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World Bank Conference on Corporate Restructuring

World Bank Conference on Corporate Restructuring. March 22-24, 2004. Turkey: The Istanbul Approach. Ira W. Lieberman Senior Economic Advisor Open Society Institute. Contents. Turkey’s 2001 Financial/ Economic Crisis Istanbul Approach: Corporate Workout Program - Inter-Creditor Agreement

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World Bank Conference on Corporate Restructuring

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  1. World Bank Conference on Corporate Restructuring March 22-24, 2004 Turkey: The Istanbul Approach Ira W. Lieberman Senior Economic Advisor Open Society Institute

  2. Contents • Turkey’s 2001 Financial/ Economic Crisis • Istanbul Approach: Corporate Workout Program - Inter-Creditor Agreement - Institutional Structure - Process • Policy Issues • Policy Response • Results to-date • Residual Problems

  3. Change In Performance of Companies in Years 100% = 194 213 213 210 Sustainable Operationally distressed Financially distressed Unsustainable 2001-Q1 1998 1999 2000 • 2001 first quarter results show a dramatic increase in the number of financially distressed and unsustainable companies • Collectively these companies account for 2/3 of all listed companies

  4. Profitability by Size

  5. Financial Expense Burden by Size

  6. Financial Expense Coverage with EBIT by Size

  7. Total Bank Debt *score above 2 = companies with negative equity

  8. Reform Issues -Government policy focused on: the need to address corporate distress - Corporate crisis assessment linked to other areas of necessary reform • bank restructuring • financing support for small business • bankruptcy reform • accounting reform • foreign direct investment • privatization • governance

  9. Role of Stakeholders • All relevant stakeholders – Government,TBA , TOBB worked to create the ‘Istanbul Approach’ to Corporate Workouts (an approach tailored to Turkey based on other country experience) • New Banking Law incorporated necessary legal changes and tax incentives to adoption of Istanbul Approach

  10. Istanbul Approach Istanbul Approach: What is it? • Voluntary restructuring agreement between creditors and debtor • Approach developed by the Bank of England and employed widely in recent crises-East Asia, Mexico

  11. Istanbul Approach Workout Program • Workout support for 150-200 companies highly distressed mid-size companies • Potentially viable companies • Debt overhang make them temporarily illiquid • Credits from several banks

  12. Istanbul Approach Basic Principles • Inter-creditor agreement • Private banks • State banks • SDIF banks • Institutional Structure • Coordination secretariat…TSKB • Arbitration committee • Creditor committee (for each case) • Eligible firms

  13. Istanbul Approach, Institutional Structure Coordinating Committee (TBA, TOBB, SDIF, State Banks) BDDK TSKB Coordination/Intermediation Arbitration Panel Creditor Committee Creditor Committee Creditor Committee Case I Case II Case III

  14. Istanbul Approach For each case • Standstill agreement • Due diligence by external experts • Agreement by majority of creditors(55-75%) (75% or over) • Arbitration panel to resolve inter-creditor problem if 55-75% creditors agree • Restructuring Agreement

  15. Istanbul Approach Process Inter- Creditor Agreement Selection of Companies Formation of Creditor Committee Standstill/Due Diligence 55-75% Arbitration Panel Quality Review Workout Agreement Creditors/Debtor Final Agreement >75% Working Capital

  16. Istanbul Approach • Rescheduling of debt over medium term 5-10 years • Variety of instruments/ modalities • Simple maturity extension • Re-capitalization of interest in arrears • Convertible debentures • Debt/equity swaps • Debt write-down • New working capital (fresh money)

  17. Istanbul Approach • Workout agreement provides for covenants on future performance/restructuring actions • Some workouts may need to be re-calibrated second round • Some firms may need to be put into liquidation/bankruptcy • Ideally, workouts should become pre-packaged bankruptcies legally recognized by the courts

  18. Results Summary of Workouts as of Septemer 30, 2003 • Agreements • Agreed but not signed • In Progress • Rejected • Total (Source: TSKB, IA Coordination Secretariat)

  19. Results • Dependence on long term rescheduling of debts ranging from 5-10 years; with certain classes of secured creditors at time benefiting from shorter reschedulings; • Grace period from 6 months to two years for principal repayment , • Consolidation of debt past due at interest rates ranging from 1.5 to 5 percent over Libor, with 3 percent over Libor the mode; • Debt/ asset swaps in an amount of US$ 273, 6 equal to 6 % of restructured debt,

  20. Results • Fresh captial, cash in an amount of US$ 79 million and non-cash (LCs, guarantees, construction bonds, etc.) in an amount of US$ 132.9 million, a total of US$ 211.9 or 4.6 % of restructured debt; • Interest-rates on fresh capital ranges from 5-7 % over Libor presumably reflecting the perceived risk; • Only US$ 3,6 million of debt was written off, and • Reported or agreed company restructuring, minimal, only one change of management noted in the 20 cases

  21. Residual Issues: Workouts • Category II loans, Banks wanted Forbearance to restructure these loans • Role of State Banks, SDIF Banks, Foreign Banks, Free Rider Problem • SDIF ineffective as an asset management company

  22. Banks focused on rescheduling and not restructuring – Why? • Lack of workout skills • Bankruptcy law • Did not want to commit fresh money • Mixed corporate/ bank ownership structures Examples: - Cukrova Group - Bank Pamuk and Yapikredi Bank

  23. Next Steps: Other Reform Areas SME Support Program • More systemic approach versus selective approach of workouts • SMEs need liquidity infusion – working capital • World Bank financing support for SMEs as part of corporate rehabilitation

  24. Next Steps: Other Reform Areas Bankruptcy • Reform work on-going, need to accelerate to complement workouts • Pre-package workouts Accounting reform • IAS • Inflation adjusted accounts • Consolidated • Critical steps at a minimum for publicly listed companies and workout companies

  25. Next Steps: Other Reform Areas FDI – Turkey lagging EC Accession countries • New equity for banks and companies • Distressed assets • REITS Privatization – not as a revenue source • Telecom • Electricity • Loss makers in PA’s portfolio – sell rapidly to reduce fiscal burden • Turkey started first, now a lagging case Important for Competitiveness

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