WORKOUT GROUPS: WHY THEY SUCCEED, WHY THEY FAILModerator: Jim Kaddaras, Partner, Developing World Markets

Introduction of panelists and panel topics:

• Why MFIs get into trouble: Mirza Halilovic, responsAbility—overview

• The composition of the lenders group and debt restructurings: Udo Schedel, independent financial advisor

• The nature of the MFI: a) from a governance perspective: Doug Leavens, ACDI VOCA; Chairman, KredAqro, Azerbaijan; b) from a management perspective: Dajana Legin-Dedic, head of Planning and Analysis, Sunrise, Bosnia

• Outcomes: a) Winding-Up and Bankruptcy, and b) Successful endings to workout groups: Jim Kaddaras, DWM

• Follow-Up Questions, including audience participation

Why MFIs get into trouble

Indicators for upcoming challenging situation

These are only indicators and normally it is a combination that pushes an institution into a challenging situation.

• Asset Quality : • Assessing loan portfolio value• Analyzing non-loan assets

• Capital structure: • What trends in CAR should be expected going forward?• What impact could a trend have on equity?

• Profitability: • What policies should be clarified to assess whether earnings figures

accurately represent business performance?

Why MFIs get into trouble

Indicators for upcoming challenging situation

• Liquidity: • Is the institution generating enough cash from its operations in order

to service its liabilities?

• Corporate Governance: • Any changes in mission, strategy or business plan?• How are the BoD and management structured? • What are the control mechanisms stakeholders have? • What is the level of transparency?

• Macroeconomic environment: • How can a deterioration in the political or economic environment

influence the performance of an institution?

The composition of the lenders group and debt restructurings

What needs to be done by whom and when 1) Form a lenders’ group -> diversity of participants/members:

• Social mission vs. commercial interests• Social funds vs. commercial banks

2) Decide on the lead in the group -> speak with one voice -> work load on the leader

3) Agree on a stand-still for a limited period-> a three- to six-month breathing space

What needs to be done by whom and when (cont’d) 4) Stand-still period: Enable all parties to have the same picture -> reduce the risk of acceleration

MFI/consultant: to develop scenarios of debt restructuring, to be discussed with the lenders and building the basis for the inter-creditors agreement

Seniority of debt Collateral Maturities Waterfall principle

What needs to be done by whom and when (cont’d)

Prime objectives: (i) keep the MFI alive and (ii) ensure timely servicing of new re-payment schedules

5) Liquidity planning with scenarios: -> decrease of interest rates, -> waiver of penalty interest, -> stretching of maturities, -> suspension of interest payments (for a limited period)

The different collateral positions:- secured vs. unsecured - senior vs. subordinated- Legal and financial implications

CASE STUDY: KredAqro, Azerbaijan1. How did KredAqro get into trouble?

• Grew quickly – attracted many social investors

• Growth peaked in 2008 with assets of $50 M

• 2008 recession squeezed Azeri economy

• Portfolio shrank - debt paid back

• No new loan capital in 2010

• By early 2011 - new funding needed

2. Tipping Point • KredAqro unable to pay its scheduled maturities in June 2011

• Local bank pulled its line of credit - swept KA’s accounts

• Liquidity crisis created

•DWM convened inter-creditor group to discuss next steps

•Long, slow process of restoring trust and stabilizing the company began

3. From Potential Liquidation to Standstill and Restructuring

• Creditors gave KredAqro time to catch up on missed payments

• After five months, creditors created a restructuring plan

• Loans were rescheduled over a 30-month period

• Inter-creditor agreement (ICA) signed in late 2011

• KredAqro came back to life

4. Steady Progress, Strengthened Governance & Management

• “Right-sizing” the institution, retaining the best employees

• Improving portfolio quality and product diversification

• Maintaining customer base

• Reassuring creditors and government agencies alike

• Complete change of management, plus technical assistance

• Strengthening of the Board of Directors

5. New Funding Obtained, Workout Concluded

• KredAqro obtained new funding from new sources in 2012, a key requirement of the creditors under the ICA

• With a final creditors’ call, all agreed ICA’s conditions met • ICA expired at the end of 2013 in accordance with its terms

• Some old investors have offered new funds

• New investors are lined up - fresh funds coming in

• Creditors’ faith restored !!

6. Lessons Learned

• Restore transparency

• Maintain owner’s presence on site

• Demonstrate serious concern and commitment

• Update creditors regularly

• Provide independent consultant oversight

• Shrink the portfolio to pay debt if necessary

CASE STUDY:Microcredit Foundation Sunrise, Bosnia

1. Creation of the Lenders’ Group and Agreements Reached

• Reasons: portfolio quality, and failure to comply with certain covenants of the original loan agreements

• The situation in the financial market/sector in Bosnia and Herzegovina during 2009, 2010 and 2011 • Description of the Standstill Agreement and the Restructuring Agreement

2. Cooperation between the Group of Lenders and SunriseNegative Aspects

• Communication problems – Sunrise - Group of Lenders (from confusing communication to resolution of all uncertainties)

• Lack of Group’s trust in Sunrise

• Sunrise’s perception of a lack of trust among the lenders themselves

• Large number of group members, different missions, methods of work and outstanding loan amounts

• Hiring of an audit company to assess portfolio collections;

•the activities of the consultant aimed at preparation of the Business Plan;

3. Cooperation between the Group of Lenders and SunriseNegative Aspects (cont’d)

• increase in the interest rate under the Restructuring Agreement;

• increased repayments and prepayment of two loans that led to:• significant reduction of the portfolio,• reduction in the number of clients, and • high cash balances sitting in bank accounts instead of being disbursed to the clients

4. Cooperation between the Group of Lenders and Sunrise-cont’dPositive Aspects

• Extension of the repayment terms by most lenders (Sunrise used time to improve portfolio quality and to achieve positive business results)

• Activities of two consultants and the representative of the Group of Lenders on the Governance Board •Successful survival of the crisis, resolution of issues and concerns regarding business cooperation with foreign investors, primarily social funds.

Winding-Up and Bankruptcy

• Out-of-court winding-up: why and how does this occur?• Mechanics—budget, escrow account and cash waterfall• How do you know when it’s over?

• In-court winding-up: what is bankruptcy and what is insolvency?• Voluntary vs. involuntary• Reorganization vs. liquidation• Role of the bankruptcy court and trustee/administrator• Creditors rights and priority of payments• How long does it take?

Successful Endings to Workout Groups

• Expiration of intercreditor agreements• When is it safe to lend again and how do lenders know it?• Lender psychology and the collegiality of social investors • How might lenders’ support to MFIs change after a

workout?• What might MFIs do differently after a workout?

• Follow-Up Questions, including audience participation

THANK YOU !