R I S K M A N A G E M E N T AT W E L L F L E E T B A N K : “ M E G A D E A L S ”

M.C.B GROUP 1 CASE PRESENTATION

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109 Ghanshyam Gupta301 Balagopal Padmakumar302 Harbir Singh Banga402 Rishi Bajaj503 Anirwan Bhattacharya

WELLFLEET BANK

• Founded in London in 1847

• Expanded over the years

• In 2007: Presence in 55 countries, Total Assets of $329 billion and market cap of $51 billion

• The bank had presence in about 78 nations by 2008 on account of several acquisitions it had undertaken.

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• Wellfleet main competitor was Global Bank.

• Corporate Banking (58% of PAT) and Consumer Banking (42% of PAT) were the two main businesses

• The bank focused more on the syndicated and leveraged loans segment.

• Syndicated loans were provided to a borrower through combined activities of several banks

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• Members in consortium could reduce their overall

exposure, each bearing only a part of any loss

• Syndicated loans help small banks to participate

in large transactions

• Leveraged loans were extended to companies

that already had considerable amount of debt

• As these loans carry a higher risk of default, the

lender usually charged a higher interest rate

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• Corporate Banking division worked as an Investment Bank

• Hired several employees from IBs

• Provided a risk perspective to Wellfleet

• Between 2004 and 2006, the bank took around 40 deals in range of $500 - $750.

• Net profit in 2006 – $2278m

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QUESTION 1

What kind of risk does Wellfleet Bank face?

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WELLFLEET BANK ORGANIZATIONAL STRUCTURE

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KEY RISK FOR WELLFLEET BANK

• Wellfleet Bank strategic intent was to pursue large scale transformational deals through its corporate banking segment.

“If a billion dollar deal went wrong it could sink the ship”

• Group Credit Committee - Group Chief Credit Officer, Deputy Group Chief Risk Officer & Group Head of Client Relationships

• There is no Risk Appetite Statement which defines the tolerance level

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KEY RISK FOR WELLFLEET BANK

• Risk of Default in case of leveraged loans which is aggressively pursued by the bank

• It is mentioned in the case that if the deputy group chief risk officer & group head of client relationships disagreed over a proposal then the Chief Credit Officer would take the ultimate decision. (Operational Risk)

• The bank is facing the regulatory risk, credit risk, increasing competition as well as the risk from acquisitions.

 

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KEY RISK FOR WELLFLEET BANK

• Concentration Risk - The bank has a very high concentration on its Corporate Banking Group.

• Other important aspect is that the bank has compartmentalized risk greatly.

• The bank had its own internal credit risk assessment model summarized as EL ($) = Probability of Default x Loss Given Default (%) x Exposure at Default ($)

Risk of over-reliance upon the model.

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ASHAR INDUSTR IES US $850 MILL ION FAC IL ITY

PROPOSAL 1

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BACKGROUND OF ASHAR INDUSTRIES

• Worlds largest steel producer (6% market share by volume)

• Specialized in low-end commodity steel• Production across developed & developed markets

• North America 40% (25% US auto)• Western Europe 33%• Eastern Europe, Ukraine, South Africa, Kazakhstan

• Controlled by Amit Ashar and family• Have several JVs (like telmak steel) • Turnover increase from $5.4bn (2001) to $28.1bn

(2005)

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REQUIREMENTS DETAILS

• Underwriting upto $850m of EUR 8bn facility • Wellfleet bank as sub-underwriter • Syndication awarded to Bentleys, Cramer and

Dougherty, MetGen (Book runner) joined by Rein Bank, Clouseau Brothers, Global Bank (Non-book runners)

• Challenges:• Integration risk• Need for streamlining complex debt structure of the

firm• Possible failure of hostile take over• Political risk high of Zellmont SA

CREDIT ANALYSIS

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CREDIT ANALYSIS (CONT.)

• Strength • World’s largest steel maker (know-how of industry)• Diversified revenue stream• High level of raw material integration• High EBITDA and FCF generations

• Rating

Agency Rating

Wellfleet Bank 5A

Moody Baa3/ review for downgrade

S&P BBB+/ watch negative

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RETURN TO BANK

• Explicit Return• In 1st year: Interest charge of 52.5bps which is $4.46mn• Additional 20bps of underwriting fee (10bps on

agreement, 10bps on closure of syndication) which is $3.4mn

• Drop dead fees of 10bps

Future Scope

• Total possible earning in medium term $1,050,000 comprising of :• Foreign Exchange Wallet $250,000• Interest Rate Derivative Wallet $300,000• Commodities Wallet $250,000-500,000

• Other opportunities for Project Finance, M&A advisory and Structured finance 15

BROADER PICTURE

• Company integration track record good• Company claimed to have no unconsolidated debt• Good track record of turning around underperforming

assets• Clean audit reports• Strong record of leveraging to acquire and then de-

leveraging• Deal: 25% Debt - 75% Equity• Wellfleet Reputational Risk Committee cleared name• Industry aspects:

• Steel companies sensitive to product price movement • Supply demand match for last 10years• Future growth: Expansion of China and India• Pricing supported by China’s consumption 16

R E F I N A N C E F O R G AT W I C K G O L D C O R P O R AT I O N O F $ 1 B I L L I O N -

C O N V E RT I B L E B O N D

PROPOSAL 2

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A DETAILED ANALYSIS

About Gatwick GC

• GCC was world’s third largest gold producer, accounting for about 7% of global gold production.

• It operates in 21 mining operations in 10 countries across the globe and conducted extensive exploration.

• 41% of its production came from the deep-level hard rock operations in South Africa.

RatingsAgency Rating

Wellfleet Grade 5B

Moody NA

S&P NA

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CREDIT ANALYSIS

Credit Challenges

• Need to refinance $ 1 billion convertible bond due to expire on 27th February 2009.

• Total Debt to EBITDA was 800% in 2007.

• Debt protection: EBITDA to interest expense was -3.1% in 2007, showing a diminishing curve since 2003.

Credit Strengths

• The world’s 3rd largest gold producer with 7% of global gold production.

• Diversified production base.

• Low-cost producer( in the lower 50% of global cost curves on average across all their mines)

BROADER ISSUESCommodity

Prices/Hedging

• The single largest risk for GGC in the long term would be sustained fall in the gold price. The risk trigger is gold price under $ 650/oz. During the recent commodity price turmoil, the gold price has only been below $700 on one day.

• Low prices would make some of its mines uneconomic and would impact investment capex and exploration.

Mining-Cost Inflation• Electricity: Mines are heavy users of

electricity. Electricity costs will increase in line with the energy-price increases.

• Labour: Labour costs in South Africa are increasing by around 12% PA

• Equipment: Industry demand for new equipment was very strong from 2004-2007, with sharp price increase, but the pressure is now starting to ease with Capex cutbacks across the industry.

• Cost inflation in GGC’s operations over the past 21 months has been appox. 21% in $ terms. The rate is likely to slow down with the depreciation of the ZAR, fall in disel prices, and fall in demand for mining equipment. Productivity investment will begin to pay dividends. 20

BROADER ISSUES

Political Risk

• Around 72% of current production is in Sub-Saharain Africa. Gold is a key export and cash generator for all 6 African Countries.

• Diversification of mines (21mines across 10 countries) mitigates risk.

• Social, economic and environmental risk: Mining safety becoming increasingly important issue in SA, both politically and operationally

Black Economic Empowerment

• BEE is a program launched by the South African Government to redress the inequalities of the apartheid by giving, historically disadvantaged South Africans economic opportunities previously not available to them. In terms of mining, companies are required to convert their existing licences into a new generation of mining licences.

• Companies that don’t comply with BEE legislation, which most importantly includes the provision of transfer of ownership of equity or assets to BEE.

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BROADER ISSUES

Shareholder Distribution

• Company presently distributes 20% of earnings as dividends.

Management Team

• Good all-round mining experience supported by well-connected African-oriented board.• Acquisitions are for

shares and not for cash.

BROADER ISSUES

Industry Issues

• Financial profile of the gold industry is characterized by: heavy investment in FA; 2+ year development period, very high fixed costs.

• Due to high fixed costs in their cost structure, gold mining companies display extreme sensitivity to product price movements.

Should we or Should we not?

• A decision can be taken after comparing the Expected Losses and Risk Adjusted performances for both the proposals.

• Pay Attention to the excel sheet!!!!

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DECISION MAKING TOOLS

ECONOMIC AND FINANCIAL COMPARISON

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CLICK TO SEE EXCEL SHEET

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THANK YOU!QUESTIONS PLEASE?