Market Exit Rules - Principles Case Studies for Slovakia & Turkey Why do Entrepreneurship Initiatives Fail Lessons from International Experience Cairo, Egypt 5 November 2006 Gordon W. Johnson Kirkland & Ellis LLP Kirkland & Ellis LLP

Context: Credit Environment Systems Foster Commercial Confidence & Reliability –Markets more accurately price, manage, resolve risk –Establish reliable backdrop for negotiations –Reduce asset deterioration & promote credit access Safety valve for corporate distress –Salvage viable businesses and preserve jobs –Efficient transfer of assets (bankruptcy) Vital to balance in commercial relationships – Encourage responsible corporate behavior & governance – Penalize owners and managers who lack financial discipline or behave irresponsibly 2 Kirkland & Ellis LLP

Premise: The Starting Point Credit is the lifeblood of modern commerce –Willing lenders & range of lending options –Reasonable, manageable repayment risk –Effective commercial and security laws Increasing significance of collateral –Greater assurance of recovery –Requires broadest range of security (im) movable –Ineffective laws lead to underutilized assets Linkage to Financial System –Properly assess, price and resolve default risk –Basel II: Capital requirements based on risk weighting / loss exposures and unexpected loss (tied to legal systems) 3 Kirkland & Ellis LLP

Risk Assessment Continuum Increasing risk of financial distress  Credit Assessment  Information  Identify Security  Negotiation  pricing  Contracting  Registry  Monitoring  Risk Assessment  Information  Identify Options  Negotiation  pricing  Amend Contracts  Possible action  Monitoring  Enforcement  Formal Insolvency  Liquidation, Rescue  Security Rights  Information  Negotiation (Plan)  Implementation  Monitoring Risk Evaluation Process Credit AccessRisk ManagementResolution / Recovery 4 Kirkland & Ellis LLP

Scope: ICR Systems Reviewed Legal Systems Governing Commercial Relationships  Credit Information systems  D & O Liability  Risk Management Practices  Workout Framework  Enabling Framework (i.e. tax treatment of bad debts, NPLs)  AMCs & systemic corrective measures Enforcement / InsolvencyCredit Risk Management Credit Access / Protection  Compatibility of Systems  Collateral Systems (Im)movable  Registry Systems (Transparency)  Enforcement Systems  Public Auction & Collections IPG A1-5IPG B1-5  Corporate Exit Mechanisms  Liquidation  Rehabilitation  Quasi-formal restructuring IPG C1-D9  Implementation –Institutional Systems –Regulatory Systems 5 Kirkland & Ellis LLP

Systems in Action: Laws & Implementation ROSC AreasLegal FrameworkInstitutional FrameworkRegulatory Framework Credit Information Credit Referencing, Credit Information & Safeguard Credit Bureaus, Agencies, Financial Institutions Central Bank, Finance, Agencies & Self-Regulation Security & Collateral Guarantees & Setoffs Mortgage & Pledge Laws Title Transfers / Assignments Notary Publics Notice and Registry Systems Ministries of Economy, Justice, Company Affairs, Trade & Industry Registries Company Registries Land Records / Registries Security Registries Registry Institutions Companies / Land Registrar Regulation of Practices by Government Agency or Private Entities Debt Resolution – Enforcement Contract Laws Civil/Commercial Proceedings Auction Laws, AMCs Internal Systems (Banks) Courts Central Bank Bank Supervisors Courts / Execution Quasi Formal Restructurings Alternative Dispute Resolution Tax Laws Out-of-court restructurings Bus. / Commerce Chambers Coordinating Institutions Courts ADR Network Coordinating Institutions Professional Associations Reorganizations Concordat, Schemes, etc. Reorganization Laws Fast Track Procedures Courts Company Registrar Agencies Ministry of Justice Supreme Court Regulatory Agency / Assoc Liquidations Bankruptcy Laws Auction Laws Company wind-up Courts Company Registrar Insolvency Administrators Auctioneers Experts 6 Kirkland & Ellis LLP

Accounting & Auditing Context for Insolvency Institutional Enterprise Creditors Employees Company laws Shareholders Directors etc Labor laws Secured Creditors State Collateral laws Mortgage laws Contract/Commercial Tax & other laws Securities laws Others laws Bank Regulators Environmental, Tariff & others Professionals Administrative Regulatory Legal Corporate Governance Governmental & Political Cultural & Social Economic & Commercial Insolvency System Fiscal & Monetary Bankr., Civil Commercial Agency 7 Kirkland & Ellis LLP

Overview of Insolvency Systems Liquidation Common Law countries UK, Commonwealth (53) - Australia/NZ, HK, Malaysia, Singapore, South Asia, Sub- Saharan Africa, handful of Latin Am & Caribbean Civil Law countries Continental Europe, Asia, Francophone Africa (OHADA), Latin America United States DIP Reorganization model Centrally Planned FSU, China, Vietnam Sharia law countries Islamic & Arab nations 8 Kirkland & Ellis LLP

Recent Reform Revolution 1979 to mid-80s: Major reforms: US, France, UK 1990s to date: FSU Transition & EU integration –New Europe, CEE, and Central Asia (The Transplant Decade) 1990s: Rescue culture driven reforms: –Australia, Canada, Germany Post-1997: Financial Crisis / Related Reform –Asian 5: Indon, Kor, (Mal), Phil, Thai / Japan –Post-2000: Russia, Mexico, Turkey, Brazil, Argentina, Bolivia, Post-2000: Progressive reforms –China, India / S. Asia –EU - Spain, Portugal, Italy, others Post-2001/2004: Age of Standards / Harmonization 9 Kirkland & Ellis LLP

AFR MNA Cameroon, Kenya, Mauritius, Morocco, South Africa, Uganda ASIAIndia, Nepal, Philippines, Sri Lanka, Vietnam ECA Czech Republic, Kyrgyz Republic, Lithuania, Romania, Russia, Slovak Republic, Slovenia, Turkey, Ukraine LAC Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, El Salvador, Honduras, Jamaica, Nicaragua, Paraguay Lessons: ICR ROSCs Kirkland & Ellis LLP

Lessons: L egal Framework & Registries 1.Creditor Rights Legislation –Secured Transactions on Real Estate: functional –Secured Transactions on Movable Assets: outdated 2.Registries –Inefficient & unreliable - Need to modernize and computerize –Need for registries for recording interests in movable assets 3.Insolvency Legislation –Frequently Antiquated & Inefficient –Unsupportive of modern businesses, especially lacking rescue procedures for financially distressed enterprises 11 Kirkland & Ellis LLP

Lessons: Court & Regulatory Practices 4.Weak / Inefficient Enforcement Proceedings –True of unsecured and secured claims –Lack of extra-judicial enforcement mechanisms –Outmoded procedural codes and regulations 5.Ineffective Court Systems –For enforcement and insolvency proceedings –Inadequate training among judges / inefficient case administration –Inconsistency in decision making / lack of transparency –System abuse and influence 6.Weak Regulatory Frameworks –Lax or absent procedures to qualify, license and supervise and discipline administrators and practitioners 12 Kirkland & Ellis LLP

Case Study - Slovakia Privatization of Banks ( ) Starting a new business (2002) Corporate governance (2002) Security/access to credit (2003) Insolvency & Enforcement (2006) 13 Kirkland & Ellis LLP

Background – Starting a new business Business unfriendly environment incompatible with economical reforms and their aims Potential for corruption Contrary to the idea of free and smooth entry into the market Need to harmonise the law with the acquis communautaire in some aspects (e.g. publicity) 14 Kirkland & Ellis LLP

Background – Corporate governance Unclear and hardly enforceable directors’ duties Unclear rules for the protection of minorities often abused by both majorities and minorities Lack of suitable capital protection rules (incl. financial assistance and related parties transactions) Need to harmonise the law with the acquis communautaire 15 Kirkland & Ellis LLP

Background – Security/access to credit Difficult to create security over a number of classes of assets (e.g. movables, receivables) Difficult to enforce security Access to credit stifled by most enterprises, but mostly SMEs Unjustified priorities (state related claims) 16 Kirkland & Ellis LLP

Slovak: Key policies - Security/Credit Access Wide definition of collateral (incl.future assets) Non-possessory charges Public register of charges Out-of-court enforcement (private or auctions) Removal of unjustified priorities 17 Kirkland & Ellis LLP

Background - Insolvency / Enforcement Inefficient mos. to open, 3+ yrs to complete Ineffective - low recovery rates (affecting both secured and unsecured creditors) Lack of modern restructuring No rules fostering responsible behaviour by stakeholders No regulated profession of trustees Enforcement - protracted and unpredictable 18 Kirkland & Ellis LLP

Slovak: Key policies - Insolvency Consistent with World Bank Principles Clearer rules governing stakeholders Management of process transferred to trustees New regulated profession of trustees created More control shifted to creditors (secured creditors in particular) over realization of assets New moratorium and restructuring concepts to give troubled businesses a chance 19 Kirkland & Ellis LLP

Case Study - Turkey (Background) Financial Crisis failed banks (USD billions NPLs) 90% lending secured - unconditional mortgage (by pass courts) No security in moveable assets Contested foreclosures (2-3 yrs or longer) 99.5% of cases (est. 500,000) execution; 0.5% insolvency cases; stigma; 3-5 years No workout or modern company rescue law 20 Kirkland & Ellis LLP

Uncontested Order 4-8 mos Declaration of Bankr (1 yr) Procedure is rarely used Liquidation (4-8 yrs) (Ave. 6 yrs) Concordat 1 yr2 yr3 yr Unconditional Mortgage (90% lending) Judgment/Execution Uncontested Public Auction 2-3 mos Contested Public Auction 2-3 years Contested Judgment/Exec. 2-3 years Contested Decl. (2-3 yrs)Claims Resolution (3-5 yrs) Appeals from Declaration of Bankruptcy (2-3 yr) Secured Creditor Actions Exempt No creditors are stayed Turkey - Debt Recovery Procedures 21 Kirkland & Ellis LLP

Turkey (Restructuring via Reconciliation) Court Judgment Affected Creditors * Injunction * Affected Creditors are those whose debts are in default or to be restructured. Out-of-court Restructuring (prepackaged plan) Status conference Pretrial relief Interim Supervisor Priority Financing Application Upon request Hearing on Plan Application Commercial Court 30 days Dismissed Approved Amended: 3 months / 2 month extension = 5-6 months Istanbul Approach Out-of-court Restructuring Application 66% Bank Signatories Approval by 75% Majority Approval 50+ number & 2/3 amt Court Judgment Approved Denied Liquidation Concordat Within 30 days Previously: 2-3 years BRSA Bank Restructuring Agency 22 Kirkland & Ellis LLP

Lessons and Trends Today’s reality: Increasing convergence in practices and laws driven by changes in business, technology and the int’l factor Vacuum tube issue: laws cannot be developed without reference to the culture and broader legal framework, nor without input from key stakeholders Transplant issue: no ideal laws, only those that serve the needs of a country; models and transplants are difficult 23 Kirkland & Ellis LLP

Lessons and Trends Old-wine-new-wineskin: laws easily change, practices do not Implementation gap: good laws, weak capacity, lax regulation Other challenges: labor, taxes, governance, accounting Risk Management: Increased need for better risk management tools and models / across the board (Basel II) 24 Kirkland & Ellis LLP