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

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. 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 199819992000 2001 - Q1 Operationally distressed Financially distressed Unsustainable Sustainable Change In Performance of Companies in Years 100% = 194213 213 210

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 BDDK Coordinating Committee (TBA, TOBB, SDIF, State Banks) TSKB Coordination/Intermediation Arbitration Panel Creditor Committee Creditor Committee Creditor Committee Case ICase IICase 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 Quality Review Formation of Creditor Committee Standstill/Due Diligence Workout Agreement Creditors/Debtor 55-75% >75% Arbitration Panel Final Agreement 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. 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

18. 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)

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. 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

24. 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