technicolor - 2019 Universal registration document

RISKS, LITIGATION, AND CONTROLS RISK FACTORS

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INDEBTEDNESS

Risk identification

Risk monitoring and management

At December 31, 2019, the Group had €1,302 million of total gross nominal debt (corresponding to €1,298 million in IFRS, taking into account the fair value adjustment) comprising mainly term loan debt for a total nominal amount of €984 million (€980 million in IFRS) and lease liabilities for €312 million (see note 8.3 to the consolidated financial statements). The Group has two committed revolving credit facilities to support its working capital needs: a €250 million revolving credit facility (the “RCF”) and a committed receivables facility (the “Committed Receivables Facility”) under which it may borrow up to $125 million on the basis of the amount of receivables available. For further information on the terms of these debt facilities and instruments, see Chapter 2: “Operating and Financial Review and Prospects”, section 2.3.3: “Financial Resources” of this Universal Registration Document and note 8 to the consolidated financial statements. The level of debt may have significant negative consequences for the Group and its shareholders. For example the terms of the debt require the Group to dedicate a large portion of any excess cash flow towards repayment of outstanding principal, thereby reducing the availability of cash flow for other purposes. In 2019, €95 million was used to repay debt although because there was no excess cash flow no repayments were required under the terms of the debt. In addition, the significant level of debt (€1,302 million) relative to the Group’s Free Cash Flow generation (€161 in 2019): increases the Group’s vulnerability to adverse general economic conditions • and industry developments; may limit the Group’s flexibility in planning for, or reacting to, changes in the • business and the industries in which the Group operates; may limit the Group’s ability to raise additional debt or equity capital; • may limit the Group’s ability to make strategic acquisitions and take • advantage of business opportunities; and may place the Group at a competitive disadvantage compared to competitors • with less debt. Any of the foregoing could limit the Group’s ability to grow its business. The financial loans documentation of the Group’s USD Term Loans as well as its credit facilities use the London Interbank Offered Rate ("LIBOR") as a reference rate. LIBOR is scheduled to be phased out by the end of 2021. When LIBOR ceases to exist, the Group will need to agree upon a replacement index with its lenders and such new rates may not be as favorable as those in effect previously. Failure to manage these risks effectively could adversely affect the financial condition and results of operations of the Group The financial loans documentation of the Group’s Term Loan Debt as well as its credit facilities includes provisions which limit the Group’s flexibility in operating its business, a breach of which may (in certain cases following the expiration of a grace period) constitute a default hereunder. The documentation of the Group’s credit facilities contains financial covenants that the Group must respect: a ratio of adjusted EBITDA to gross debt of no more than 4.00 times, tested • at June 30 and December 31 if there are more than €100 million of drawings on the RCF or less than $25 million of availability on the Wells Fargo credit line; and under the terms of the agreement by the lenders in the RCF and the Wells • Fargo facility to extend the facilities, conditional on the completion of the rights issue announced on February 13, 2020, a minimum liquidity of €30 million at each month end starting February 29, 2020. Failure to respect these financial covenant would constitute a default. Moreover the financial loans documentation includes so-called “cross default” clauses which, absent a waiver from the creditors, would provide them with the right to declare amounts that are outstanding thereunder at the time of any default under other financial loans documentation (plus accrued interest, fees and other amounts due hereunder) immediately due and payable. Upon the occurrence of a change of control of the Group, any outstanding amounts under the financial loans documentation would become immediately due and payable. The Group cannot ensure that it would have sufficient liquidity to reimburse or be able to refinance all or part of the amounts that came due following an event of default or change of control. This risk has increased due to the deterioration of the Group’s financial position and in particular due to its negative cash flow in 2018 and 2019.

The risks related to indebtedness are managed by a close monitoring of the level of the Group’s debt and debt maturity schedule, and the compliance with all covenants and restrictions (including operational restrictions) in the Group’s debt documentation. This monitoring is part of the Group’s management of its liquidity risk. With specific regard to indebtedness it consists of using the Group’s 13 week and monthly cash forecasts to project future leverage ratios, covenant ratios and respect of scheduled debt maturity payments. The results of this regular monitoring is reported regularly to the Chief Financial Officer, the Audit Committee and the Board of Directors and may lead the Group to take action such as reducing debt levels, refinancing or renegotiating its debt, or raising equity. This monitoring led the Group to launch on February 13, 2020 a comprehensive balance sheet restructuring consisting of: a €300 million rights issue; • an 18 month extension of the RCF and the Wells Fargo facility; and • a new short-term credit facility in the amount of $110 million. • The successful conclusion of these operations will reduce the Group’s net debt and the risks associated with the current level of indebtedness.

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TECHNICOLOR UNIVERSAL REGISTRATION DOCUMENT 2019