time courses and promote commercial studies.

• Fraud hotlines established & whistle-blowing encouraged To to report dishonesty on a confidential basis To strictly maintain the security and integrity of identity

• Accountancy profession involvement Reliability of financial information Correct disclosure

• Tax authority approved accounting packages.

• Communicate success stories and good news.

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What are the benefits ?• The importance of SMEs to the economy

Job creation and employment Support for big business Export driven Increased competitiveness – especially internationally Retention of young professionals and others in the country ‘Bring them back’ – businesses & people Rebuilding a sustainable economy

• Social Fabric of Greek Society and Pension Fund capacity is rebuilt.

• Inculcating a new culture of : Trust Transparency Efficiency Respect Strong business governance Curtailed corruption Doing the ‘right thing’

• Preventing further damage to the ENVIRONMENT.

• Accounting profession & financial reporting Reliability must be built up Major reliance by all stakeholders- local & international

• Attracting Foreign Direct Investment & Structural funding.

• Honesty is rewarded & building up businesses with a good history.

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Core Statements• Rebuilding from a period of weakness & fragmentation to a period of strength & stability.

• Building a culture of trust & transparency

At all levels of society

Don’t repeat mistakes

• Change the culture of payment

Government – ‘ Draw a line in the sand’ : Write-off / Extend old debt & Honour new obligations

Big corporates to speed up payments to SMEs

Treatment of post-dated cheques

• Create an agency (SBDC) to stimulate a market for the private placing of funding for SMEs.

• Public / Private Sector Partnership is absolutely essential – for all role players and stakeholders.

• Absolutely essential that non-bank funding channels are made available.

• The FUNDING GAP is so large that banks are simply unable to fill completely.

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Conclusion• Some interesting Statistics

• ‘Plain-Vanilla’ Trade Finance market is worth $10tn per annum *• Trade Finance supports >80% of global trade• Trade Finance is a key lubricant of the global economy• Funding gap in Europe is estimated >€500bn

* Financial Times 8 April 2012

• Some important messages‚In a new world of ‘state capitalism’, government efficiency will become a key determinant to competitiveness. Alas, the time lag between government reforms and economic imperatives keeps on increasing‛.

- Professor Stéphane Garelli Director : IMD World Competitiveness Centre

‚It is becoming clearer that in a globally competitive environment, markets with strong regulation, solid infrastructure and thriving institutions will be better positioned to attract sustainable capital flows!‛

- Richard LoubserEx-CEO : JSE Limited (Johannesburg Stock Exchange)

• ‚The ETHOS, entrepreneurial spirit and ability is there. Just look at the success of the Greeks of the diaspora!‛

THANK YOU !

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Lavaux Capital SARoute de Lavaux 291800 Vevey 1Switzerland

www.lavauxcapital.com

Tel: +41 21 926 97 70Fax: +41 21 926 97 71

George Delyannis Mobile : +41 79 874 51 13g.delyannis@lavauxcapital.com

Lavaux Capital SA is a regulated entity, affiliated to ARIF which supervises compliance with the rules, laws and

regulations of the Swiss Financial Market Supervisory Authority (FINMA) with respect to anti-money laundering. Lavaux

Capital SA also act as Fund Manager for Lavaux Capital PCC Ltd, a fund regulated by the Guernsey Financial Services

Commission.