Private equity breakfast

Bucharest, 28 April 2004

Question & Answer session

On April 28, CMS Cameron McKenna and Pedersen Partners held the largest private equity event in Romania to date at the Hilton hotel in Bucharest. Over 100 delegates from private equity funds, banks, and other investors from across the region gathered to discuss the opportunities and what to look out for when investing in Romania.

The session included a panel discussion, which gave the audience an opportunity to ask the expert panel members questions on topics including financing, fundraising and what to look out for when negotiating through the Romanian legal system.

This briefing note provides the questions that were asked along with the answers. For more information on the issues addressed within this document please contact Paul Stallebrass, Partner, CMS Cameron McKenna on +420 296 798 111 or [email protected]

Chair

Poul Pedersen, Managing Partner, Pedersen & Partners

Panellists

-Cristina Brinzan, Managing Partner, CMS Cameron McKenna

-Paul Stallebrass, Partner, CMS Cameron McKenna

-Emma Popa-Radu, Principal, Advent International

-Cornel Marian, Investment Manager, Oresa Ventures, Romania

-Brian Wardrop, Partner, DBG

-Hoerhager, Managing Director, Mezzanine Management

-Christian Turcu, Department Manager Project Finance, Raiffeisen Bank

What are the panellist's views on the current state of the Romanian market?

For many private equity funds countries such as the Czech Republic, Hungary and Poland are still considered exotic, therefore selling Romania as a stand-alone investment is extremely difficult. CEE funds with a South Eastern European element are becoming increasingly popular and are a good way to introduce the concept of Romania to investors.

The market looks extremely interesting in Romania. It is anticipated that there will be a reasonably large number of opportunities, which will generate good returns.

The M&A market in Romania is likely to increase but not at a spectacular rate.

What is mezzanine finance?

Mezzanine is a new product for the Romanian market. It is a loan product that sits between the private equity providers and the banks. It does not compete with them. Essentially it is a loan agreement that tracks the bank loan but is subordinate to the banks. The lender only receives interest throughout the term of the loan with the principal being repaid at the end of the term. The lender will also often receive a warrant component entitling it to a percentage of the equity at exit. This type of finance is playing an increasing role in acquisition finance throughout CEE as it can be applied to a wide variety of situations including MBO/MBI and expansion financing.

Is leverage available on the Romanian market, if so, on what terms?

Leverage is available on the market, but the leveraged buy out market is very new and small compared to regional standards. Overall M&A activity in Romania currently stands at 0.5billion USD, which is 5-6 times less than in Poland, Hungary and the Czech Republic. As leveraged buy outs are a new concept, with limited opportunity in Romania the commercial banks are still cautious and the majority of transactions are equity not debt driven. Commercial banks are now beginning to see the LBO market as an opportunity for cross selling and developing relationships with the major targets.

What are the major legal issues facing private equity funds in Romania?

There are no insurmountable problems for private equity funds in Romania that careful planning and consideration of timing will not solve. There are a significant number of bureaucratic authorities that are difficult to deal with and it is therefore essential to plan ahead properly. Good legal advice from lawyers who can guide you through the bureaucracy is essential to ensuring the transaction goes smoothly.

The labour code is particularly protective towards employees and is highly complicated to navigate. This may cause problems for funds looking at local restructuring.

The absence of any squeeze out provision means that there is no way to obtain 100% of the shares in the company if shareholders are not willing to sell. This can cause particular problems with companies that have been listed on the stock exchange that may have 10,000s of minority shareholders. There is no way to get hold of the individual share holders therefore money has to be kept on the books of the company in the hope that they collect dividends.

Should there be a move from equity to debt on deals in Romania?

In Romania currently half the deals are buy outs and the other half are expansion deals. There is likely to be a move from equity to debt for buy outs but expansion deals are more difficult to leverage.

What affect has the National Bank of Romania's new consumer credit regulations had, particularly on retail businesses like Flanco?

The new regulations have affected the entire market, however most banks have now found workable solutions to the issue, which include using insurance companies as guarantors and using bridged finance. It is unlikely that there will be an implication for the consumer market in the long-term as the banks will now be more careful and look more closely at how the risk is managed.

Is flotation on the stock market a viable exit option in Romania?

There is scepticism about IPO as an option for exit in Romania due to the absence of liquidity on the Romanian Market. Panellists agreed that IPOs were not the prime exit route for their deals.

Are new funds coming to Romania?

A number of South Eastern Europe focus groups are trying to raise funds and several of those present revealed that they were fundraising and committed to the region and are looking for more deals with Romania as a core country. The general consensus is that there is money coming to Romania and that more opportunities will be seen in the not too distant future.