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]