3 2 yevgen -corp-debt-restruct rom

8/6/2019 3 2 Yevgen -Corp-Debt-Restruct Rom

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Corporate Distressed Debt Recovery:

Banks Perspective

Bucharest, March 3, 2011Dr. Y. Prokopenko, IFC Advisory FMCRP

Managing Partner, DMC Forum


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IFC Support to the Financial Sector Post-Crisis

IFC Top Priorities

Supporting financial institutions and staying close to them through a

strong local presence Maximizing counter-cyclical role

Business Approach

Detailed and frequent monitoring of existing investment Pricing to reflect market condition

Equity investments in financial institutions and AMCs significantlycontributing to working out the corporate distressed debt in the region

Combining IFC funds and money mobilized from governments and other IFIs,

IFC address problems experienced by the financial sector in ECA through:

Launch of the DARP and Global Equity Funds. IFC expects to invest $1 billion

over three years with additional funds provided by other investors

Risk/NPL Management Advisory Services


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IFC Partnerships in Distressed Assets Buy-Out and Restructurings

Investor Invr/ServicerFund Mngr

1. IFC is a limited partner to the distressed assets funds of CRG ADM; Fund Managers are liable for the investment decisions.IFC co-invests.

2. Vaerde has investment appetite on all types of distressed assets, though some markets do not pose sufficient invtpotential

Country Type of AssetsRestructuring

Distressed Corporate

Debt

Secured

Corporate/SME debts

Unsecured

Corporate/SME

Distressed Debt

Secured Retail

Loans Buy-Out

Unsecured Retail

Debt Buy-Out

Russia Vrde Vrde Vrde EOS Vrde

Ukraine ADM CRG Vrde Vrde Vrde Vrde EOS

Albania CRG

Baltic States CRG Vrde Vrde Vrde

BiG CRG

Bg CRG EOS

Croatia CRG Vrde Vrde Vrde EOS

Hungary CRG Vrde Vrde Vrde Vrde

Kz ADM

Macedonia CRG EOS

Romania ADM CRG Vrde Vrde Vrde Vrde

Serbia CRG Vrde Vrde Vrde EOS

Slovakia CRG

Slovenia CRGTurkey ADM


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Provide institution-building needs in RM and NPL work-outs Dedicated Risk and NPL Management Advisory in ECA: help

clients identify key issues with corporate NPL management \

and put in place the right systems and processes (incl., new

capacity-building programs for client banks in NPL Portfolio

Workouts) Financial Infrastructure & Policy: reinforces engagement

with stock exchanges (Perspektiva, Adam Stock Exchange)

and other types of platforms to help financial institutions

securitize NPLs raise funding for projects rehabilitation,

eventually exit and re-engage in lending activities when theeconomic cycle permits

Special IFCs Advisory Services


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Challenges of CD Collections and Recovery

in the ECA Emerging Markets

Government controls (MIC, sensitive industries),

External and internal political pressures,

Financial information is often unreliable, The legal framework frequently does not support

debt recovery.

Collections vs Recovery dilemma (Collections Client

is willing to work on a solution; Recovery Client isuncooperative or not communicating)


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CD Workout Planning

Detailed analysis of file, collateral establishing the repaymentcapacity (if any);

Prepare action plans;

Prepares specific bad debt proposals;

Action steps shall be measurable and achievable with firm dates;

Regular reporting of progress;


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Prior to the Work-Out

Who Bank deals with SME / Corporate

Has Bank got personal guarantees?

Is client Co-operative?

Might Internal Fraud by Front Office be suspected? Document Check- Are the Credit Agreements &

Collateral in order?

Get view of Professionals on Sector / Valuations

Advise the debtor to seek repayment proposals


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Workout Assessment Questions

What is the cause of clients problem?

Where is the money going?

How is the client working to solve these problems?

Client willingness to cooperate with bank?

Can the client bring payments up to date?

Strengths and weaknesses of Banks position?

Other debts incurred by borrower? What can be done to avoid late payment in the

future?


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Work-out Process Best Practices

Banks must improve their distressed corporate credit

management in order to prevent the quality of theirassets from deteriorating further.

Be open to any offer made by customer in the light ofany additional information provided.

Keep Minutes of all meetings and communicate inwriting with clients for clarity.

Try to include Professional Advisors where possible.

Get debtor to sign and return a copy of the minutes.

have a system in place for remedial action on non-performing credits and workout situations


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CORPORATE WORK-OUT CYCLE

ESTABLISH

CAUSE

GENERATE

SOLUTIONS

IMPLEMENT

AGREED

ACTIONS

ASSESS AND AGREE

ACTIONS


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Pre-Insolvency

Special Payment Arrangements work for loans in arrearswhen a borrower is experiencing temporarydifficulties -an agreementbetween the borrower and the bank thatallows for a partial deferralof the regular payment and a

planfor recovery.Rescheduling is used when the borrowers repayment

capacity is reduced for an indefinite period of time, if theCollateral is in good condition and the borrower has thefinancial capacity to make reduced systematic payments,

- extending the repayment period. NOTRECOMMENDED! Good money after bad as ithides the Problem, doesnt solve it

Where agreement is not reached with customer inrelation to the debt repayment RECOVERY

THROUGH INSOLVENCY IS RECOMMENDED


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Sell-Out Debt to a Specialized Fund

Usually done at a steep discount

Usually cases where the cases are extrahard and where write-off of the balance isthe next step

Option: sell entire bad debt portfolio(Serbia) can be risky.

Securitization through the SPVs atdesignated platforms


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Creditors Rights Exercise dilemma: Workouts vs.Formal Insolvency

Economic benefits forcreditor banks:

Speed (6 vs. 26 monthson overage)

Cost (50 cents in a dollar

vs. 5, actually 4 in Ua, 9

in RF

Control (bankers gainingcontrol over businesses)

Keys to successful work-outs in CIS EmergingEconomies (RF, Ua, Kz):

Proper due diligence andenterprise valuation

Sufficient creditors

administrative levers in alargely neutral (meaning

pro-debtor) environment

Proactive and creativeapproach

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Work-out Implementation Features

Stabilize distressed companies to avoid

unwarranted (self-propelled) liquidation / asset-funneling

Agree to apportion losses among secured andunsecured creditors

Facilitate financial andoperational restructuring andmonitor progress

Commit on providing access to working capital;equity restructuring

Gap bridging mechanism between workout andinsolvency proceeding (lock-up agreements; courtsupervised creditor initiated insolvency proceedings)

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Features of Formal Workout Structures

Creditor standstill arrangement

Committee of creditors to lead negotiations for greatercreditor body; information sharing

Opportunity to insert qualified professionals (interim

administrators)

Opportunity for creditors to develop rehabilitation

plan;

Debt-to-equity swap

Cram down to enforce the plan; pre-selection of aprofessional AMC running the non-core assets

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Corporate Work-Outs Increased shareholder contribution Haircut to shareholders - Share capital

reduction must be greater than debt reduction Clarity of usage of funds cap on capital

expenditure Try to involve debt/equity swap Repayment period- 5 year maximum Benefit from written down/off assets - Any

subsequent benefits from assets written down as part ofrecovery scheme should be shared.

Anti-dilution clause important- No new shareissuance which will dilute value of equity.

Covenants for monitoring - inter-company lending;transfer of assets; dividend payments; future borrowings.


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External AdministrationThe most common regime is an Administrator, appointed by either the

borrower or the lender(s) to take control of a company and seek aconsensual restructuring.

Key features include

- Control for a limited time handed to an independent party \ competent creditor, subject to mitigating its conflict of interest

- Claims against the company are frozen, providing thenecessary breathing space to effect a restructuring

- All restructuring options are on the table

- Implementation of a plan requires majority agreement

- Administration is usually limited to a short amount of time

- Inability to reach agreement on a restructuring leads to aformal liquidation process


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Case studies

Case 1: pooling of claims towards a groupof real estate constructors by 6 financialinstitutions into a hedge-fund.

Case 2: debt-to-debt and debt-to-equityswaps, a cram-down and equity basedevelopment through the exchange.

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Takeawaysfrom the CIS Emerging Markets

Banks shall locate the pools of externalexpertise to manage the distressed non-coreassets;

Once the professional management had beeninstalled, the working capital shall be providedby existing creditors.

Investment climate stakeholders shall supportthe reforms of insolvency laws, creating meaningcreditor remedies to lower the reliance onshadow administrative levers.

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Thank You!

Dr. Yevgeniy ProkopenkoIFC Financial Markets

Crisis Response Program

[email protected]+380-95-2805271
mailto:[email protected]:[email protected]

3 2 yevgen -corp-debt-restruct rom

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