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Financial Accounting Advisory Services Transaction accounting support for refinancing by bond offering

April 2014

Transaction accounting support for refinancing by bond offering

Agenda

Reasons for a bond offering 3 Current market environment for bond offerings 6 Regulatory and market requirements 9 Best practices to prepare for a bond offering 11 How EY can support you 12 Why EY 13 About EY 14 Contacts 16


Refinancing by bond offering


Reasons for a bond offering

► International bond markets are currently offering favorable rates for mid- and long-term funding: ► Funding for growth opportunities ► Funding for refinancing more expensive bank debt

► Bonds typically offer greater flexibility in the finance amount and its term.

► Prepayment options at a certain rate of your nominal bond amount allow you to be more responsive to changes in the market conditions or in your funding needs.

► A limited offering of securities for the bond placement allows your company additional funding flexibility than with other financing forms.


Reasons for a bond offering

► Financial covenants for bond placements are very often limited and less restrictive than, for example, bank debt.

► By presenting your entity to a broader public, a bond placement in a public market can have a positive impact on your business’ reputation.

► However, due to the costs involved in a bond placement, consideration should be given to the funding amount. ► Typical transaction costs triggered by a bond placement are fees for

investment banks, lawyers, credit agencies, auditors and internal costs during the bond placement process.


Current market environment for bond offerings

► Interest conditions in international bond markets are at a historical low.

► Bond markets also offer midsize companies the chance to refinance existing debt or to increase funding for growth opportunities.

► IFRS financial statements facilitate bond placements in different international markets using the same accounting standards.


Regulatory and market requirements for a bond offering

► A detailed prospectus, including audited historical IFRS (or, in rare cases, national GAAP) consolidated financial statements for at least two periods (three years are required for a 144A private bond placement in the US market for US investors).

► Interim IFRS (or, in rare cases, national GAAP) consolidated financial statements for an interim period in the current business year (including comparative financial information for the corresponding period in the prior year), if the prospectus is dated more than nine months after the reporting date of the last audited consolidated financial statements included in the prospectus.

► A comfort letter from a certified public accountant (CPA) issued on the basis of agreed-upon procedures used to provide the financial information in the bond prospectus.

► A description of the business and a risk assessment in the prospectus.


Regulatory and market requirements for a bond offering Detailed content of bond prospectus

Content Bond prospectus

Description of business and business development

Historical results

Historical cash flows

Pro forma results

Historical net assets

Forecasted results, net assets and cash flows

Management and employee information

IT systems

Accounting policies

Annual and interim financial statements and MD&A discussion

Tax issues

Legal and risk

Integrated business plan

Mandatory or typical content Voluntary or less typical content

Data room Bond offering Management presentation


Best practices to prepare for a bond offering Typical process

Preparation phase Implementation phase Offering phase Listing period

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1.Discuss the bond offering strategy and story

2. Identify the internal resources and the external advisors for the bond offering

3.Analysis and comparison of the status quo of financial information and the financial statements and governance requirements in the capital market

4.Create the capital market infrastructure (financial reporting, investor relations, compliance)

5. Decision on bond type, market for the bond offering and selection of the offering team (investment banks, lawyer or certified accountant) by a beauty contest

6. Start due diligence and drafting of the prospectus

7. Finalize presentation materials for credit agencies, analysts and investors

8. Fine-tuning of bond story and pricing expectations based on feedback from investors

9. Prospect finalization, acceptance by regulator and bond admission by the exchange commission

10.Press conference and start of road show with investors

11.Signing process with or without underwriter

12.First auction at the exchange commission

13.Active investor relations

14.Expectation management with investors using efficient communication and communication tools

15.Use of the bond funds in accordance with the communicated forecasts

16.Transparent reporting (IFRS, ad hoc etc.)


How EY can support your bond offering?

► Advise you on the capital market readiness of your company, the best markets for your bond offering and the bond story (this can be accomplished in a detailed one- or two-day workshop)

► Assist in an IFRS conversion and provide hands-on support in the preparation of historical annual IFRS consolidated financial statements and of the interim IFRS consolidated financial statements, as required

► Assist in implementing first-time IFRS requirements due to the public offering (e.g., segment reporting)

► Advise on the accounting consequences of the bond offering, e.g., impacts from the replacement of old funding, accounting for transaction costs, and assist with hedge accounting and the calculation of the effective interest expense in accordance with IAS 39

► Help you to improve your financial closing processes to deal with the reporting timelines of the respective public market


How EY can support your bond offering?

► Help you to implement risk management processes to meet governance requirements

► Prepare the bond prospectus, with all required legal and financial information

► Advise, with EY’s transaction tax team, on tax structuring for the bond offering in your group, e.g., on debt push down, thin capitalization rules and restrictions in the tax deductibility of interest expenses

► Assist with the provision of information to rating agencies and advise on communications to them

► Support management in the preparation of meetings with investment banks and investors

► Provide project management services


What you can expect from EY?

IFRS conversion and accounting

► EY’s team has vast IFRS conversion and accounting experience in an international and capital markets environment. So, we can help you run an effective process to produce reliable IFRS financial statements.

► EY can provide IFRS advice to optimize your financial statements for a bond offering.

Comfort letter

► EY has experience with comfort letters on bond placements in all markets — including 144A filings.

► EY has a deep relationship with investment banks and lawyers in the capital markets environment. This means that we can help you ensure a smooth bond offering process.

Preparation of prospectus

► EY can assist you with the inclusion of all regulatory requirements. ► EY can provide effective advice or assistance in preparation of the prospectus, thanks to our

deep knowledge of capital market expectations and the requirements of investment banks and investors.

Support for your team

► EY can help assurance that the presented IFRS consolidated financial statements for the bond offering are of the highest quality, limiting the risk of regulator queries.

► EY’s highly experienced team can limit the risk of delays in the bond offering. ► With EY’s support, management can have greater confidence of a successful process and

outcome.


Why choose EY for your bond offering?

Experience and technical knowledge

► Our dedicated bond offering teams have extensive knowledge in IFRS, in capital markets transactions, in the preparation of bond prospectuses and in performing agreed-upon procedures for comfort letters.

Multidisciplinary advisory teams

► If your bond placement requires additional tax structuring expertise, we cooperate closely with our Transaction Tax colleagues. Our teams will work effectively with your finance function to take timely advantage of bond offering opportunities.

Tools and services

► We can draw on the EY tools and services that we have developed from other bond offerings and IFRS advisory projects, to increase efficiency and provide a faster service at a lower cost — without compromising our standards at any time.

In summary ► EY provides dedicated teams, with extensive knowledge of bond offerings, that can quickly

respond to your needs. ► If engaged in an advisory capacity, we will share all our experience and knowledge with your

management team, making the bond offering process less stressful.


About EY


Your regional EY network

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EY Global

Countries worldwide 150

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Financial Accounting Advisory Services contacts – EMEIA

Ralf Geisler Transaction accounting [email protected] + 49 6196 996 27304

Günter Doleczik Transaction accounting [email protected] + 49 711 9881 15691

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