World Bank Conference on Corporate Restructuring

Turkey: The Istanbul Approach

Ira W. Lieberman Senior Economic AdvisorOpen Society Institute

March 22-24, 2004

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

9 14 152413

2211

40

5

5

67359

70

30

4

• 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

1998 1999 2000 2001-Q1

Operationally distressed

Financially distressed

Unsustainable

Sustainable

Change In Performance of Companies in Years

100% = 194 213 213 210

Profitability by Size

Profitability by Size

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Large Medium Small

Financial Expense Burden by Size

Financial Expense Burden

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Large Medium Small

Financial Expense Coverage with EBIT by Size

Financial Expense Coverage with EBIT

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Large Medium Small

Total Bank Debt

9% 11%15%

41%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2000q1 2000q4 2001q1 2001q4

Distributions by score and size, 2000-2001, ISE companies Total bank debt, % (all sample)

Companies scored above 2

*score above 2 = companies with negative equity

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 businessbankruptcy reformaccounting reform foreign direct investmentprivatizationgovernance

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

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

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

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

Istanbul Approach,

Institutional Structure

BDDKCoordinating Committee

(TBA, TOBB, SDIF, State Banks)

TSKBCoordination/Intermediation

Arbitration Panel

Creditor Committee

Creditor Committee

Creditor Committee

Case I Case II Case III

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

Istanbul Approach Process

Inter-Creditor

Agreement

Selection of Companies

QualityReview

Formation of Creditor

Committee

Standstill/Due Diligence

Workout Agreement

Creditors/Debtor

55-75%

>75%

Arbitration Panel

Final Agreement

Working Capital

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)

• 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

Istanbul Approach

Results Summary of Workouts as of Septemer 30, 2003

• Agreements

• Agreed but not signed

• In Progress

• Rejected

• Total

Number

20

6

7

1

34

Mio of US$

4,561

622

223

17

5,423

(Source: TSKB, IA Coordination Secretariat)

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,

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

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

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

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

Next Steps: Other Reform Areas

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

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