eg tap investor presentation - draft - 191015 (with risk ... · (1-99 employees) not eg p r o j e c...

Investor Presentation

October, 2015

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2

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Click to edit Master text stylesAgenda

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Introduction and transaction overview

EG’s business and market

EG financial performance

Introduction Silkeborg Data

EG’s acquisition of Silkeborg Data

Key investment highlights

Appendix – Risk factors

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Click to edit Master text stylesToday’s presenters

4Source: EG Group and Axcel webpages

Leif Vestergaard, CEO

Allan Buhl Møller, CFO

• Joined EG as CEO in 2004

• Previously employed with IBM for 16 years

• IBM’s representative on EG’s board from 2000-2004

• MSc in Business Economics from Aarhus School of Business

• Joined EG as CFO in 2009

• Previous employment as CFO of International Health Insurance Danmark A/S

• MSc in Business Economics from Copenhagen Business School

Christian Bamberger Bro

Christoffer Arthur Müller

• Partner at Axcel

• Joined Axcel in 2014

• Previously worked for Permira both in London and Stockholm (2006-2014), McKinsey in Copenhagen and Nordea Corporate finance in Copenhagen

• Deputy Chairman at EG and Conscia

• Cand. oecon. from the University of Aarhus

• Director at Axcel

• Before joining Axcel in 2009, he worked at A.T. Kearney and Nordea

• Christoffer is a board observer at TCM, EG and Silkeborg Data

• MSc in Economics from the University of Copenhagen and has furthermore studied at London School of Economics

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In brief

EG is among Scandinavia's leading IT software & service companies with a strong market position within the SME segment

Position based on close relationships with customers, deep sector knowledge and value adding IT solutions

22 acquisitions in selected verticals since 2009

Prior to the acquisition of Silkeborg Data, EG had approx. 12,000 customers and more than 1,650 employees

2014 revenue of DKK 1,636m and normalized EBITDA of DKK 229m

Axcel acquired EG in 2013

75%

Local presence with more than 30 offices throughout Scandinavia

Strong footprint securing proximity and flexibility towards customers

Group management located in Ballerup, Denmark

Financial development Product offering

EG at a glance

51) Management normalisation include restructuring costs and integration and transaction costs; 2) Reflects EDB Gruppen Holding A/S; 3) Pro-forma for AX IV EG Holding III Aps.

Consultancy & programming Management consultancy, Implementation and Programming of IT

solutions

Software Solutions are based on EG’s own software and configurations of the ERP

platforms Microsoft Dynamics AX and NAV and EG’s proprietary ERP platform ASPECT4. Sale of own developed software is 55% of segment revenue

Subscription based revenue Operating the customer’s IT solution, either hosted from EG’s own data

centre or at the customers premises and service agreements (Technical, Hotline & Support, BPO)

Hardware Sale of infrastructure hardware (e.g. servers) and industry specific

hardware (e.g. POS and hand terminals) from external providers

Offices

11%

14%

EG is a leading Scandinavian IT software & service provider

924

9.4%

20092

11.3%

20112

1,330

20102

10.8%

20122

12.1%

1,6111,502

14.0%

201420133

1,636

11.3%

1,017

9.1%

LTM Q3 15

1,756

13.1%

Revenue, reported

EBITDA margin, reported normalised1

Strong presence in Scandinavia

51%

27%

17%

5%

CAGR


Strong strategic rationale to combine EG and Silkeborg Data


6

Industry solutions

Business Ready

Solutions

Citizen Solutions

Business Application

services

Strategic rationale

Creation of clear number 2 player in the ~ DKK 17 billion Danish public IT services market

Ability to engage in strategic dialogue with public sector clients on IT

Increasing share of recurring revenue and EBITDA

Significant cost and sales synergies

Proven ability of management to integrate acquisitions


DKKm Existing Transaction Pro Forma

Term Debt 1,100 +300 1,400

Other Debt 18 5 23

RCF (drawn amount) 37 0 37

Cash -8 -802 -88

Net Interest Bearing Debt (NIBD)

1,147 225 1,372

Normalised EBITDA (incl. synergies)3

230 67(incl. DKK 17m

synergies)

297

Leverage Ratio 4.98x - 4.62x(4.89x excl. synergies)

Fixed Charge Cover Ratio4

2.78x - 2.88x(2.72x excl. synergies)

Sources DKKm

New term debt at EG level 300

Total 300

Uses

Refinancing of SD debt1 -285

Costs and expenses -3

Overfunding -12

Total -300

1) DKK 245m refers to drawn term debt and DKK 40m replaces Silkeborg Data’s existing RCF which is undrawn; 2) Includes existing cash at Silkeborg Data of DKK 28m; 3) Synergies over the next 12 months amount to DKK 17m; 4) Pro forma for interest on additional DKK 300m in term debt. Interest rate calculation assumes same coupon levels as for the existing notes during the last 12 months. Also includes DKK 9m in interest rate swap cost

Refinancing of Silkeborg Data debt

Situation overview

7

Pro forma capitalization as at 30 September 2015Sources and uses




Business

Market






Agenda

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Building & Construction

Logistics & Production

9

Retail Utility Public Professional Services

Understanding industry is our DNA

Our mission: Adding value to business through industry leadership


10

New organization to improve performance

EG is improving its ability to refine operating models

From all business models in each customer vertical...

…to business models separated by divisions to improve operational efficiency

Tail

ore

d

solu

tio

ns

Pack

ag

ed

so

luti

on

sB

usi

ness

in

a b

ox

Large enterprises(+500 employees)

Mid-sized enterprises(100-499 employees)

Small and medium businesses(1-99 employees)

Industry Solutions

Citizen Solutions

Business Ready Solutions

Customer Verticals

Cross Business Application

Managed Services

Business Application Services

Customer Verticals


EG has leading market positions across all four divisions

Competitive landscape

11

Market position Larger main competitors

One of the strongest Microsoft Dynamics AX partner’s in Europe

Scandinavia’s largest end-to-end supplier of IT solutions for

production, logistics and retail companies

Divisions Revenue1

Note: 1) Based on LTM Q3 2015. % do not add to 100%, due to group eliminations

Smaller competitors

EG Industry Solutions

DKK 853m(49%)

EG Citizen

Solutions

DKK 291m(17%)

EG Business

ReadySolutions

DKK 212m(12%)

EG Business Application

Services

DKK 460m(26%)

Solutions for the utility sector in Denmark and Sweden and the public

sector in Denmark

Leading provider of SaaS based software solutions in a number of

small attractive niches

Leading provider of infrastructure-, cloud solutions and managed services,

cross business application solutions (BA, CRM, etc.) and 3rd party software


Industry Solutions Citizen Solutions

Business Ready Solutions

Customer Verticals

Cross Business Application

Managed Services

Business Application Services

We are building a Nordic IT services champion

Our vision

12

Northern Europe’s largest

industry focused ERP-

house

Clear #2 in Public inDenmark

Create market leader in selected

microverticalsleveraging

Business-in-a-box

Leading top-line growth

IT solutions provider

(customer view)

Ability to deliver EG 360 in all

Nordic countries


Accelerating organic growth underpinned by recent client wins

Recent EG client wins and business momentum

13

Recent client wins Organic growth

0%

2.3%

Average 2010-2014 2015 YTD


The three strategic themes are unchanged

Strategic themes

14© EG A/S

Accelerate organic growth

Improve operational efficiency

Continue the M&A

trajectory

Acquisitions to strengthen the market position in existing verticals

Focus on adding to CS, BRS and BAS

Continue to add to existing ERP footprint in Sweden & Norway

Develop and deepen industry solutions including CBA

Implementation of One EG 2.0 to sharpen the go-to-market and delivery models

Enable (cross) sales of Managed Services and Business Application Services

Reduction of scope creep and implementation of ODM

Building up Nearshore/Offshore capacity

Lean, procurement and fixing the salary pyramid, and improved structural efficiency in shared service and operations




Business

Market






Agenda

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EG focuses on selected industries in the Scandinavian IT market where EG has in-depth industry insight and knowledge of the value chain

EG’s focus in the market

Utility

Industry focus of EG

Logistics/ wholesale

Discrete manufacturing

Construction

Transport

Communication / telecom

Retail

Central gov.

Business services

Local gov.

Education

Banking

Insurance

Agriculture & mining

Health2 ()

Process manufacturing

Other finance

Other services

Primarily projects Primarily volume business Not in focus of EG

Market position

EG is one of the leading IT and software providers in Scandinavia

– Strong presence in Denmark with revenue of DKK 1,219m in 2014

– Critical mass in Norway accounting for DKK 269m of revenue in 2014

– Critical mass in Sweden accounting for DKK 147m. Acquisition of Medius strongly increases EG footprint in 2015

Strong position in selected verticals where EG has deep industry knowledge

– Main industries in focus include logistics & manufacturing, retail, construction, utility, local government and business services1

– Deep knowledge of industry value chain and business best practice provides for a good dialog with both business and IT decision makers

Within its focus industries, EG is present across all market size segments, from small and medium businesses with 1-99 employees to large enterprises with +1,000 employees

#1 Scandinavian and strong European Microsoft Dynamics partner with more than 350 AX + NAV consultants

EG’s country focus

EG’s segment focus

Focus of EG

Share of revenue Q3 2015 LTM (100% = DKK 1,756m)

Segment focus (size) varies across verticals

Large enterprises(+1,000 employees)

Mid-sized enterprises(500-999 employees)

Small enterprises(100-499 employees)

Small and medium businesses(1-99 employees)

Not EG

Pro

jects

Volu

me

78%

17%

5%

2012

75%

14%

11%

2015

Note: Scandinavian defined as: Denmark, Norway and Sweden; IT market comprise Software, Service and Hardware. 1) In the businesses services segment EG has a strong position within several niche segments including among others lawyers and housing association administration; 2) Strong presence within practitioners

16


Healthy growth rates in the Scandinavian IT market – generally higher growth rates on Norway and Sweden, but better trend expected in Denmark

The Scandinavian IT market

17Source: IDC . 1) IT market excl. tablets, smartphones and feature phones

Scandinavian IT market

The Scandinavian IT market is expected to grow with a CAGR of 2.4% from 2015 to 2018, 0.6% lower than the historical growth from 2012 to 2015 which was affected by a rebound from the financial crises

Growth rates in Denmark has increased from rates seen during the financial crisis, but is still below rates in Norway and Sweden

Growth rates in Denmark expected to increase, while growth rates in Norway and Sweden are decreasing towards the level in Denmark, especially driven by lower demand for hardware products

Scandinavian IT market growth1

EURbn

+2.4%

+3.0%

2018

32.1

2017

31.3

2016

30.6

2015

29.9

2014

29.2

2013

27.8

2012

27.3

Country growth1

EURbn

+2.0%+1.9%

2018

9.4

2015

8.9

2012

8.4

+2.9%+3.9%

2018

15.0

2015

13.8

2012

12.3

+2.0%+2.7%

2018

7.7

2015

7.2

2012

6.7

CAGR


Five primary market drivers expected to impact IT spending

Market drivers in the Scandinavian IT market

18Source: YouGov, EG and Quartz+Co analysis based on Gartner, Constellation Research, IDC and industry observers

Market drivers

Big data

Analysis of large data amounts requires strong and well integrated systems to collect and store information

Big data drives demand for Business Intelligence solutions and provides for new types of IT services

Cloud

Cloud computing has been taking market share in many software applications and will start to affect ERP market within the next 3-5 years

Drives the opportunity for IT provided as a service IT decisions moves from IT to line of business

CRM and customer

experience

According to a recent Gartner survey, CRM is the top software investment priority for 2013 (ERP is second) due to a stronger business focus on enhancing the customer experience, which has a positive impact on ERP spend

Mobility

Mobile internet expected to be larger than wired in 2016 driving cloud-based business and revenue opportunities

Large untapped productivity potential from mobility in most sectors drive extended usage of ERP on other devices

Productivity

Efficiency improvements from process optimization and IT is an important factor in undertaking IT investments

Perception of IT as productivity enhancer drives decision making upwards towards business decision makers

3

2

4

5

1

Scandinavian Cloud spending 2010-2016

USDm

Perception of IT investments on productivity and profitability

967736

538367

+30%

2017

2,780

2016

2,113

2015

1,630

2014

1,253

2013

2012

2011

2010

Source: IDC Black Book Q1 2013, May 2013

74%

3%

23%

NoDon’t knowYes

12%

88%

Does IT investments contribute to improved productivity?

Do you expect improved profitability from IT supported process optimisation?

“We obtain an annual saving of 9 million euros and it is vital for the survival of our entire business”

Peter Maarssø, IT manager, Orifarm Group

CAGR


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Analysing the financial performance of EG as reported

Q3 2015 financials

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Reported financials

PRESENTATION OF FINANCIAL INFORMATIONIn this Company Description, the Group makes references to EBITDA and/or EBITA and EBITDA/EBITA margin, neither of which is defined under the Danish Financial Statements Act. The items excluded from EBITDA/EBITA and EBITDA/EBITA margin are significant in assessing the Group's operating results and liquidity. EBITDA/EBITA and EBITDA/EBITA margin have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, analysis of the Group's results as reported under the Danish Financial Statements Act. Other companies in the Group's industry and in other industries may calculate EBITDA/EBITA and EBITDA/EBITA margin differently from the way that the Group does, limiting their usefulness as comparative measures.

Under accounting policies of the Group certain development costs are capitalized in the balance sheet and not expensed in the year they were incurred. This means that EBITDA is higher than had such development costs been expensed. The development cost capitalized in the balance sheet will be depreciated over 3-5 year. EBITA includes depreciations on capitalized development costs.

DKK million Q3 2015 YTD 2015 LTM Q3 2014 31-12-2014

Realised:

Revenue 400 1,280 1,756 388 1,636

Costs of sales 76 251 366 78 354

Gross profit 324 1,029 1,390 310 1,282

Staff costs 225 769 1,038 209 924

Other external costs 31 116 150 52 181

EBITDA 69 144 202 49 177

Depreciations 12 34 43 8 29

EBITA 57 110 159 41 149

Normalisations:

Acquisition/sale of activities/companies *) 0 1 2 0 19

Restructuring expenses 0 1 20 3 26

Costs related to EG's acquisition of companies 1 4 6 4 6

Axcel's costs related to the acquisition of EDB Gruppen Holding A/S 0 0 0 0 1

Normalisations, total 1 6 28 7 52

Normalised EBITDA 70 151 230 56 229

Normalised EBITA 59 116 188 48 200

*Acquired companies may not have prepared interim financial statements according to the same accounting principles as EG. Normalisation of acquired companies

under "Acquisition/sale of activities" is therefore estimated on the basis of the financial due dil igence performed in connection with the acquisition.

Positive growth momentum – EG shows organic growth YTDThe increase in revenue from DKK 388 million in Q3 2014 to DKK 400 million in Q3 2015 is due to acquisitions and organic growth of 2.3% year to date. Adverse currency movements of NOK and SEK had a negative impact of approximately DKK 6 million on the Q3 2015 revenue

Increasing EBITDA and marginReported EBITDA increased from DKK 49 million (EBITDA margin 12.6%) in Q3 2014 to DKK 69 million (EBITDA margin 17.2%) in Q3 2015. This development is attributable to positive contributions from the acquired companies and from the Danish and Swedish business, whereas the Norwegian business contributed negatively due to challenges in parts of the consultancy business related to the oil industry. Reported LTM EBITDA amounted to DKK 202 million

Normalised EBITDA for Q3 2015 amounted to DKK 70 million compared to DKK 56 million in Q3 2014. Normalised LTM EBITDA after Q3 2015 amounted to DKK 230 million

For 2015, the company expects growth in reported EBITDA and normalised EBITDA as a result of the companies acquired in 2014 and 2015 as well as the restructurings carried out in Q4 2014


21

Selected balance sheet items September 2015

Selected balance sheet items

DKK million 30.09.2015 30.09. 2014

Intangible fixed assets 1,641 1,643

Tangible fixed assets 41 40

Financial fixed assets 0 0

Non-current assets 1,683 1,683

Inventory 16 16

Trade receivables 229 208

Contract work in progress 32 17

Prepaid rent and deposits 10 12

Other receivables 17 22

Prepayments 41 30

Trade payables -67 -58

Other payables -251 -215

Accruals -71 -76

Reported NWC -44 -45

Cash 8 43

- dividend 0 0

Securities 0 0

Bank loan -37 -36

Bond debt -1,100 -1,100

Employee bonds 0 -7

Tax payable -18 -15

Interest-bearing net debt -1,147 -1,115

The increase in trade receivables and contract work in progress is mainly due to a major project that began in 2015, and for which payment is due upon final approval of milestones. The first milestone was approved in early October and payment was received in early October.

The company's non-current assets amount to DKK 1,683 million, primarily in the form of goodwill and other intangible assets acquired in connection with company acquisitions.

The company reported a negative working capital of DKK 44 million.

The company's net interest-bearing debt at the end of Q3 2015 was DKK -1,147 million


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Leading provider of payroll and HR services for the public sector in Denmark

Silkeborg Data at a glance

23

In brief

Provider of payroll and HR services for the Danish public sector

– Handles more than 400,000 salary and pension payments to employees in the public sector each month

Market leading positions and strong customer relationships with regions and municipalities

Headquartered in Silkeborg, Denmark

– Approximately 207 employees

History dating back to 1966

LTM Sep-2015 revenue of DKK 276m and normalized EBITDA of DKK 50m

Previously owned by Jyske Bank but acquired by Axcel in December 2013

Financial development1

Source: Silkeborg Data. 1) Financials are adjusted to reflect normalisation adjustments for one-off items and in 2010-2012 there are also adjustments to reflect stand-alone financials of Silkeborg Data (then owned by Jyske Bank)

Product offering

Business split per customer type

Payroll tools

HR tools

Shift planning

Employee tools

Payroll specialist

Managers

Employees

29 of 98 municipalities4 of 5 regionsRevenue split

Regions43%

Municipalities45%

Central government

6%

Other6%

170196

236251

274 276

15.9%

11.7%

15.7%

17.1% 16.8%18.1%

8%

10%

12%

14%

16%

18%

20%

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 LTM Q3 2015

Revenue EBITDA margin adj.


High entry barriers in SD’s market

High entry barriers in payroll services for the public sector

24

Legislative complexityTender requirements

and market knowledgeSafe and robust solutions

• Complex market• Significant experience and

knowledge required• Large number of collective

and local agreements• Legislation

• Typical tender requirements require prior experience to qualify

• Market understanding and customer relationships are important

• Payroll services are mission critical for the public sector

• Accuracy and stability is crucial for customers

• Silkeborg Data’s software handles more than 250 collective agreements

• Dedicated team of 6 employees focused on reading, updating and implementing relevant laws and rules into the software as the collective agreements evolve

• Silkeborg Data’s market presence dates back more than 40 years

• Good reputation and high understanding of the market

First hospital customer

1970

First county customer

1995

4 region and 29 municipality customers

2015

Uptim

e f

or

SD

’s

Core

payr

oll

syst

em

(“B

asi

sløn”)

• Silkeborg Data’s payroll system has high accuracy and uptime

High switching costs

• Payroll service are closely integrated to other IT systems

• Large number of staff involved in the system

• Changing provider is associated with high switching costs

99.9

%

99.6

%

100.0

%

98.9

%

99.3

%

99.7

%

100.0

%

100.0

%

99.9

%

99.9

%

98.0

%

99.9

%

okt-14 dec-14 feb-15 apr-15 jun-15 aug-15


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Total Danish IT market

Overview of the Danish IT market

26

23.7 23.6 23.7 23.5

15.5 16.3 17.1 18.0

33.9 34.535.2

35.8

0

10

20

30

40

50

60

70

80

90

2012 2013 2014E 2015E

Hardware Software ServicesDKKbn

CAGR

1.8%

5.2%

-0.2%

The Public IT market (services and software, EG estimates)

2015

Services~12bn

Software~5bn

Commentary

Source: IDCNumbers are rounded and may not sum

A total market of close to DKK 80bn of which DKK ~17bn relates to Public IT services and software

IT market in Denmark is a large DKK ~80bn market with stable growth

EG is addressing the services and software parts of the market, representing close to 70% of the total IT market

Services and software grow faster than hardware

In terms of the Public Sector, EG estimates that spending on the IT services amount to approximately DKK 12bn. In addition to this, Public Sector spending on software is estimated by EG to an amount of DKK 5bn


Strong rationale for EG to acquire SD as a Group and to combine EG Citizen Solutions with SD to create a clear #2 in the public Danish IT services market

Key transaction rationale

27

Significant expansion of recurring revenue base and

EBITDA

Improved position in the attractive DKK ~17bn public Danish IT services market

Ability to create a clear #2 with EG & SD becoming a strategic partner to public customers

Substantial revenue and cost synergies from integration of organizations and operations

Proven management team to deliver the vision for a

combined EG & SD

Step change for EG Group in terms of size and profitability

1

2

34

5

6


The combined EG Citizen Solutions and Silkeborg Data

EG Citizen Solutions – overview

281) Before synergies

Combined revenues Market position EmployeesCombined EBITDA1 % recurring EBITDA1

DKK 600m(approx.)

DKK 600m(approx.)

#2(in Danish Public IT)

#2(in Danish Public IT)

420(approx.)

420(approx.)

71%71%DKK 105m(17.5% margin)

DKK 105m(17.5% margin)

EG Citizen Solutions


What do we want to create?

EG Citizen Solutions – customer offering

29

Value promise Current solutions

A supplier, which has the capacity to proactively develop digital solutions to address customer challenges

A supplier, which has the domain knowledge to develop reliable digital solutions addressing key customer pains

strategic partnerships A supplier, which has the ability to form strategic partnerships with regions and municipalities

Citizens service

Citizen self service

Utility self service

Marriage

Funeral

Complaints

Economics

Debtor controlling

Financial management

Employment

Communication between municipality and general practitioners

Communication between municipality and region

Social benefits (KY)

Culture

Resource booking

Allocation of funds

Social and healthcare

Foster care

Residence

Management of aid’s

Healthcare (Helbredskort, tillæg)

Salaary and HR

Salary payments

Management of shifts

IT operations

Hosting

PC Lifecycle

Environment

Public communication regarding infrastructure

Public event management

Internal efficiency

Digitisation of journals

Law information

Management of temps

EG and SD combined have at least 4 active products with all municipalities and considerable business with 4 out of 5 regions

EG and SD combined have at least 4 active products with all municipalities and considerable business with 4 out of 5 regions


EG Citizen Solutions & SD would create a real alternative to KMD and a clear #2 in the DKK ~17 billion Danish public IT services market

The vision for EG Citizen Solutions

301) Next 12 months. DKK 9m from personnel savings, DKK 7m from external consultants and DKK 1m from board and audit

Ab

ilit

y t

o d

rive

th

e c

usto

me

r a

ge

nd

a

Number of customer touch points & access to key decision makers

• A real alternative to KMD and a clear #2 in the DKK ~17 billion Danish public IT services market

• Sales synergies from becoming a strategic partner to local government

• Sales synergies from cross selling solutions to existing customers

• Cost synergies and savings of DKK 17m1 from integrating organisations and operations

• Strong platform for further M&A in the Danish market

• Proven management team in EG to deliver the vision

Key commercial high lights:Illustrative:


230

50

17

297

EG SD Synergies PF

Creation of a DKK 2bn+ IT services company with a higher degree of recurring EBITDA

Pro forma financials

31

1,756

276

2,032

EG SD Synergies PF

Revenue, pro forma LTM Sep-15, DKKm

EBITDA Q3 LTM – SD contributes with a large part of recurring EBITDA2

EBITDA, pro forma LTM Sep-15, DKKm

Pro forma capitalization

Recurring~51%

Recurring~56%

SD has ~83% recurring EBITDA

>0

1) Next 12 months. DKK 9m from personnel savings, DKK 7m from external consultants and DKK 1m from board and audit; 2) Normalised EBITDA, excluding synergies; 3) Existing includes: DKK 1,100m in bonds, DKK 37m in drawn RCF, DKK 18m in Other Debt. Transaction includes: DKK 300m new term debt and DKK 5m in Other Debt at SD; 4) Transaction includes DKK 28m of SD cash; 5) Synergies over the next 12 months amount to DKK 17m; 6) Pro forma for the new term debt

1

DKKm Existing Transaction Pro Forma

Total debt3 1,155 +305 1,460

Cash4 -8 -80 -88

Net Interest Bearing Debt (NIBD)

1,147 225 1,372

Normalised EBITDA (incl. synergies)5

230 67(incl. DKK 17m synergies)

297

Leverage Ratio 4.98x - 4.62x(4.89x excl. synergies)

Fixed Charge Cover Ratio6 2.78x - 2.88x(2.72x excl. synergies)

EG expects to realise substantial revenue

synergies going forward

EG expects to realise substantial revenue

synergies going forward

EG Pro forma


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Click to edit Master text stylesKey credit highlights

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Leading Scandinavian IT service and software provider

Diversified customer base

High cash conversion

Customised proprietary software solutions

Large share of recurring business

Experienced management team and lean organisation

Unique in vertical focus and deep sector knowledge


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RISK FACTORS IN GENERAL

Prospective investors should carefully consider the risks described below before making an investment decision. Since the Issuer is highly dependent on the performance of the Group, the following risk factors relate to the Group, rather than only to the Issuer. The risks described below are not the only risks facing the Group. Investment in the Bonds involves a high degree of risk and to the extent any of the risks described below have a material adverse effect on the Group’s business, Bondholders may lose all or part of their original investment.

The Issuer believes that the factors described below represent the principal risks inherent in the Group’s business and in investing in the Bonds. The Issuer does not represent that the statements below regarding the risks of holding the Bonds are exhaustive. Additional risk factors not presently known, or that are currently deemed immaterial, may also render the Issuer unable to pay interest, principal or other amounts on or in connection with the Bonds.

RISK FACTORS IN GENERAL

All of these factors are contingencies which may or may not occur and the Issuer is not in a position to express a view on the likelihood of any such contingency occurring. It is not possible to quantify the significance of each individual risk factor, as each risk described below may materialize to a greater or lesser degree, or may have unforeseen consequences. The risk factors are not listed in any order of priority with regard to significance or likelihood of occurrence.

Prospective investors should also read the detailed information regarding the Group, its business and industry in general as set out elsewhere in this Company Description, in the Issuer’s annual report and otherwise available to the investors in order to reach their own views prior to making any investment decision with respect to the Bonds. Prospective investors are recommended to seek independent advice concerning legal, accounting and tax issues relating to the specific circumstances of individual investors before deciding whether or not to invest in the Bonds.

Investors should be aware that the Bonds are exposed to market conditions of a general nature. Accordingly, the market price of the Bonds may be influenced by, for example, economic factors that cannot be foreseen at the time of investment. Investors should be aware that the number of Bonds in circulation may fluctuate over the term of the Bonds and that the marketability of the Bonds in the secondary market may change over the term of the Bonds, thus limiting investors’ ability to sell the Bonds. In conducting its business activities, the Group assumes risks of a varying nature, any and all of which may affect the Group's performance and the value of the Bonds.

Each of the risks set out below applies equally to the Issuer and the Group and the occurrence of any of the following risk factors may materially and adversely affect the Group's business, results of operations or financial condition and consequently have a negative effect on the Issuer and its ability to meet its respective obligations under the Bond Agreement.

Intra-group dependencies

A significant part of the Issuer’s assets are comprised of its shareholdings in its subsidiaries. The Issuer has limited income and a significant part of the Issuer’s income derives from dividends distributed by its subsidiaries. The Issuer and its ability to pay interest, principal and other amounts under financial indebtedness are therefore dependent on the capacity of the Group to generate earnings and distribute these within the Group.

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Risk Factors


RISKS RELATED TO THE BUSINESS

Global Economy

The Group is operating in primarily Denmark, Norway and Sweden and to a certain extent also worldwide, particularly with Scandinavian based global companies. The Group's operations and performance depend on economic conditions and the effects hereof on and within the Retail & Media, Logistics & Production, Public, Utility, Building & Construction and SaaS & Infrastructure sectors.

The global economy and the global financial system continue to experience a period of significant turbulence and uncertainty following the severe dislocation of the financial markets and economic decline that began in 2008. The current market climate has until recently been one of continuing recessionary conditions and trends in many economies throughout the world and this has impacted the commercial sector and the general financial situation of enterprises.

Uncertainty about global economic conditions poses a risk as consumers and businesses may postpone or reduce spending in response to tighter credit, negative financial news or declines in income or asset values and other macroeconomic factors, which could affect consumer spending behavior and have a material negative effect on demand for the Group’s software, services and products. The Group's revenues and gross margins are dependent upon demand for the Group’s software, services and products and if this demand declines or the margins decline, it could have a material adverse effect on the Group’s business, results of operations or financial condition.

The economic environment, pricing pressure and decreased employee utilization rates could negatively impact the Group’s revenues and operating results.

The Group is unable to predict the likely duration and severity of the current economic downturn and adverse global economic conditions. If the current uncertainty continues or economic conditions further deteriorate, it could have a material adverse effect on the Group’s business, results of operations or financial condition. Furthermore, if the economic downturn continues or worsens, the Group may not be able to secure short-term and long-term credit or leasing facilities on favorable terms or at all, which could have a material adverse effect on the Group's liquidity.

Industry and market risks

Technology changes

Rising new technologies such as cloud-based solutions and mobile technologies are gaining traction. Today, a considerable amount of the Group’s revenues are derived from cloud-based solutions, but other unknown technologies may arise and change the foundation for the software, services and products offered by the Group. Existing ERP-players such as the Group will have to adjust their software, services and product offerings with the emergence of new technologies, and if the Group does not manage to adjust their software, services and products accordingly, then it may have a material adverse effect on the Group’s business, results of operations or financial condition.

The Group’s financial condition is partly dependent on solutions based on large software platforms. These standardized solutions are offered in a highly competitive and specialized market. Approximately 60 per cent of the Group’s revenues are based on solutions and services related to Microsoft Dynamics AX and Microsoft Dynamics NAV, both of which are increasing their market share in the ERP SME segment. The Group is dependent on its ability to develop scalable best-in-class industry solutions that supplement these standardized solutions. Changes in the technical foundations of the standardized solutions and/or changes in customers’ preferred ERP platforms may force the Group to alter its products accordingly. The Group is forced to invest time and resources on educating employees and updating existing software, services and products to be competitive when updated versions of existing technologies and completely new technologies are launched. If the updated versions of existing technologies or the completely new technologies do not penetrate the market, these investments may prove futile. Furthermore the updated versions of existing technologies may contain errors and flaws, such as the 2012 version of Microsoft Dynamics AX, which are outside of the Group’s control. These errors and flaws may entail difficulties for the Group to price and budget project offerings for customers. The Group’s business will suffer if the Group fails to anticipate and develop new services and enhance existing services in order to keep pace with rapid changes in technology, in the industries and in the standardized solutions on which the Group focuses. This poses a risk that could have a material adverse effect on the Group’s business, results of operation or financial condition.

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Risk Factors - continued



Competition

The Group may face significant competitive pressure from other participants in the market resulting in pricing pressures, lower sales and reduced margins, which could have a material adverse effect on the Group’s business, results of operations or financial condition.

A significant part of the Group’s revenues are based upon customized add-on solutions to standard software supplied by platform providers, primarily Microsoft, and to a very limited degree SAP. In Scandinavia the platform providers do not deliver such customized solutions and the Group competes with smaller specialized companies e.g. CGI, Columbus IT, Fujistsu, KMD, Infor, iStone, NNIT, Netcompany Tieto and Visma.

A part of the Group’s activities within standardized solutions is subject to competition from competitors based in countries with a lower level of expenses. As the global market place develops with among other things the development of cloud technology lower market entry barriers are expected. If the Group does not meet these challenges it may have a material adverse effect on the Group’s business, results of operations or financial condition.

Industry changes

The balance between insourcing and outsourcing is constantly changing. An increased focus on insourcing will lead to falling sales especially within service agreements, while a decreased focus on insourcing will lead to rising sales.

If major platform service providers such as Microsoft seek downstream expansion in the value chain and increase their attention towards developing their own industry solutions then it may pose a risk which unless mitigated by the Group may have material adverse effect on the Group’s business, results of operations or financial condition.

Operational risks

Innovation and software development

In order for the Group to remain competitive within its markets, it is important that the Group is able to develop and launch new software, services and products, update existing products and services and expand new or redesigned products and services in a timely manner. Failure by the Group to do so might result in the Group falling behind its competitors. There are risks with launching a new product on to the market. The Group’s software, services and products are complex and may contain errors, faults, performance problems or defects which were undetected in testing. It is important that both the Group’s support and research and development teams become familiar with new software, services and products so as to be able to efficiently respond to any problems that may arise. Once a product is launched, it is necessary to ensure that quality standards are maintained to ensure continuing customer satisfaction and confidence. If problems were to occur which are not adequately managed it could damage the Group’s reputation and prove more difficult to market the product. If these risks were to arise they may adversely impact the Group’s business, results of operations or financial condition.

Compatibility

In order for the Group to remain competitive within its market, compatibility with other significant components and general IT standards is a core value. Failure by the Group to be compatible with other components might result in the Group falling behind its competitors and in loss of customers. If the issue of compatibility is not adequately managed it could damage the Group’s reputation and prove more difficult to market the product. This may have adverse effect on the Group’s business, results of operations or financial condition.

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Project Management

The management consultancy and programming part of the Group is a project driven organization that requires the Group to ensure that the offer documents have high standards as well as the subsequent management of the projects and resources is closely supervised. It is of vital importance that the projects are carried through with high quality in accordance with the agreed price and deadline. There are risks connected to marketing, sales, analysis and design, development, implementation and operation in the Group’s project planning. The Group has established well planned phases and has experience with calculating the risk of budgeting, resourcing and quality. As fixed prices become more common in the industry there exist risks that a project exceeds the anticipated number of hours based on a flawed estimation of the necessary resources needed. Furthermore there exists a risk when defining and describing the software, service and/or product to be delivered as there may occur misunderstandings between the Group and customers on the customers objectives which may result in re-deliverance or disputes.

Connection with Microsoft

The Group’s business and operations are among other things based on sales of standard Microsoft licenses and individually designed solutions based on Microsoft products but the Group has not entered into any agreements with Microsoft that are unusual or peculiar within the industry. However, if Microsoft’s market share decreases, it may have an adverse effect on the Group’s business, results of operations and financial condition.

Customer Concentration

The Group operates mainly in Denmark, Norway and Sweden and has a large customer base. Currently the Group has a diversified customer base with low dependency on single customers. Based on LTM Q3 2015, the 10 largest customers accounted for approx. 11 per cent of the Group’s revenues, while top 20 per cent accounted for approx. 17 per cent. The Group’s division Citizen Solutions is characterized by having relatively larger customers than the rest of the divisions. Dependency on one or more customers within Citizen Solutions may have material adverse effect on the division’s business and results of operations.

Attack by IT viruses

As an IT business, attacks by IT viruses are a threat, both to the Group and its customers. If the Group’s products or internal IT systems are contaminated with a virus this could temporarily prevent the Group’s customers from conducting their business or the Group from providing adequate support and services to its customers. Failure to maintain sound IT infrastructure and virus protection could therefore result in disruptions and if they were to continue for a considerable length of time they may adversely impact the Group’s business, results of operations or financial condition.

Fires and other natural catastrophic events

The Group’s servers, systems and physical operations are vulnerable to damage or interruption from earthquakes, volcanoes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. The Group may not have sufficient protection or recovery plans in certain circumstances and the Group’s business interruption insurance may be insufficient to compensate the Group for losses that may occur. As the Group rely heavily on the Group’s servers, systems, the physical operations and the Internet to conduct the Group’s business such disruptions could negatively impact the Group’s ability to run the business, which could have an adverse affect on the Group’s operating results.

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Acquisitions

The business segments within which the Group is active are subject to continuous consolidation driven by the increase in cross-border trade and the search for economies of scale. As illustrated by the acquisition of Silkeborg Data, the strategy of the Group is to participate actively in this consolidation process. This strategy for long-term growth, improved productivity and profitability depends in part on the Group's ability to make acquisitions and to realize the expected benefits from its acquisitions. While the Group expects such acquisitions to enhance its value proposition to customers and improve its long-term profitability, there can be no assurance that the acquisitions will meet the Group's expectations within the established time frame or at all.

Acquisitions involve a significant number of risks, including, but not limited to, risks arising from change of control provisions in contracts of any acquired company, local law factors, pending and threatening lawsuits and risks associated with restructuring operations. The integration of acquired companies may result in unforeseen operational difficulties and costs, and the Group may encounter unforeseen difficulty in retaining customers from and key personnel in acquired businesses. The Group may not be able to realize the expected benefits from a certain acquisition or the profitability of the acquired company may be lower than expected or even result in a loss.

To successfully manage the integration of acquired companies or assets, the Group will need to maintain high standards of service and manage its employees effectively. The Group's successful growth will furthermore depend on its ability to manage its expanding operations, as well as the operations of the networks of its local partners, including its ability to establish and maintain an adequate IT infrastructure, to integrate new qualified personnel and any newly acquired businesses on a timely basis, and to maintain robust financial and management control and reporting systems and procedures. There is a risk that the Group will not succeed therein.

If the Group is unable to expand its operational, financial, and management systems in a manner that supports the expected growth, or is unable to attract, motivate and manage a skilled workforce, the Group may not be able to continue to satisfy customer demands. If the Group expands the business too rapidly in anticipation of increased customer demand that does not materialize, the increase in operating expenses could exceed revenues growth and as a result reduce net income. Thus if the Group is unable to manage its growth, it could have a material adverse effect on the Group’s business, results of operations or financial condition.

The Group has built up considerable goodwill on its accounts due to acquisitions. Notwithstanding that the goodwill is impairment tested annually the rise of new “game changing” or transformational technology may entail that the goodwill must be immediately written off.

Risks related to employees

Attracting and retaining employees

To a large extent the Group relies on human know-how. The employees of the Group have specific sector related know-how, which is valuable for the Group. The Group has not generally entered into non-competition or non-solicitation clauses. If employees with specific sector related know-how leave the Group, the Group might lose valuable knowledge and the employees might be hired by competitors or establish their own companies.

The customers of the Group require deep sector knowledge including supply chain knowledge and understanding. To ensure the Group continues to offer high level advice and solutions, including further development of software, services and products, thereby ensuring profitability the Group depends largely upon highly skilled technology professionals and the Group’s ability to hire, attract, motivate, retain and train these personnel. Key employees might be attracted to opportunities in rising market, i.e. Norway. A failure to attract and retain competent key employees could have material adverse effect on the Group’s business, results of operations or financial conditions.

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Invoicing rate

The Group is highly dependent on the employees’ invoicing rate, which equals the billable hours. The invoicing rate depends on the composition of the staff as well as how the individual employee spends his time. In 2014, a change in the invoicing rate of 1.00 percentage point across the EG group will result in an increase in the gross profit and thus in EBITDA of DKK 15 million (taking into account fixed price contracts). A decline in the employees’ invoicing rate across the Group could have material adverse effect on the Group’s business, results of operations or financial condition.

Increased wage pressure

In certain industry sectors and countries there continues to be a significant wage pressure due to the demand for skilled employees. In a positive economic environment the wage pressure will rise as well as the employee turnover. This may cause heavier expenses for training of new employees. If the Group does not comply with the wage demands within these industry sectors and countries, the Group may lose valuable employees. The wage pressure and employee turnover may have an adverse effect on the Group’s profitability

IPR and Legal Risks

Contractual liability

Typically a service agreement contains provisions requiring a high percentage of uptime as well as other service requirements. In connection with the contract negotiation phase the Group seeks to draft provisions that mitigate the size of potential liability claims and penalties. The Group has established internal controls to secure reasonable liability provisions when entering into agreements. Nevertheless, the Group is exposed to contractual liabilities, which could have a material adverse effect if such exposure materializes. Moreover, human errors in judgment may cause the Group to accept contractual liability provisions inadvertently or outside of internal control systems established to secure management approvals.

Under some contracts or legal regimes the Group may have unlimited liability for losses caused by its own negligence, and such liability may not be covered by the Group’s insurance policies.

Litigation and disputes

The Group’s software, services and products relate to extensive, complex transactions often involving considerable sums. Customers or other parties may file claims for compensation for loss or damage alleged to have arisen due to reported faults or defects in the Group’s software, services, products and management or the Group may become party to judicial or administrative proceedings relating to the Group’s business, including, responsibility for software, services and products as well as contractual interpretation and intellectual property rights. Any such claims against the Group or the Group’s involvement in any judicial or administrative proceedings in respect of such claims could mean that the Group is forced to expend considerable sums and resources in defending such claims, whether or not they have legal merit, and this could adversely impact the Group’s business, results of operations or financial conditions.

Insurance

The Group believes that is has a normal, market standard insurance program. The insurance program is reviewed once a year. However, the insurance program contains provisions on own risk and not all types of losses and liabilities are covered. If a loss occurs that the insurance does not cover, it may have material adverse effect on the Group.

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Competition

The Group had entered, enters and will enter into agreements with other companies who in some aspects of the Group’s business may be assessed as competitors of the Group. The Group does not believe that it has entered into any agreements that contain provisions that infringe current competition law. However, the competition authorities in various jurisdictions may interpret the agreements otherwise. Furthermore, there cannot be given any assurance that an adoption of new competition legislation may result in that certain of the provisions of the agreements may be assessed as an infringement of the new competition law. If the Group fails to comply with the existing competition law this could adversely impact the Group’s business, results of operations or financial conditions.

Intellectual property rights

The products marketed by the Group consist mainly of computer programs developed by the Group over a long period of time. The Group relies primarily on copyright and trade secret protection, and not on registered rights, for the computer programs in question. It cannot be assured that the intellectual property rights relied on by the Group will afford sufficient protection of the Group’s technology or business and given the international market in which the Group operates, any attempt to take measures against any infringement of its intellectual property rights may be difficult and result in considerable costs. If the risk of infringement and the fetters on access to judicial remedies were to materialize, it may adversely impact the Group’s business, results of operations or financial conditions.

In addition that Group has and may in the future enter into cooperation agreements and other contractual arrangements with third parties that allow such third party to use knowledge obtained during such cooperation or the right to use any source codes, which may include the third party applying such knowledge in its own products and services.

The Group does not consider that its software, services and products infringe the rights of any third party. Nevertheless, customers or others might make claims to the contrary whether or not they have legal merit. If such claims were to be made the Group may be prevented from licensing the necessary technology or be unable to develop alternative software, services or products to avoid such claims of infringement and continue to deliver the software, services and products to its customers. The Group gives its customers certain guarantees and indemnities including, amongst others, that the Group holds all necessary rights to the products that are made available to the customers. If any claims were filed against customers, enforcement of the guarantee or infringement claims under the indemnity may result in considerable costs for the Group, which may adversely impact the Group’s business, results of operations or financial conditions.

Open Source

The Group incorporates open source software into the Group’s platform. The Group believes that the use of open source codes has not surpassed what is deemed ordinary within the industry. It is within ordinary practice for Danish and Scandinavian companies, who offer and develop proprietary solutions, to use open source codes when developing proprietary solutions, including use of open source components. Given the nature of open source software, third parties might assert copyright and other intellectual property infringement claims against the Group based on the Group’s use of certain open source software programs. The Group could be required to seek licenses from third parties in order to continue offering the Group’s software, services and products, to re-develop the Group’s software, services and products, to discontinue sales of the Group’s software, services and products, or to release the Group’s proprietary software source code under the terms of an open source license, any of which could adversely affect the Group’s business. This may adversely impact the Group’s business, results of operations or financial conditions.

Legislation and regulations

As the Group’s business activities are spread over a number of geographical markets, it is exposed to many different laws, regulations, ordinances, agreements and guidelines. New laws and regulations or changes in the applicability of existing laws and regulations to the Group’s business activities may result in a risk of reduced revenues and/or increased costs. If changes in laws or regulations, or their applicability to the Group’s activities, were to occur it may adversely impact the Group’s business, results of operations or financial conditions.

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Financial Risks

Seasonality

The Group’s earnings and turnover may vary from period to period. If the spreading of earnings and turnover over a year surpasses expectations it may have an influence on the Group’s liquidity as a part of the Group’s expenses do not fluctuate with the revenues on a short term basis.

The Group’s biggest single expense is salary. Almost all staff are hired as salaried employee. It is therefore not possible to reduce the major part of the Group’s expenses on a short term basis. The Group has launched programs to minimize this risk. If the programs do not have the expected effect it may adversely impact the Group’s business, results of operations or financial conditions.

Risk of refinancing and financial covenants

The Group has debt obligations and is required to dedicate a portion of its cash flows to service the debt, which reduces cash available to fund acquisitions and to finance operations, capital expenditures, working capital and other general corporate purposes. A part of the Group’s financing is short term financing, making the Group dependent on having such credit facilities renewed from time to time. If any of the lenders under such financing agreements are unwilling to extend such arrangements and the Group is unable to find an alternative source of funding at comparable rates, this may affect the Group’s liquidity adversely or increase the Group’s interest expenses substantially. Furthermore, the level of indebtedness may render the Group unable to secure new credit facilities when required, either on commercially attractive terms or at all.

The Group’s ability to make payments on and to refinance its debt, and to fund planned capital expenditures and other strategic investments will depend on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are outside the Group’s control.

There can be no assurance that the Group’s business will generate sufficient cash flows from operations or that future debt and equity financing will be available in an amount sufficient to enable the Group to pay its debts as they fall due or to fund other liquidity needs.

Certain of the Group’s financing arrangements are subject to various covenants, including financial covenants, including the Bond Agreement, which could limit the Group’s ability to finance its operations and capital needs and pursue acquisitions and other business activities. There can be no assurance that the obligations contained in the aforementioned financing arrangements will be met.

You are advised to carefully read the covenants in the Bond Agreement, including the carve-outs and permitted actions.

A breach of the Group’s financing agreements may trigger cross-default or cross-acceleration provisions and provide a substantial number of the Group’s lenders with a right to cancel their commitments to the Group and require the outstanding indebtedness to be immediately repaid. In addition, an event of default would occur under the Bonds. In such circumstances, all of the Group’s debt could be accelerated at the same time.

The occurrence of either of the above could have a material adverse effect on the Group’s ability to satisfy its debt obligations as they fall due and, as a result, could have a material adverse effect on its business, results of operations or financial condition.

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Currency

The Group’s accounts are consolidated in DKK, whereas a proportion of the proceeds of sale of the Group’s products and services outside Denmark are denominated in NOK and SEK. In the twelve months up to 30 September 2015 revenues in NOK constituted approximately 14 per cent and revenues in SEK approximately 11 per cent of the total consolidated revenues. In the twelve months up to 30 September 2015 the revenues in NOK constituted approximately 3 per cent and revenues in SEK approximately 6 per cent of the total EBITDA. The Group is consequently exposed to currency risks, including currency exchange control risks and other restrictions by foreign governments. To some extent the Group hedges currency risks but there is no standard operating procedure requiring hedging in any event. Furthermore there are risks connected to conversion of intragroup outstanding accounts. Fluctuations in currency exchange rates, including primarily NOK but also in SEK, relative to DKK could have a material adverse effect on the Group’s business, results of operations or financial condition.

Goodwill

See the section “Acquisitions” for the description on the risks related to goodwill.

Taxation and Duties

The Group conducts its operations through companies in a number of different jurisdictions. Applicable taxes could increase significantly in each of these countries as a result of changes in the tax laws or their application. Furthermore, the Group may become subject to tax audits, which could increase the amount of tax that the Group is required to pay and have a material adverse effect on its business, results of operations or financial condition.

The Group has transfer pricing arrangements among subsidiaries in relation to various aspects of the Group’s business, including operations, marketing, sales and delivery functions. Transfer pricing regulations require that any international transaction involving associated enterprises be on arm’s-length terms. The Group considers the transactions to be on arm’s-length terms. The determination of the Group’s consolidated provision for income taxes and other tax liabilities requires estimation, judgment and calculations where the ultimate tax determination may not be certain. The Group’s determination of its tax liability is always subject to review or examination by authorities in various jurisdictions.

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RISKS RELATED TO THE BONDS

Suitability

The Bonds may not be a suitable investment for all investors. Each prospective investor in the Bonds must determine the suitability of that investment in light of its own circumstances. In particular, each prospective investor should:

(i) have sufficient knowledge and experience to make a meaningful evaluation of the Bonds, the merits and risks of investing in the Bonds and the information contained or incorporated by reference in this Company Description;

(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Bonds and the effect the Bonds will have on its overall investment portfolio;

(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Bonds, including Bonds where the currency for principal or interest payments is different from the potential investor’s currency;

(iv) understand thoroughly the terms of the Bonds and be familiar with the behavior of any relevant indices and financial markets; and

(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

Credit Risks

The Group may become unable to pay interest, principal or other amounts on or in connection with the Bonds, which may affect the value of the Bonds adversely. An increased credit risk or decrease in the Group’s creditworthiness may have an effect on the market price of the Bonds.

The Group’s ability to make payments on the Bonds will depend on its ability to generate cash or refinance itself in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are outside the Group’s control.

Registration

The Bonds will be registered with VP Securities A/S and payment of interest, principal or other amounts on or in connection with the Bonds will be made through VP Securities A/S. The Bondholders will thus rely on VP Securities A/S’ procedures for transfer, payment and communication with the Group.

Modification, Waivers and Substitution

The terms of the Bonds contain provisions for calling meetings of Bondholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Bondholders, including Bondholders who did not attend and vote at the relevant meeting and Bondholders who voted in a manner contrary to the majority. A Bondholder may be adversely affected by such decisions.

Bondholders Representation

In accordance with the Bond Agreement, the Bond Trustee represents each Bondholder in all matters relating to the Bonds and the Bond Agreement and holds and shall enforce the Bond Agreement on behalf of the Bondholders. The Bond Agreement contains provisions to the effect that a Bondholder is prohibited from taking actions of its own against the Issuer. This does not, however, rule out the possibility that the Bondholders, in certain situations, could bring their own action against the Issuer, which could negatively impact the chances of an effective enforcement of the Bond Agreement.

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Additionally, under the Bond Agreement the Bond Trustee has the right in some cases to make decisions and take measures that bind all Bondholders without first obtaining the prior consent of the Bondholders, including:

(a) the right to agree to amendments to the Bond Agreement provided such amendments do not materially and adversely affect the rights or interest of the Bondholders or such amendments are made solely for the purpose of rectifying obvious errors and mistakes; and

(b) the right to accelerate the Bonds and exercise any right, remedies, powers or discretions under the Bond Agreement upon the occurrence of an Event of Default.

Legislative Changes

The terms of the Bonds are based on Norwegian law as in effect on the issue date, [●] October, 2015 and no assurance can be given as to the effect of any possible judicial decision or change to Norwegian or Danish law or administrative practice after [●] October, 2015.

Covenants

See “Risk of refinancing and financial covenants” page 42.

Liquidity

The Bonds will be admitted to trading on the First North Bond Market Copenhagen. The first two tranches are already admitted. If an effective market does not develop, the Bonds may not be very liquid. Therefore, investors may not be able to sell their Bonds easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. Illiquidity may have a material adverse effect on the market value of Bonds.

The Issuer expects the liquidity of the Bonds to be limited.

Early Redemption

Under the terms of the Bonds, the Issuer may under certain circumstances redeem the Bonds prior to the Redemption Date. An investor may not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Bonds being redeemed and may only be able to do so at a significantly lower rate.

Restrictions on Resale

The Bonds are subject to certain restrictions on resale and other transfers thereof as set forth in the section entitled “Notice to Prospective Investors”. The Issuer gives no representation with respect to the existence of a secondary market for the Bonds or the liquidity of such a market if one develops. Consequently, Bondholders must be able to bear the economic risk of their investment in the Bonds for the terms of the Bonds.

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Market Volatility

The market price of the Bonds may be volatile and subject to significant fluctuations caused by various factors, many of which not directly related to the Group. Factors having a potential effect on the price of the Bonds include actual or anticipated fluctuations in the results of the operations of the Group or its competitors, circumstances, trends or changes in the markets in which the Group operates, changes to the market’s valuation of other corresponding companies, changes to management and as well as general macroeconomic conditions.

Tax Risks

Prospective investors should be aware that the investment in the Bonds may have unforeseen tax implications. Prospective investors should seek independent advice relating to tax risks prior to making a decision to invest in the Bonds.

Exchange Rates

The Issuer will pay principal and interest on the Bonds in DKK. This presents certain risks relating to currency conversions if a Bondholder’s financial activities are denominated principally in a currency or currency unit other than DKK. As a result, Bondholders may receive less interest or principal than expected, or no interest or principal.

Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, Bondholders may receive less interest or principal than expected, or no interest or principal.

European Monetary Union

It is possible that prior to the maturity of Bonds the euro may become the lawful currency of Denmark. In that event (i) all amounts payable in respect of any Bonds denominated in DKK may become payable in euro; and (ii) the law may allow or require such Bonds to be re-denominated into euro and additional measures to be taken in respect of such Bonds. The introduction of the euro in any jurisdiction could also be accompanied by a volatile interest rate environment, which could adversely affect investors in the Bonds.

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The Bonds will be secured

The security interests over the Security are subject to the Intercreditor Agreement. For certain risks relating to the Intercreditor Agreement, please see the section “Intercreditor Agreement” under these Risk Factors.

If the Issuer defaults on the Bonds, the Bondholders will be secured only to the extent of the value of the Security underlying the security interest. The Group may incur additional indebtedness in the future which may also be secured by the Security on a pari passu basis with the Bonds. If the value of the Security is less than the value of the claims of the Bondholders together with claims from the other secured creditors, those claims may not be satisfied in full.

The value of the Security may fluctuate over time and no appraisal is made by us or any other person with respect to the value of any Security. The amount received upon a sale of the Security will depend on numerous factors including, but not limited to, the actual fair market value of the Security at such time, market and economic conditions, and the timing and the manner of the sale. There also can be no assurance that the Security will be saleable and, even if saleable, the timing of any liquidation or foreclosure is uncertain.

Under applicable law, a security interest in certain assets can only be properly perfected, and its priority retained, through certain actions undertaken by the secured party or the grantor of the security. Absent perfection the holder of the security interest in the Security may have difficulty enforcing or may be entirely unable to enforce such holder’s rights in the Security in competition with third parties, including the receiver or administrator in bankruptcy and other creditors who claim a security interest in the Security. In addition a debtor may in certain circumstances discharge its obligation under a receivable by paying to the security provider until the debtor receives a notification of the existence of the security interest. Finally the ranking of pledges may be determined by the date on which they are perfected. A security interest created on a later date but perfected earlier would generally have priority.

The security interests in the Security and the provision of any of the Guarantees may be set aside and clawed-back under applicable law claimed by the bankruptcy estate of the security provider in the event that the security provider is deemed to have been or became insolvent at the time the security interests were provide, or due to the security interests were provided, and the secured parties knew or had reason to believe that the security provider was or became insolvent, subject to applicable hardening periods if any.

The security interests in the Security will not be granted directly to the Bondholders but will be granted to the Bond Trustee as security agent. The Bond Agreement and the Intercreditor Agreement will provide that only the Bond Trustee in its capacity as security agent has the right to enforce the Security and the Guarantees. As a consequence, Bondholders will not have direct security interests and will not be entitled to take enforcement action in respect of the Security securing the Bonds, except through the Bond Trustee as security agent, who will provide the relevant instructions with respect to enforcement.

Nordic Trustee ASA acts not only as trustee for the Bondholders and security agent for the Bondholdes, but also as security agent for all secured parties under the Intercreditor Agreement. In certain situations Nordic Trustee ASA will accordingly by obliged under the Intercreditor Agreement to act on behalf of and under and following the instructions of other parties than the Bond Trustee.

Furthermore the ability to enforce the Security will be subject to mandatory provisions of the laws of the jurisdiction in which the security interests over the Security are taken, and the concept of a trustee or a security agent may not be recognized in all relevant jurisdictions.

The security interest in the Security and the Guarantees may also be released in certain situation described in the Intercreditor Agreement.

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Structural Subordination

The payment obligations of the Issuer under the Bonds will be structurally subordinated to payment obligations owed to creditors of the subsidiaries of the Issuer and the subsidiaries of such subsidiaries. The Guarantors will unconditionally and irrevocably guarantee the payment obligations of the Issuer under the Bonds. The Bonds will accordingly have the benefit of a direct claim on the Guarantors, but not on all members of the Group. The benefit of the Guarantees are also limited by the provisions of the Intercreditor Agreement and general law. Please see the sections “IntercreditorAgreement” and “Enforceability of the Security Interest Granted and Guarantees”

Intercreditor Agreement

The security interests over the Security are subject to the Intercreditor Agreement. The Intercreditor provides that the proceeds of enforcement of the Security will be applied to repay claims of thelenders under the RCF and counterparties to certain hedging liabilities in priority to the holders of the bonds (such creditors, the super senior creditors). Holders of the Bonds may therefore receive less or no proceeds from the enforcement of the Security or in a insolvency scenario.

The holders of the Bonds may not control the enforcement of the Security as such enforcement is certain circumstances controlled by the super senior creditors as provide in the IntercreditorAgreement. The arrangements in the Intercreditor could result in the enforcement of the Security in a manner that results in lower recoveries by holders of the Bonds.

Additional security interest may be provided to the RCF lender in the form of cash cover which are not also granted to the Bonds, and the terms of the RCF may be amended by the parties thereto without the consent of the holders of the Bonds and without such amendment entitle the holders of the Bond to get repaid, prepaid or accelerate the Bonds, save that the RCF cannot be increased above DKK 90,000,000.

Under the Intercreditor Agreement the security agent will in the case of conflicting enforcement instructions with respect to enforcement of the security interests in the Security follow the enforcement instructions provided by the Bond Trustee as representative of the holders of Bonds in the event that the Bond Trustee as representative of the holders of Bonds and the representative of the super senior creditors deliver conflicting enforcement instructions to the security agent. The security agent will, however, not follow the enforcement instructions delivered by the Bond Trustee as representative of the holders of Bonds, but follow the enforcement instructions of the representative of the super senior creditors, if (i) it cannot reasonably be expected that the recoveries from the enforcement of the Security will result in any payment to the holders of the Bonds, (ii) enforcement of the Security has not commenced 90 days after the initiation of the enforcement or (iii) the super senior creditors have not been fully discharged 6 months after the initiation of the enforcement.

The holders of the Bonds are in certain default, insolvency and acceleration events described in the Intercreditor Agreement obliged to turn over any amount received in respect of the Bonds to the security agent under the Intercreditor Agreement. This may also include holding such amount on trust or the benefit of the security agent pending payment or pay an amount to the security agent corresponding to any amount received in the form of set-off. In such events the Issuer and the Guarantors will not pay any amounts to the holders of the Bonds. Instead the Bond Trustee will be instructed to direct that payments are made to the security agent under the Intercreditor Agreement to applied in accordance with the waterfall in the Intercreditor Agreement.

The Bonds will under the Intercreditor Agreement be subject to provisions on equalisation. This means that a holder of Bonds in the event the not all holders of Bonds are repaid in full after enforcement of the security interests in the Security, the Guarantees and any other money or assets available for realisation may be required to pay an amount to the security agent under the Intercreditor Agreement for the purpose of the security agent distributing such amount to other holders of Bonds so that the resulting loss borne by each holder of Bonds corresponds to its holding of Bonds out of the total principal amount of Bonds outstanding.

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The Intercreditor Agreement contains provisions whereby the security interests in the Security can be released in certain circumstances, including in connection with a permitted disposal of the Security in either a non-distressed or distressed scenario or in connection with an enforcement of the security interests in the Security. The same applies to the obligations of a Guarantor under a Guarantee. The security agent under the Intercreditor Agreement is irrevocably authorised to effect such release on behalf of the Bondholders. The net proceeds of any distressed disposal of Security will be used in accordance with the waterfall in the Intercreditor Agreement, which means that the super senior creditors will rank in priority to the Bondholders in relation to such proceeds. Any proceeds of the disposal in a non-distressed scenario may have to be applied for the purpose of mandatory prepayments under financing agreements, including the RCF and the Bond Agreement.

You are advised to carefully read the Intercreditor Agreement in full and recommended to seek independent legal advice concerning the interpretation and your position under the IntercreditorAgreement.

Interest Rate

The Bonds are exposed to the risk of fluctuating interest rate levels and uncertain interest income. Investment in the Bonds involves the risk that subsequent changes in market interest rates may adversely affect the value of the Bonds.

Legal Investment Considerations

The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Bonds are legal investments for it, (2) the Bonds can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Bonds. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Bonds under any applicable risk-based capital or similar rules.

Dematerialized Securities

Because the Bonds are dematerialized securities held in the system of VP Securities A/S, investors will have to rely on the clearing system procedures for transfer, payment and communication with the Issuer. The Bonds will not be evidenced by any physical note or document of title other than statements of account made by VP Securities A/S. Ownership of the Bonds will be recorded and transfer effected only through the book entry system and register maintained by VP Securities A/S.

Change of Control Put Option

The Bond Agreement contains provisions relating to a "Change of Control". Upon the occurrence of a Change of Control, each Bondholder will have the option to put all or part of its Bonds to the Issuer who will be required to redeem or purchase or procure the purchase of such Bonds at a price equal to 101 per cent of the nominal amount together with accrued interest. If a Change of Control were to occur, the Issuer may not have sufficient funds available, or may not be able to obtain the funds needed, to redeem or pay the purchase price for all of the Bonds put to it by Bondholders. Failure to redeem or purchase the Bonds would be an Event of Default under the Bond Agreement.

Various restrictions in future indebtedness of the Group may also prohibit the Group from being provided with the funds necessary to redeem or purchase any Bonds prior to their stated maturity in the case of a Change of Control. Before the Issuer can be provided with any funds to redeem or purchase any Bonds, the Group may be required to repay indebtedness under future senior credit facilities, or, possibly, other future indebtedness that ranks senior to the Bonds or obtain a consent from various lenders of other indebtedness, to make funds available to permit the redemption or repurchase of the Bonds.

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Choice of Law and Enforcement

The Issuer is a private limited liability company under the laws of Denmark, and the terms of the Bonds are subject to Norwegian law, which may complicate or make it difficult for Bondholders to exercise or enforce certain rights. For example, it may be difficult for investors outside Denmark to serve process on or enforce judgments against the Issuer in connection with the Issue or in connection with their rights as Bondholders.

The Enforceability of the Security Interests Granted and Guarantees

The laws on inter alia financial assistance may limit the security providers’ ability to grant the security interests in the Security and the Guarantors’ ability to provide the Guarantees. These limitations arise under various provisions or principles of corporate and tax law which include provisions requiring a subsidiary security provider or guarantor to receive adequate corporate benefit from the provision of the security or guarantee respectively, financial assistance rules, ultra vires rules and rules governing preservation of share capital. In Scandinavia the Security Documents will contain language limiting the amount of debt secured to the maximum extent allowable in accordance with applicable local law.

Please note that the Danish security providers and Guarantors have not and will not in connection with the provision of the security interests in the Security and Guarantees apply or follow the procedure in the sections 206-209 of the Danish Corporations Act for the provision of legal financial assistance, and no security provider or Guarantor from any other jurisdiction will apply or follow a similar procedure under the laws of such jurisdiction.

Accordingly the security interests of the grantor in these jurisdictions were to be enforced; the claims of the holders of the Notes may be limited. If these limitations were not observed, the security interests could be subject to legal challenge. Furthermore, although we believe that the security interests are enforceable (subject to local law restrictions), a third party creditor may challenge these security interests and prevail in court.

Danish law limits the ability of Danish subsidiaries, directly or indirectly, to guarantee and secure debt of a direct and indirect parent company. These limitations arise under various provisions, which include, among others, provisions or principles of corporate law concerning minority interests and the interests of creditor, ultra vires rules and rules related to capital maintenance, meaning that the issuance of a guarantee or granting of security must be justifiable in light of the financial position of the entity in question.

Further, it is a requirement under Danish law that a guarantor or security provider obtains an adequate corporate benefit from the issuance of a guarantee or granting of a security. It has not been tested to what extent such corporate benefit is established when a subsidiary guarantees and secures debt of direct or indirect parent company.

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