On June 2, 2017, CEE Legal Matters reported that regional used car dealership AAA Auto International had negotiated the refinancing of the acquisition of its entire group from CSOB. Jan Siroky, Senior Lawyer for AAA Auto International, agreed to comment on the deal.
CEELM: Clifford Chance reported to CEE Legal Matters that its Prague team had "provided advice under Czech and Slovak law as well as coordinating the services of external counsel in Cyprus." Which law firm was that in Cyprus and what tasks were delegated to it? Were you involved in selecting the counsel in Cyprus? Why was Cypriot assistance necessary?
J.S: The Cypriot legal counsels were Deloitte Legal. Their task was only to prepare capacity legal opinion, which requires a renowned law office acceptable to the bank. Actually, there was no shopping, the parent company Mototech Holdings Limited (a Cypriot company) and other companies belonging to Abris Capital Partners (our ultimate private equity owner) residing in Cyprus use this office for these tasks on a regular basis. The capacity legal opinion was a CP (condition precedent) for utilization of loan facilities under the Facilities Agreement, so it was necessary.
CEELM: Milos Felgr referred to AAA Auto International's "clear objectives” in the refinancing. How and why did the company set those objectives?
J.S: Our “clear objectives” were based on our experience from living with a previous version of the Facilities Agreement with the same bank.
In 2014, Mr. Anthony James Denny, the founder of AAA Auto, sold the group to Abris Capital Partners, a private equity fund. Abris intended to finance the acquisition through LBO (leveraged buy out), i.e. substantially from a loan provided by a bank, which would be ultimately repaid from the target (after a merger between the acquiring SPV and the target).
In 2014, Abris was not known on the Czech banking market, and the only bank which was able to provide the financing was Ceskoslovenska obchodni banka (CSOB), of course as a leading member (arranger) of a bank syndicate. Even now, we believe that CSOB is the most pro-business bank on the Czech market and we are grateful for the cooperation with them and their attitude. However, the financing was then quite expensive (high above average margin) and the general undertakings and financial covenants were quite strict and harsh on us.
During the negotiation of the original Facilities Agreement, AAA Auto had no experience with such a type of contract and our internal teams (finance and legal) were not able to negotiate the necessary exemptions and provisos from the vast scope of covenants that were micro-managing every aspect of our activities. On top of that, I was new to the company and did not know its business in detail. Maybe, the banks would not have been ready to listen at that time as well.
Accordingly, within the next two years, we had to repeatedly ask the banks for extensive waivers on third party financing (including provision of security) necessary for our car stock financing, disposal of property, CAPEX limit overrun, and so on. Fortunately, CSOB always listened patiently and our requests were well reasoned, so we succeeded almost every time (sometimes on a second attempt).
In the meantime, CSOB established a rapport with us and understood that AAA Auto is a pretty usual and creditworthy company. At the beginning of 2017, AAA Auto and CSOB (both without involvement of external legal or other counsels) negotiated a term sheet of a new contract, which promised decreasing the interest margin to a current standard market level and provision of a requisite flexibility for our business activities.
So our objectives were cheaper financing and flexibility (the overall ability to do our business as usual with no need to ask the banks for any waivers), plus an increase of funds for our operations both from banks (a revolving line) and our third party partners. All were achieved as desired, even though it took some negotiation to implement the principles into meaningful and effective contract provisions.
Unfortunately, the bank insisted that we conclude a new facilities agreement, not just an amendment. So we actually refinanced with substantially the same banking club, which entailed a release of the old security and re-pledging of all our assets again.
CEELM: How did you manage your external counsel in this case? How were the roles/responsibilities divided, how frequent was the communication, and so on?
J.S: We instructed Clifford Chance on our focus in this transaction – we only needed to transform the term sheet into the contract and we did not want to open purely abstract legal provisions with no impact on our operations.
The agreement was redrafted by White and Case, who have been working for CSOB (but were paid from us) from the very beginning, so they drafted the original contract in 2014 and were involved in all our later discussions on waivers with the bank. Our AAA Auto team (involving one lawyer and two people from the financial department, plus the financial director in later stages) reviewed the drafts from White and Case in the first place, then I made a quick redraft of the contract and sent it over with our further comments to Cliffords, who were to polish it and elaborate on revisions of purely legal terms (in a pre-agreed extent). They of course consulted with us regarding their legal comments, so the final version was always pre-approved. Then they provided the counter-party with our consolidated comments. So the AAA’s team mostly focused on the matter and business substance and Cliffords on the form and legal standards. Their tasks further involved reviewing the hedging documentation, pledge documentation (just selected issues), corporate approvals and preparing the capacity legal opinion on Czech and Slovak entities. Cliffords were also proactive, so helped us to improve some terms beyond our earlier expectations.
The frequency of our communication was as needed, actually quite low and mostly via quick call (I prefer it) – all of us knew our roles and everyone played them well.
CEELM: How big is the legal team at AAA Auto International, and where are they located?
J.S: Our legal team consists of four experienced senior advocates sitting in the Prague headquarters, so we are able to independently handle almost all legal matters. In addition, we have two lawyers in Slovakia and one in Poland and Hungary, where we run our branches as well.
We only outsource special tasks – such as legal consultancy relating to M&A, where it is necessary given transaction’s value, stakes and the complexity (mostly involving more jurisdictions). However, the experience of our in-house lawyers enables us to efficiently manage the external lawyers.
CEELM: You've commented that, "we selected Clifford Chance based on their excellent performance when advising AAA AUTO Group on its disposal in 2014.” Do you have a formal performance evaluation system in place for external counsel? How does it work?
J.S: Yes, it is mostly a beauty contest (smiles). It’s not a science, we cooperate with about firms – both Czech and international law firms residing in Prague (plus a few others in other countries) – and we pick up one of them as needed for the task at hand. Sometimes we add one more to our list, when needed. Our choice is always driven by the specialization of their teams – we always focus on effectivity and a smooth cooperation with our legal department.
A previous cooperation with us on a similar or related transaction is always reflected, as it cuts down the need to provide long explanations. Only exceptionally do we let them bid and then compare their prices. Despite that, we know that we always get pretty decent fee quotes.
In other words, once we need the external lawyers, we require skilled and cost efficient lawyers who will not complicate the deal for us or our partner, and we always reflect our previous experience. Our approach must be right, as we have always been satisfied so far.