potential eu breakout v.0.7

CFO RoundtableNavigating uncertainty inthe Eurozonethe Eurozone

Strictly Privateand Confidential

March 2013

Table of Contents

Section Overview Page

1 Introduction 1

2 What are other companies doing? 5

3 Regulatory pressure and challenges 13

IntroductionSection 1

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1CFO Roundtable • Navigating uncertainty in the Eurozone

Section 1 – Introduction

Where we will end up?

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Businesses are taking action to prepare for a potential Eurozone fall-out

Formerly profitable regions havebecome unviable

Minimising country exposurethrough cash management

“Carrefour pulls out of Greece”

FT, 15 June 2012

“Vodafone sweeps all spare cashout of Greece every evening”

Bloomberg, 9 February 2012

Limiting supply chain exposure Redesigning products to suit newcustomer needs

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“ArcelorMittal announced thepermanent closure of its blastfurnaces in France”

Economist, 6 October 2012

“Unilever looks to sell goods incheaper, smaller packagesin Europe”

Fox Business, 27 August 2012


No industry is safe as uncertainty continues

Siemens opened account with the European Central Bank seeks to protect €12B incash

Ford has configured its computer systems to be able to immediately handle a newGreek currency

Industrial/Auto

Greek currency

Credit Agricole transfers all Greek balances to Paris nightly, looking to sell itsGreek banks for €1

JPMorgan has created new accounts that are reserved for a new drachma orwhatever currency might succeed the euro in Greece and other countries.

Banking

Pepsico also sweeping cash out of southern Europe daily

Dixon has contingency plans for its 69 owned and 29 franchised Greek stores

ConsumerGoods

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Pharma companies worried about supply chain and receipts fromEuropean health services

Pharma

What are other companies doing?Section 2

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Section 2 – What are other companies doing?

Consider the following (real-life) example

US Company

Majority of revenues in Euro Majority of revenues in Euro

Company recorded ~$ 65mio loss related to Greek government bond holdings

Accounts receivable in Southern Europe totals ~$ 900mio

$ 350mio are past due more than 120 days

Critical suppliers based in Eurozone scenario

Board questions to CFO

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Board questions to CFO

- Should we be concerned?

- How are we impacted if “something bad” happens?

-How can/should we protect ourselves against adverse scenarios?


Approach

Objective: identify and assess the potential risks as a result of the Eurozone crisis anddevelop contingency plans to proactively mitigate this risk.

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• Look at European business operations and financial assets and liabilities – assess theexposures and risks on a country-by-country basis from a strategic, operational and financialperspective.

• How much exposure does we have? Where are the concentrations? How much can we bear?

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• Define potential Eurozone outcomes – include several different scenarios, from optimistic toworst-case scenarios, looking at the short-term and long-term.

• Quantify how we would be impacted by each scenario.

• Determine which risks are acceptable and which need to be mitigated.

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Ex

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• For the risks that need to be mitigated, come up with a contingency plan including financialand operational mechanisms to reduce risk exposure.

• Assign ownership for plans and monitor effectiveness of mitigation plans over time.

• Revisit scenarios as conditions change and make adjustments to the risk mitigation plan ifnecessary.


Considering scenarios for how the Eurozone could evolve…

Main Scenario: Successive phase of monetary and fiscal action hold theEurozone together

• Eurozone leaders act to save the euro

• Policy support to inflate the economy

Greek Exit: Greece exits the Eurozone and a firewall is built aroundother economies

• Greek exit of the Eurozone

• Currency union remains intact but causes an 18 month contraction in Eurozone

• The Greek economy would enter a severe recession

New ‘euro’: A new currency union is formed by the stronger economies

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• An unravelling of the Eurozone starting with Greece’s exit

• New currency union of the ‘core’ economies is formed by Germany and France

• Capital flight to ‘new euro’ supports output growth in the medium term

• Exiting countries have high inflation and low output


Assess business impact and exposures across all functions...

Legal • Contract review, renegotiation and amendments.

Revenue • Assess revenue breaking point and strategize to maximize revenue under different scenarios

• Prepare for lost revenue due to customer insolvency

Finance • Changes to statutory and management reporting;• Changes to planning, budgeting and forecasting e.g. contingencies, restatement of historical data, costs to

implement the Eurozone restructuring; and• Presenting finance and accounting data in new formats, e.g. conversion of balances, fixed asset valuation

restatements, changes in consolidation processes.

IT • IT changes, e.g. systems configuration, payment and billing systems changes, master data, transaction datamigration, package applications and support arrangements.

Procurementand SupplyContracts

• Review third party relationships (e.g. supply and procurement contracts, lease contracts)• Change internal operations (e.g. documentation, pricing arrangements, customer payment mechanisms)• Review procurement options in the event of key supplier insolvency

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HR/ People • Review compensation and benefits, payroll arrangements and implications• Manage communications to shareholders, stakeholders (including Works Council/ Trade Union),

customers and suppliers regarding organisational impact and arrangements

Tax • Tax implications on new and existing contracts


Focus on Treasury

Problem Statement

• Banking reaction to Eurozone results in (further) credit squeeze;• Which scenarios will cause covenants to be triggered, cash to be trapped?;• Possible capital and foreign exchange controls invoked at short notice;• Have parameters been set for exchange rate appetite if volatility increases and new currencies are created?;• Euro hedging strategies may need to be disaggregated by country, with aspects no longer effective as ‘new’ currencies are created; and

Critical Questions

Actions / Remediation

• Is there an appropriate forum for discussing working capital and cash forecasting?• How is credit risk currently monitored? Should changes be made to better predict and/or react to declining credit? Have counterparty risk policies

and credit scoring processes been reviewed?• What cash can be moved to neutralise euro exposures, surplus repatriated?• Ability of weak zone euro banks to provide local funding, match debt location to assets?• What will become of local deposits if banks are no longer functioning?• Implication of bank accounts no longer functioning & impact on cash pooling arrangements?• Ability to redirect /collect customer proceeds outside high risk countries?• How might increasing currency volatility impact FX hedging programs?• Do intercompany loan agreements need to be amended?

• Euro hedging strategies may need to be disaggregated by country, with aspects no longer effective as ‘new’ currencies are created; and• Working capital strain as customers take longer to pay + suppliers weakened looking for prompt payment.

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Actions / Remediation

• Develop contingency plan for cash management, funding and risk management;• Assess funding sources and ability to access them in Euro jurisdictions at risk;• Develop investment strategies to enable surplus funds to be held in investments and jurisdictions aligned with the organization’s risk appetite;• Maintain dialogue with key banks and consider impact on banks with significant direct or indirect exposure to Eurozone countries at risk;• Consider the impact of redenomination risk by legal jurisdiction / category of contract. This should include ISDA & inter-company agreements;• Develop strategies and policies to allow hedging strategies to be amended or implemented with relevant CTP’s;• Identify and quantify significant AR and AP exposures;• Consider creating centralised payment hubs to enable local payments to continue to be paid in the event of local disruptions; and• Design and build effective stress test models that cover extreme but feasible scenarios.


Some companies have already taking action

Organizations are proactively taking steps to mitigate the risk of the crisis:

1. De-risking foreign currency holdings – moving cash out of Eurozone into “safer” currencies1. De-risking foreign currency holdings – moving cash out of Eurozone into “safer” currencies

2. Managing supplier exposure in the Eurozone – no long term contracts

3. Mitigating refinancing risks – setting cash aside for upcoming bond repayment / refinancing

4. Performing assessment of net Euro exposure by country

5. Increasing cash reserves by controlling non-essential expenditures

6. Preparing for volatility in the exchange market by reassessing hedging strategies

7. Analyzing impact of new currency introduction in procurement and sales contracts as well as IT support systems

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Summary Approach and Methodology – Pulling it together

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Regulatory pressure and challengesSection 3

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Section 3 – Regulatory pressure and challenges

Corporates demonstrate varying degrees of preparedness for the forthcomingregulation - from wait and see to fully initiated projects and budgets set to implementchanges required.

Regulatory challenges for Corporates

SEPA

FTT FATCA

Dodd-Frank IFRSEMIR

“…when one compares Dodd-Frank to the Sarbanes-OxleyAct of 2002, SOX seemsalmost quaint: Dodd-Frank ismore than 10 times longer,and mandates more than tentimes the rulemakings andstudies that SOX required.”

SEC Commissioner Kathleen

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14

CFO Roundtable • Navigating uncertainty in the Eurozone

Are you prepared?

SEC Commissioner KathleenL. Casey

While many new rules are geared toward financial firms, therewill be significant impacts to non-financial companies

Hans Candries

Contact

Hans Candries

Director – Consulting Treasury

Tel: +32 3 259 32 46

Mob: +32 493 240 525

[email protected]

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potential eu breakout v.0.7

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