CONFIDENTIAL FOR RESTRICTED USE ONLY (NOT FOR USE BY THIRD PARTIES)

THE REPUBLIC OF UKRAINE

ENTERPRISE RENEWAL: ADDRESSING THE IMPERATIVE LINK BETWEEN

ENTERPRISE FINANCIAL DISTRESS AND RESOLUTION OF NON-PERFORMING LOANS

TECHNICAL NOTE JUNE 2011

THE WORLD BANKFINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY

EUROPE AND CENTRAL ASIA REGION VICE PRESIDENCY THE WORLD BANK

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TABLE OF CONTENTS

EXECUTIVE SUMMARY…………………………………………………………………………………………...1

I. INTRODUCTION....................................................................................................................................3II. THE 2008 GLOBAL CRISIS IMPACT ON UKRAINE..............................................................................3III. FINANCIAL SECTOR REFORM AND RESOLUTION OF NPLS................................................................5

A. Banking Sector Landscape.........................................................................................................5B. Non-performing loans: Levels and Treatment...........................................................................7C. Current initiatives to promote resolution of NPLs and troubled assets....................................10D. Framework for NPL Resolution and Recovery........................................................................12

IV. CORPORATE RESTRUCTURING CONTEXT IN UKRAINE..................................................................14A. Corporate Sector Landscape.....................................................................................................14B. Impact of the 2008 Crisis on the Corporate Sector..................................................................16C. Post-crisis enterprise restructuring efforts................................................................................18D. Framework for corporate restructuring....................................................................................20

1. Corporate restructuring mechanisms........................................................................................202. Renewal of the Debtor’s Solvency and Corporate Rehabilitation...........................................24

V. RESTRUCTURING OF STATE-OWNED ENTERPRISES.........................................................................26A. State-Owned Enterprise Sector Landscape..............................................................................26B. Restructuring of State-Owned Enterprises...............................................................................28

VI. RECOMMENDATIONS.........................................................................................................................31

AnnexesAnnex 1: Financial Sector: Non-Performing Loan Data 2005-2010

Annex 2: Corporate Sector Distress: 2008-2010Annex 3: Key Features of informal restructuring mechanisms

Annex 4: Comparative Country Experience – Workout FrameworksAnnex 5: Regulatory Considerations Supporting Prepackaged Plans

Annex 6: Data and Statistics on State-Owned Enterprise Sector

Tables and Figures

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EXECUTIVE SUMMARY

The Ukrainian banking system constitutes nearly 95 percent of the financial sector with assets equaling 96 percent of GDP. As of May 2011, there were a total of 177 banks operating in Ukraine (down from 184 at year end 2008), of which foreign-owned banks held slightly more than one third of total bank capital. Banking concentration remains low. The top 17 banks hold two thirds of market share, while the bottom group of 116 smallest banks collectively account for only 9.4% of assets, 9.3% of clients’ deposits and 12.5% of total equity of the banking sector.

The financial crisis in Ukraine was caused by both external and internal factors. A major impact of the crisis was the devaluation of hryvna and destabilization of the banking system. The banking system’s rapid expansion from 2005-2008 also contributed, as growth outpaced prudential regulation and supervision. Poor liquidity and risk management practices, excessive credit and foreign exchange exposures and related-party lending contributed to bank failures during the crisis. Measures adopted following the crisis helped to stabilize and recapitalize the banking sector, but further work needs to be done to reactivate lending.

Distressed loans continue to pose an enormous obstacle to the recovery of the Ukrainian banking system with NPLs (substandard, doubtful and loss loans) reaching as high as 40% of the total loan portfolio. Official statistics (containing only doubtful and loans past due more than 90 days) reflect corporate NPLs as of end April 2011 at approximately 64.8 billion UAH, or 12.2% of corporate loan portfolio. This has had a stifling effect on lending, as reflected by the static level of corporate loans in absolute terms in 2009, and a slight reduction in 2010.

Nearly one third of total loans have undergone restructuring or rescheduling, with a significant portion being evergreened, without being fully recognized as NPLs or adequately provisioned. In Ukraine, in-house workouts have so far been the preferred method of distressed debt resolution. NPL resolution efforts to date have been largely superficial and defer more serious restructuring to the future. A number of legal and regulatory obstacles impede swift resolution of NPLs. The GoU has introduced several reforms since the beginning of the crisis, but many more are needed to create an appropriate environment that is conducive to resolving NPLs or transferring them to a secondary market.

The flip side of the NPL problem is the severe impact of the crisis on the corporate sector and its need for restructuring and renewal. Following the crisis, Ukraine’s corporate sector experienced significant declines in production and consumption levels. The corporate sector continues to strain under an increasing load of external and internal debt, which hinders access to new financing. While the corporate sector showed some signs of recovery in 2010, boosted by base effects and improved export prices, the recovery remains precarious and is likely to be prolonged due to the heavy toll on consumers, high unemployment and ineffective mechanisms to promote rational restructuring. Moreover, the pace of the global recovery has slowed and sovereign debt concerns dampen the outlook for recovery across Europe.

There is no formal framework in Ukraine to support enterprise restructuring, other than the procedures under the insolvency law, which most stakeholders consider highly ineffective and widely abused. There is an urgent need to adopt effective out-of-court and formal court restructuring mechanisms, including a new bankruptcy law that supports accelerated approval of restructuring agreements. The experience in Asia, Turkey and other crisis-affected countries reveals that formal mechanisms can help promote a faster economic recovery and return to normalcy. Draft Law No. 8531 On Restoring Solvency of a Debtor or Declaring a Debtor Bankrupt aspires to improve the efficiency of the insolvency procedures but in its current form falls short of the changes needed to promote effective and swift corporate restructuring. Moreover, institutional and regulatory failures undermine the system.

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The state-owned enterprise (SOE) sector has been equally, heavily impacted by the crisis. SOEs represent a significant share of Ukraine’s economy, and play a dominant role in sectors such as rail, transport, utilities, energy and telecommunications. While significant progress has been made in transitioning to a market-oriented economy, major challenges remain with respect to effective oversight and governance of these enterprises. In 2010, MOE figures showed 3,855 SOEs (across 3 categories – unitary, kazenni and joint-stock companies where the state share exceeded 50%) operating in Ukraine. Many others state enterprises are unaccounted for or operate under uncertain management and oversight.

A sizeable percentage of SOEs are encountering problems of financial distress and require either informal or formal corporate restructuring. In 2010, less than half of SOEs reported profit, yet only a small number were undergoing a restructuring. Market participants report greater difficulty reaching solutions with SOEs due to an inability to hold SOEs accountable. For example, SOEs have been exempt from liquidation under the formal bankruptcy procedures and likely will endure an even slower recovery in the market unless a more proactive approach is adopted. There is an urgent need to adopt a comprehensive, integrated strategy to support the turnaround and restructuring of financially distressed and loss-making SOEs to increase contributions to the budget, support higher recoveries for privatized SOEs, and generally promote more effective governance and improved performance of SOEs.

Key policy recommendations from this note are in the following areas:

Reforms to promote the transfer (from banks to distressed debt investors) and resolution (jointly by banks and enterprises) of NPLs, including to support the formation of a viable secondary market;

Reforms to support out-of-court and accelerated court approved corporate sector restructurings;

Reforms and strategic plans to promote the turnaround and renewal of SOEs to enhance value and performance for taxpayers’ benefit.

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I. INTRODUCTION

1. This note was prepared by a staff team of the World Bank1 as part of a series of Corporate Sector Analytical Reports prepared by the Bank on a range of topics aimed at promoting a dialogue on ways to ameliorate enterprise financial distress and expedite resolution of non-performing loans in the public and private sectors. Information contained in this note is based on preliminary findings from meetings conducted by the Bank with public and private stakeholders. Data and information on the issues, where available, was collected from those met and supplemented by other available resources. This note does not cover financial distress in the retail sector.

2. The global financial crisis exposed major macroeconomic and financial system vulnerabilities in Ukraine, one of the most severely impacted countries in the region. While important steps have been taken to stabilize the banking sector and restructure problem banks, less progress has been made in addressing the systemic levels of corporate distress and resolving corporate non-performing loans (‘NPLs’). The problem is both compound and inter-connected. Access to credit is the oxygen that fuels corporate recovery and growth, yet weak banks have tightened or withdrawn credit from the market to cope with their own significant troubled assets and losses, thereby exacerbating the problems of corporate distress and in turn making it more difficult for enterprises to timely repay their loans. At the same time, corporate malfeasance also has contributed to the problem, as corporate owners engage in various schemes to evade paying their creditors. Corporate distress tends to have a domino effect throughout the market, as the distress of one enterprise typically leads to an inability to timely pay suppliers of goods and services, thereby affecting other businesses.

3. Ukraine has responded slowly to the need for resolving corporate financial distress. This is due in part to the severity of the crisis and in part to the ineffectiveness of normal debt resolution mechanisms (e.g., enforcement, insolvency and workout procedures) that make it difficult to achieve an effective and rapid solution. While part of the steady state process to resolve debt problems, these systems play a more important role in a crisis to facilitate a more rapid recovery of the financial and corporate sectors. In Ukraine, these systems are highly ineffective and inefficient, stifling efforts of stakeholders to resolve their disputes. Weak and unreliable legal mechanisms also render consensual solutions ineffective, as stakeholders lack proper incentives and disincentives to reach agreements. Gaps in the regulatory framework and institutional weaknesses also enable widespread abuses of the system, further eroding distrust among stakeholders and undermining legitimate resolution and recovery mechanisms. Based on experience in other countries, Ukraine would benefit from a number of immediate reforms to strengthen and enhance the framework for corporate restructuring and debt resolution, which are the subject of this Corporate Restructuring Technical Assistance (‘CoRTA’) project.

II. THE 2008 GLOBAL CRISIS IMPACT ON UKRAINE

Factors contributing to the financial crisis

1 The Bank team was led by Marius Vismantas (ECSPF, Ukraine), and supported by Gordon Johnson (Senior Consultant), Nataliya Lutsenko (ECSPF, Ukraine). The team also thanks the following for their contributions to and feedback on the note: Riz Mokal (Senior Counsel, LEGPS), William Mako (Senior Financial Specialist, FPDMN); and Ira Lieberman (Senior Consultant).

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4. The financial crisis in Ukraine was caused by both external and internal factors. With large exports in the metallurgical sector, Ukraine’s economy has been affected by fluctuations of world commodity prices. In 2009, average export prices were 34.1% lower than in 2008. The global financial crisis slowed inflow of long-term capital into Ukraine (31% of FDI is concentrated in the financial sector of Ukraine) and contributed to the outflow of short-term funds and sharp decrease in exports by 36.6%. Scaled down industrial production provoked significant employee layoffs (unemployment rose from 5.5% in 3Q2008 to 9.4% by the end of 2009) and led to a drop in real income of consumers (by 12.9% y/y as of 1Q2009). Moreover, large borrowings of the private sector became due in 2009.

5. A major impact of the crisis was the devaluation of hryvna and destabilization of the banking system. Reduction in exports contributed to a roughly 60% decline in the value of the hryvna from the beginning of the crisis which, along with lower domestic demand, led to a decrease in imports of 43.7% by end 2009, as compared to the previous year. Financial difficulties of several banks and untimely actions by the regulator instigated mistrust among depositors who withdrew approximately 25% of household deposits in NCU from August 2008 to August 2009). Decline in consumer purchasing power and high level of corporate distress resulted in deterioration of loan portfolio quality and devaluation of collateral of the banks.

6. The banking sector contributed to the overheating of the economy and was at the center of the macroeconomic pressures as the crisis unfolded. Mounting vulnerabilities in the banking sector, generated by lax credit analysis in the context of fast credit growth fueled by external borrowing, were accentuated by the crisis. During the years leading to the downturn, regulation and supervision were unable to catch up with the growth of the sector, and thus currency and maturity risks increased, coupled with a severe under-provisioning for potential problem loans. Pre-crisis banking practices were characterized by related party transactions, significant volumes of FX lending to unhedged borrowers, rapid expansion of unsecured lending to households, high exposures to riskier borrowers in the absence of sound credit underwriting and risks management practices. Both domestic and foreign owned banks took advantage of an over-heated market to aggressively expand market share by substandard lending, in an effort to gain higher profits and recognition, and to attract investors. Credit portfolios grew twice as fast as deposits (the loan-to-deposit ratio increased from 205% at the end of 2008 to 224% by end 2009). Additionally, foreign currency loans in 2008 exceeded 50% of total loans, comprising 72.5% of retail loans and more than 80% of mortgage loans. Rapid growth of loan portfolios was fueled by easy access to international markets, which in turn contributed to a substantial increase of foreign debt on the banks’ balance sheets. Foreign loans represented 59% and 56% of banks liabilities at the end of 2008 and 2009, respectively.

Impact of the Crisis

7. The global crisis exposed Ukraine’s inherent macroeconomic and banking sector vulnerabilities. These included: (i) high and rapidly growing external debt (85.4 of GDP in 2007 and 82% of GDP in 2008); (ii) very high loan to deposit ratio in the banking sector (205% in December 2008) and heavy dependence on external borrowings (these amounted to a third of the banks’ liabilities), and (iii) terms of trade and external demand vulnerabilities and in particular heavy reliance on metal export to few destinations such as Russia, CIS and the Middle East and dependence on imported gas from Russia. As a result of the crisis and absence of credit, debt roll over became much more difficult, and prices of metal exports declined sharply as demand contracted.

8. Vulnerabilities in the banking sector were accentuated by the crisis, leading to a systemic liquidity and solvency crisis. With rising concerns over the health of the banking sector, almost a quarter of the deposits in volume left the system from October 2008 to April 2009. As the hryvna depreciated and the effect of the crisis on the real sector unfolded, non-performing loans (NPLs) escalated

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affecting the profitability and ultimately the solvency of the financial sector. Banks reported total losses of UAH 38.4 billion in 2009 and an additional UAH 13 billion in 2010. Twenty-six of the largest 39 banks had a capital deficiency in 2009, while in 2010, 17 of the largest banks needed to raise additional capital. During the period of 2008-2010, the NBU introduced temporary administration (TA) in 27 banks, 18 of which were placed into liquidation. Notably, deposit outflow reversed mid-2009, and as fragile financial sector stability set in during 2010, new inflows brought the level of deposits in the banking system above the pre-crisis level.

III. FINANCIAL SECTOR REFORM AND RESOLUTION OF NPLS

A. Banking Sector Landscape

Rapid Banking Sector Growth from 2002-2008

9. The Ukrainian banking system constitutes nearly 95 percent of the financial sector with assets equaling 96 percent of GDP. As of May 2011, there were a total of 177 banks operating in Ukraine (down from 184 at year end 2008), of which foreign-owned banks held slightly more than one third of total bank capital. Banking sector concentration also remains relatively low with the top 10 banks holding 54.1% of total assets, 55.9% of total loans and 54.1% of total deposits as of April 1, 2011. As Table 3.1 below reveals, the top 17 banks hold two thirds of market share, while the bottom group of 116 smallest banks collectively account for only 9.4% of assets, 9.3% of clients’ deposits and 12.5% of total equity of the banking sector. Consolidation of the banking system is still lagging despite the closure of 70 banks during the period 2000-end June 2011.

Table 3.1 Selected data on Ukrainian banks as of 1-Apr-2011, UAH bln

Banking sector by groups as divided by

assets size)

Assets Market share

Deposits

Market share Equity

Market

share

Net profit/lo

ss

Market share

UAH bln % UAH

bln % UAH bln % UAH bln %

Group 1 (17 banks) 661.8 66.5 311.9 65.8 91.5 66.1 0.5 n/aGroup 2 (22 banks) 175.4 17.6 82.7 17.5 21.1 15.2 -0.2 n/aGroup 3 (21 banks) 64.4 6.5 34.8 7.4 8.6 6.2 0.1 n/aGroup 4 (116 banks) 93.4 9.4 43.8 9.3 17.3 12.5 -0.6 n/aTOTAL FOR THE SYSTEM 995.0 100 473.2 100 138.5 100 -0.2 100Source: NBU

10. The banking system’s rapid expansion from 2005-2008 outpaced prudential regulation and supervision. Factors fueling the growth included a stable exchange rate, external and domestic liquidity, steady economic growth, increasing real income, and an improved legal framework for mortgage and retail lending. The positive economic factors were combined with intensified competition among banks after a massive entry of foreign banks to the Ukrainian market in 2006-2008 improved financial access for SMEs and retail clients. Banking sector assets grew on average 60% per annum from 2005-2008, reaching 84% of GDP in 2007 and nearly 98% of GDP in 2008. Growth reached 76% year-on-year at its

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peak in 2007. Retail lending also skyrocketed in 2002, marked by 115% average annual growth from 2002-2008, with a nearly 173% jump in 2002 and 134% growth in 2007.

Impact of the Crisis on the Banking Sector

11. Poor liquidity and risk management practices, excessive credit and foreign exchange exposures and related-party lending contributed to bank failures during the crisis. In such a high growth, competitive environment, numerous banks adopted risky lending strategies to gain market share in hopes of becoming an attractive acquisition target for foreign banks. These distorted incentives contributed to excessive risk taking behavior by bankers, the overbanking of the system and to a bubble-boom in various sectors. When the financial crisis occurred in late 2008, loss of depositor confidence led to a massive run on banks, erosion of capital and subsequent insolvency of a number of institutions. Banking sector assets shrunk by 5% in 2009, primarily triggered by the 17.2% reduction in the household credit portfolio, securities dropped in value significantly following the failure of the domestic securities market, and NPLs escalated.

12. Measures adopted following the crisis helped to stabilize and recapitalize the banking sector, but further work needs to be done to reactivate lending to full capacity. During 2009-2010, some 26 banks were placed into temporary administration, coupled with a formal legal moratorium on repayment of liabilities (including freezing household deposits) and mandatory requirements for the temporary administrators to adopt resolution programs for the banks. Of the problems banks, seven were sold to new private investors or rehabilitated, three were recapitalized by the state, and eighteen were placed into liquidation. To address problems in the banking sector, the GoU adopted a two phase program focused on (i) crisis preservation of core banking assets and (ii) consolidation and strengthening supervision and governance. Among other things, the rehabilitation program (as part of the crisis response) focuses on distressed asset resolution and enhancing the legal and regulatory framework. Much of the banking system has been recapitalized and loan loss provisions (LLPs) increased to match nearly 100% of losses, with some banks provisioning at levels above those required by the NBU.

13. The crisis had devastating effects for the deposit base and quality of loan portfolio of banks. Following the significant outflow of deposits during the period of October 2008-March 2009 and despite the introduction in October 2008 of the moratorium on withdrawal of deposits from banks’ accounts, confidence is returning to the banking sector, as evidenced by the growing deposit base, especially the increasing inflow of household deposits. This positive trend is supported by three factors, namely (i) absence of alternative vehicles for individual investors, as investments in real estate are becoming less attractive and more risky due to real estate market illiquidity and a drop in real estate prices, (ii) erosion of non-interest savings by double-digit inflation, and (iii) high interest rates on deposits in 2009-early 2010, which on average meant 11-12 percent on dollar deposits and up to 25 percent on local currency denominated deposits. In the recent months however banks have launched cost reduction campaigns, resulting in a significant decrease in interest rates on deposits. A number of banks, suffering from excessive liquidity, are even reducing their deposit base in the absence of adequate investment opportunities.

14. Despite growing liquidity of the market, Ukrainian banks adopted a hospice approach maintaining existing loans, while avoiding new lending. As a result, loan portfolios decreased by 5.9 percent in 2009 and continued to shrink in the first half of 2010. The outstanding portfolio of retail loans to households dropped by 17.2 percent in 2009 and 9.9 percent in the first half of 2010 on the back of massive restructuring of mortgage loans and conversion of foreign currency (FX) denominated loans into

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local currency. New lending to households has basically ceased due to the risk-averse attitude of banks, coupled with NBU’s prohibition on issuing FX denominated loans to households.

15. The portfolio of corporate loans in absolute terms remained unchanged in 2009, and shrunk slightly in 2010. If adjusted for inflation and local currency depreciation, however, the total portfolio of corporate loans shrank significantly in 2009. New lending was extended largely to existing clients, either to meet the outstanding commitments under existing credit lines, or for debt restructuring purposes, i.e. to roll over the maturity of a loan or rescheduling of principle and interest payments. Local currency denominated lending remains the only active market segment – the volume of UAH loans to corporate clients has been growing on a monthly basis since January 2010 (with a 2.3% m/o/m increase in August, and 7.5% year-to-date). A large portion of new local currency denominated lending is the result of a direct stimulus intervention from the NBU (through the “stimulus” lending practices of NBU (Regulation #47 – now revised in response to IMF SBA requirements) and the Government (through lending to the economy by the state banks).

B. Non-performing loans: Levels and Treatment

Non-performing loan levels

What is an NPL?

NPL definitions vary across the globe. For purposes of this note, three definitions are adopted:

Least Conservative: NPLs as defined by the NBU for the purpose of their monthly accounting data collection. This definition includes only overdue loans (more than 90 days) and loans on which enforcement/foreclosure action was initiated.

Moderately Conservative: NPLs as defined by the NBU for the purposes of their quarterly Financial Stability Indicators (FSI) report. This definition includes only loans which are classified as doubtful and loss (categories 4 and 5 out of the 5 total).

Most Conservative: NPLs as defined by the IMF for the purposes of their Global Financial Stability Report. This definition includes loans which are classified as substandard, doubtful, or loss (categories 3, 4, and 5 out of the 5 total). Substandard loans are often performing with slight delays or changes in the collateral or business performance that rendered them potentially impaired.

16. Distressed loans continue to pose an enormous obstacle to recovery of the Ukrainian banking system rising as high as 40% of total loans under the IMF’s definition. Since the beginning of the crisis, NPLs have tripled or nearly quadrupled depending on the definition applied, as shown in Table 3.2 below. Applying the least restrictive formula for measuring NPLs, they grew from UAH 18 billion in 2008 to UAH 85 billion in 2010, representing an increase from 2.3% to 10.8% of total loans. Applying the more stringent test including doubtful and loss loans, NPLs grew from UAH 30.7 billion (3.9 %) to UAH 120.4 billion (15.3%) during the same period. Applying the IMF definition, NPLs grew from UAH 129 billion (16.4%) to 317 billion (40.3%). Notably, even at the end of 2010, the levels continued to rise under all three definitions. It is also worth noting that in 2010, doubtful and loss loans were provisioned by a ratio of 123% on an aggregate portfolio basis. However, this does not reflect disparate practices among some banks, where many have taken an ultra conservative approach while others have applied a more lenient approach.

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Table 3.2 Ukraine – NPLs from 2005-20102005 2006 2007 2008 2009 2010

90 days overdue loans + loans under enforcement/foreclosure NPLs, UAH mln 3,379 4,456 6,357 18,015 69,935 84,851NPLs to Total loans, % 2.2 1.7 1.3 2.3 9.1 10.8

LLPs to NPLs, % 277.3 298.2 317.6 268.7 175.1 175.4Doubtful + Loss loans (2005-2007 included 4 categories; 2008 to date includes 2 categories - loss + doubtful)NPLs, UAH mln 90,688 159,709 238,675 30,744 102,387 120,386NPLs to Total loans, % 58.0 59.2 49.2 3.9 13.7 15.3

LLPs to NPLs, % 10.3 8.3 8.5 157.5 119.6 123.6Substandard + Doubtful + Loss (IMF Definition)NPLs, UAH mln 19.6 17.8 64,134 129,323 289,651 317,791NPLs to Total Loans, % 30,651 48,004 13.2 16.4 37.6 40.3

LLPs to NPLs, % 30.6 27.7 31.5 37.4 42.3 46.8DATA FOR REFERENCELLPs, UAH mln 9,370 13,289 20,188 48,409 122,433 148,839Total Loans, UAH mln (incl. Money Mkt Loans)

156,385 269,688 485,866 788,556 770,349 788,564

Sources: NBU and IMF

17. Official statistics from the NBU reflect corporate NPLs as of May 1, 2011 at approximately 64.8 billion UAH (or 12.2% of corporate loan portfolio).2 Corporate NPLs are distributed among industries, as follows: trading-cars/household appliances and repair items (37%); processing industry (25%); real estate, leasing, engineering and services (14%); construction (12%); agriculture, hunting and forestry (5%). Some banks report corporate NPLs as high as 50% or more of their total corporate loan portfolio. And while short term loans reportedly increased by USD 1.5 billion in 2010, of which 73% were to the corporate sector, long term borrowings during the same period increased by only USD 0.5 billion, suggesting that maturing long term debt is being replaced by short term debt.3

18. Nearly one third of total loans have undergone rescheduling or restructuring, with a significant portion being “evergreened”, without being fully recognized as NPLs or adequately provisioned. NBU Regulation 279 on Probable Lending Loss Reserve Formation and Management Procedure for Banks (as amended) on loan classification and provisioning is considered to be sufficiently 2 Formal level of NPLs as reported by the NBU include only doubtful loans plus those overdue more than 90 days, but excluding substandard and rescheduled/restructured and reclassified loans. 3 The spike in lending occurs quarterly, without a commensurate increase in the overall loan portfolio, suggesting that new lending is merely a rescheduling or replacement of debt.

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flexible to allow banks discretion in determining how to classify and provision for loans, with the result that a number of banks adopt less stringent procedures.4 Loans classified as NPLs by some banks might be classified as performing by others, and even classified differently among branches of the same bank.

Methods for resolving NPLs

19. International experience from prior crises reveals that restructured/evergreened loans often become the source of a second wave of banking distress and insolvencies. Efficient resolution of the NPLs is therefore one of the top policy priorities for the NBU. Reducing the level of such loans through effective resolution procedures releases provisions in the banking system, increases profitability of the banks, reduces demand for new bank capital, leads to improved market sentiment, and facilitates resumption of credit flow (albeit more conservatively) to the economy.

20. There are three conventional methods used by banks for resolving NPLs: (i) in-house resolution programs; (ii) distressed debt sales; and (iii) transfer or sale of distressed debt to an asset management vehicle or bad bank. The primary difference in the three approaches is how losses are allocated (as among banks, debtors and the public) and who bears responsibility for contributing new capital.

In-house resolution programs – either keep distressed loans on their balance sheets or transfer them to an SPV for tax and legal reasons. This includes debt-equity swaps. Such in-house workouts require adequate operational resources, skills, and proper legal staffing/support, but offer a possibility of the highest potential recoveries to a bank, albeit with time delay. New capital needs to be brought in by existing bank shareholders to ensure continuous capitalization and liquidity of such banks.

Distressed debt sales to private buyers – generally sales are to collection companies or distressed debt investors who take on the risk of collection and loss. Such sales typically result in steeper discounts on the nominal debt value and yield the lowest levels of short-term recovery. Such sales have the advantage of immediately relieving the banks from the operational burden and expense associated with in-house workouts and the time delay of recovery. Once the balance sheet is cleaned up, bank management can focus exclusively on further growth and strategic development. By comparison to the “in-house” solution, shareholders will likely need to raise or contribute more capital to cover losses.

Transfer/sale of distressed assets to a public AMC/bad bank – offers a possibility of higher recovery levels to the banks compared to sales to private distressed debt buyers, likely with recourse/risk sharing provisions. The gain to banks generally comes at the expense of taxpayers. The method is typically used as a last resort measure by policymakers in systemic financial crisis situations where there is little likelihood of banks bringing in new own capital or private buyers buying substantial amounts of distressed assets, or both, thus threatening banking sector rehabilitation and lending resumption.

4 Section 1.3 of NBU Reg. 279 provides that “Banks will assess, acting at their own discretion, the risk levels of the lending transactions, evaluate the financial situations of the borrowers/ bank’s partners and appraise the value of the offered collateral, acting in compliance with the legislation in effect.” Section 1.5 requires lenders to calculate loan loss reserves based on “the financial condition of the borrower, status of the loan debt service by the borrower, and taking into account the level of collateralization of the lending transaction.” Assessing collateral values and the financial condition of the borrower is subjective and affords wide discretion to banks in assessing potential risk.

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21. In Ukraine, in-house workouts have so far been the preferred method of distressed debt resolution. This is partly attributable to the absence of a public AMC, and because private distressed debt investments to date have focused on relatively small volumes of unsecured (uncollateralized) consumer loans. By some accounts, approximately 32,000 loans with an aggregate value of UAH 3.8b have been sold by banks to third parties. No mortgage or corporate loan portfolios have been sold by banks, due largely to legal impediments related to taxation, FX, and bank secrecy regulations. For corporate loans, banks have a stronger incentive to retain the loans to preserve customer relations, where a corporate customer is deemed valuable, or to try and maximize recoveries through customized workouts. Reports abound of widespread abuses of the legal system for judicial enforcement and insolvency, rendering these conventional procedures for resolution largely unreliable for the honest party.

22. There have been numerous discussions among the Ukrainian authorities on establishing a public AMC. The NBU has been a primary proponent of an AMC, as this would help clean up the banking system by off-loading NPLs and clean up its own balance sheet with respect to (i) non-performing liquidity loans issued to commercial banks during the crisis5, and (ii) NPLs issued by banks and pledged to the NBU as collateral for the liquidity loans6. The banking market has generally been skeptical of a public AMC, wary of governance and competitiveness issues arising from such undertaking, and relying rather on their own efforts in resolving he NPLs.

23. A public AMC is a complex and expensive proposition from Ukrainian taxpayers’ perspective, unsuitable for Ukraine given its weak fiscal capacity. Moreover, private sector solutions for the NPLs should be encouraged, and facilitated before any commitment of major public funds is considered. A public AMC should be the last-resort measure relied upon by policymakers in truly systemic NPL situations, when all other measures for restoring capacity of the banking system to lend to the economy (typically relying on private sector-led solutions) have been tried and exhausted. Furthermore, a successful AMC is in the first instance a function of good public governance. Even in countries with much stronger public governance standards than Ukraine’s, success of public AMCs cannot be guaranteed (e.g., the recent troubles of the Irish NAMA). At this time, an AMC in Ukraine has been considered only for resolution of NPLs of the state recapitalized banks.

C. Current initiatives to promote resolution of NPLs and troubled assets

24. During the past 12 months, the IFC and the World Bank have reviewed key impediments to the private sector’s more active role in NPL resolution, and came up with a set of specific proposals for legislative amendments. The following legal amendments have been identified as essential to supporting NPL resolution and a secondary market for troubled assets:

Obstacle: NBU Regulation No. 424 of September 13, 2010, obliged banks to fully write off bad loans at 100% of created loss reserves. The New Tax Code (Art. 159.4 point 159.4.1) indicates that for tax purposes qualifying expenses for write-off of bad debts must be done according to NBU methodology, which must be approved by the Ministry of Finance. No such methodology has been created or has yet been approved by the MoF. Banks are therefore reluctant to write-off the full amount of bad loans in view of potential tax risks. Solution: Obtain MoF approval of an NBU methodology to implement NBU Regulation No. 424.

5 As of Jan 1, 2010, total NPLs of the NBU (past due and impaired loans issued to banks in Ukraine) were UAH 32.8 bln, or 37% of the total bank lending portfolio (UAH 87.6 bln) of the NBU (source – NBU Annual Report for 2009).6 As of Jan 1, 2010, total fair value of collateral for the loans issued by the NBU to banks was UAH 21.2 bln, or 24% of the total bank lending portfolio. Of that, fair value of loans issued by commercial bank to their customers and used as collateral for the NBU loans to these banks was UAH 9.4 bln – only 17.3.% of the total outstanding amount of NBU loans collateralized by the banks’ customer loan portfolios (UAH 54.3 bln).

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Obstacle: The write-off of retail loans for tax purposes is possible on limited grounds: (a) force majeure; (b) recognition of a debtor missing; (c) invalidity of a contract; (d) deficit of costs from sale of collateral through public auction; (e) deficit of funds collected by legal means. Secured loans are ineligible for a write-off unless the collateral is sold through a public auction. The cost and length of the foreclosure procedures referred to in item (d) and (e) above inhibit the transfers of NPLs from credit institutions to professional investors. Solution: Grant banks and other credit institutions the right to write off qualifying non-performing retail loans at their own discretion.

Obstacle: The tax authorities’ qualification of debt purchase and workout remain stumbling blocks in many situations. For example, certain regional tax authorities appear to have decided that when a portfolio of loans is bought, profit tax must be applied to each individual underlying loan. Thus, if the same price is applied to all the loans in a portfolio, a profit is generated when the recovery on a single loan exceeds the sale price. A profit tax must be applied to that amount. When no profit is generated no tax is applied. But the loss, namely the difference between the sales price and the recovered value is not set off against the profits on the more successful parts of the transaction. This increases the tax burden on the processor of the problem loans. Solution: Remove unfavorable tax treatment of factoring and debt purchase by financial companies that acquire NPLs or claims at discount to their nominal value.

Obstacle: According to Corporate Income Tax Law, factoring/debt purchase transactions are taxed with CIT at 25% on difference between cash collected on individual receivables and the allocated purchase price, while acquisition of unrecoverable debt does not constitute a tax credit. Solution: Provide for (a) the tax deductibility of full purchase price of the NPLs bought on both individual and portfolio basis, and (b) the possibility to carry forward losses on NPL acquisitions for at least 2 years (or any other economically justified term) in Subclause 7.9.2 of the Corporate Income Tax Law.

Obstacle: National Bank of Ukraine tends to treat a purchase of each non-UAH denominated loan as a foreign currency transaction under the Decree № 15-93, buyers (including off-shore ones) not registered as financial service providers are compelled to apply for individual licenses while purchasing each non-UAH denominated NPL. That is especially impracticable in case of portfolios of homogenous small-size loans. Solution: Amend Article 5 of the Decree of CMU “On the system of currency regulation and control”, dd. February, 19, 1993 № 15-93 (the “ Decree № 15-93 ”) to address a long-standing problem resulting from its current reading: while financial companies may obtain a general license to execute foreign currency transaction, non-financial institutions are entitled to individual licenses only, dedicated to each and every specific transaction.

25. The Ukrainian authorities should strive for a faster clean-up of the banking system from the currently very high level of NPLs, to allow the banking system to focus on new lending. This could be achieved, among other ways, by increasing disclosure of the NPLs, allowing faster/more cost efficient write-offs of the NPLs, facilitating sales of NPL portfolios to third parties (distressed asset investors) through proposed legal amendments. Strategic options currently available to the authorities include the following:

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Immediate application of the expanded definition of NPLs in order to openly reveal their true extent, which would be subject to statutory loan-loss provisions. This would provide maximum transparency of the banking sector books, but would result in significant additional LLP and capital requirements. New capital would reduce the risk of “formally” unrecognized NPLs. However, the extent of such new capital could be sizeable, and more bank insolvencies would likely follow.

Introduction of proposed legal changes in order to facilitate NPL resolution by the private sector. They would not change the “formal” extent of NPLs, but would allow faster cleanup of the NPLs from the banking system’s balance sheet. Some of these proposals are addressed above.

Creating a public AMC/bad bank. Depending on the amount of capital provided, the majority of the system’s NPLs could be absorbed by the AMC. This would be an enormously expensive solution from the taxpayers’ perspective, further increasing public debt and fiscal pressures. Any public AMC should be limited to taking over NPLs from the recapitalized banks only, as this would limit public sector NPL purchases to distressed debt of public banks. Given that banks are now substantially provisioned for bad loans, and have been heavily recapitalized, and that the system is over-liquid and funding is not the barrier for lending resumption, the rationale for the public AMC/bad bank option is significantly reduced.

Do nothing. This would lead to banks muddling through and resolving their NPL portfolios individually, as they have been doing. Losses, NPL sales and write-offs would be covered with fresh capital injections from the current shareholders. A growing economy and improving corporate sector financial situation could lead to natural NPL reduction and LLP reversals. This solution would likely constrain the availability of lending until the NPLs are substantially resolved.

26. NPL resolution efforts to date have been largely superficial and defer more serious restructuring to the future. Most banks report that the typical process for resolving NPLs is by means of rescheduling, which postpones the realization of loss and does not involve any significant financial or operational restructuring of the company. Such practices hide the true extent of troubled loans, as restructured loans are not recognized by the formal NPL statistics. Many of these loans will likely require a second or third round of restructuring in the future, similar to the pattern that characterized restructuring following earlier financial crises in other countries. Some restructured corporate loans already have gone into default. All banks unanimously confirmed that the enforcement mechanisms were inefficient and ineffective, sometimes taking years to collect on a judgment, due to unchecked opportunities for appeal.

D. Framework for NPL Resolution and Recovery

27. NPL resolution and recovery is significantly hampered by ineffective enforcement mechanisms. The resolution and recovery of NPLs relies heavily on the traditional legal mechanisms available for enforcing debt, executing on assets, and insolvency. Even informal negotiations are often said to take place “in the shadow of the law” based on a general understanding of the relative costs and outcomes in relying on the formal mechanisms. Where the formal mechanisms are dysfunctional and inefficient, as they are in Ukraine, parties cannot be held accountable and negotiations frequently break down. Ultimately, the costs to creditors in the form of losses and concessions are transferred back to the market as a whole in the form of more selective lending to the most credit worthy borrowers and at higher prices, creating a constraint on access to finance for all businesses. The following general legal problems are reported by stakeholders in trying to recover or restructure bad loans:

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Documentary challenges include contesting sufficiency of transferring of title, security over collateral, third party contracts, and ability to assign or transfer loans to third parties.

Loan management and supervision problems include an inability to (i) strictly enforce contractual covenants, and (ii) access information on the debtor’s property or business. There are no state databases on borrowers or nation-wide registers for title over land and immovable property.

Restrictions on restructuring agreements include discretionary amendments, overly restrictive conditions for foreign lending (controls on interest rates), and imposition of duties and stamp taxes for certain asset transfers that may be part of the restructuring.

Currency controls exist on foreign denominated assets and present obstacles for a foreign buyer of assets.

Loan write-off costs are said to be too costly or impose burdens on lenders.

Tax legislation imposes high transfer costs, stamp duties, or unduly restrictive tax treatment for loss write-offs and loss carry-forwards.

Restrictions on transferring legal proceedings make it difficult to transfer an underlying credit that is the subject of litigation, as the buyer cannot subrogate or be substituted in the action. Legal actions must be recommenced.

Default and enforcement problems include widespread practices to invalidate loan and collateral agreements, mandatory conversion of FX loans, and adverse rulings by courts in regard to loan amendments due to deterioration in a lender’s collateral position.

Bank secrecy laws are vague or unreasonably strict and may preclude the ability to transfer borrower data along with the NPLs to buyers, who will need to conduct due diligence on the quality of the assets transferred and credit-worthiness of borrowers.

Ineffective judicial enforcement procedures, including: (i) protracted proceedings; (ii) corruption in the court system; (iii) inefficiency and corruption in the enforcement office; (iv) inefficient pledge enforcement mechanisms, including ability of notary to refuse to accept voluntary transfers of title; and (v) controversial court practices and inconsistent decisions by the courts.

Bankruptcy problems include inefficient proceedings, bad faith filings to perpetrate fraud, and inability of creditors to challenge actions of administrators or replace administrators.

Insufficient criminal laws to hold companies and owners accountable for engaging in fraud, asset stripping and other inappropriate conduct.

28. The formation of a secondary market for NPLs is stifled by numerous legal impediments. The other common method for banks to resolve NPLs is to transfer such troubled assets to the secondary market for resolution or recover by more efficient market stakeholders. As noted above, there are numerous legal and institutional impediments to such transfers that make such transfers too costly for all parties.

IV. CORPORATE RESTRUCTURING CONTEXT IN UKRAINE

A. Corporate Sector Landscape

29. Ukraine has a diverse and reasonably robust corporate sector. Ukraine’s corporate sector is comprised of 11 sectors, the largest being industry, trade (retail and wholesale), real estate operations,

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transport and communications and financial services. In 2010, there were an estimated 1.1 million enterprises of varying sizes registered in Ukraine. Total corporate assets amounted to UAH 2.7 trillion (250% of GDP) at the end of 3Q2010, while equity amounted to UAH 0.9 trillion (see Table 2.1, Annex 2). Prior to 2008, corporate sector balance sheets reflected steady and continuous growth in equity and capital investments. Retail sales and industrial production averaged growth of approximately 7% per year from 2002-2008.

30. Ukraine’s corporate financial information reveals reasonably steady growth in the corporate sector prior to the crisis, with increasing debt to asset ratios . Ukraine’s corporate sector funding structure reveals a 3 to 1 ratio of current liabilities over long term liabilities, rising significantly immediately after the 2008 crisis and peaking in the fourth quarter of 2009, possibly corresponding to arrears in 2008 and rescheduled debt in 2009. (Figure 4.1, and Table 4.1 below) The high short term to long term debt ratios suggest both a reluctance to provide long term finance in the Ukraine context and increasing pressures on the corporate sector to meet short term obligations. Trade credit also spiked by 40% at the end of 2009, which may be explained by a lag in payment to suppliers. Notably the ratio of foreign debt to local debt has risen from approximately 17% immediately after the crisis to current levels of approximately 21% as of April 2011. (Table 4.2) Gross external debt rose sharply before the crisis, and remained static during 2009 and 2010, increasing by approximately 10% in the last 6-8 months. (Annex 2, Table 2.2).

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Figure 4.1 Corporate Sector – Funding Structure

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q20110

200400600800

1,0001,2001,4001,6001,800 Funding Structure, bln UAH

LT Liabilities Equity Current LiabilitiesSource: Statistics Department of Ukraine (www.ukrstat.gov.ua)

Table 4.1 Corporate Financials in 2007-2011, quarterly (UAH bln)

PERIOD ASSETS EQUITY CURRENT LIABILITIES

LT LIABILITIE

S

DEBT TO ASSET RATIO

1Q2007 1,394 626 594 174 0.552Q2007 1,488 674 626 188 0.553Q2007 1,598 731 661 206 0.544Q2007 2,422 1,051 1,021 351 0.571Q2008 1,886 806 802 279 0.572Q2008 2,010 850 872 289 0.583Q2008 2,109 882 918 308 0.584Q2008 3,162 1,134 1,449 579 0.641Q2009 2,205 829 990 386 0.622Q2009 2,255 861 1,009 386 0.623Q2009 2,321 870 1,038 412 0.624Q2009 3,583 1,269 1,705 609 0.651Q2010 2,595 902 1,192 428 0.622Q2010 2,645 921 1,218 459 0.633Q2010 2,692 932 1,235 474 0.644Q2010 2,848 978 1,307 478 0.631Q2011 2,924 985 1,359 495 0.63

Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

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Table: 4.2 Corporate Debt: Foreign and Local (USD billion)      1/1/2008 1/1/2009 1/1/2010 1/1/2011 4/1/2011Foreign Debt (USD bln) 33.6 41.3 43.4 50.8 52.4

Loans 22.1 28.8 27.0 29.0 28.9Trade Credit 8.7 9.7 11.1 13.8 15.4Other debt 2.8 2.8 5.4 8.0 8.1

Local Debt (UAH bln) 1,372 2,028 2,314 1,785 1,854Loans 272.6 460.2 484.2 520.1 541.1Trade Credit 832.5 1,181.0 1,427.8 1,084.1 1,133.4Taxes 6.0 8.6 10.6 14.4 14.1Other local debt 261.0 378.2 391.4 166.4 165.4

31. Debt to asset ratios in the corporate sector are pushing the boundary of being over-leveraged. As indicated in Table 4.1 above, debt to asset ratios have risen from a moderate level of 0.55% at the beginning of 2007, peaking at 0.65% in the fourth quarter of 2009, and leveling off at a current ratio of 0.63%. A rate over 0.65% generally represents an unhealthy level of leverage. In all likelihood, the debt to asset ratios following the crisis are larger than indicated, as asset values have significantly devalued, with some banks reporting that an over-collateralized position of 150% collateral to loan value currently represents about 50% loan coverage.

B. Impact of the 2008 Crisis on the Corporate Sector

32. The global turmoil had a severe impact on Ukraine’s corporate sector, resulting in significant declines in both production and consumption levels. The crisis led to a decrease in long-term capital inflows and contributed to an outflow of short-term funds. Meanwhile, during the same period, exports plunged by 36.6%, combined with a 34.1% fall in average export prices in 2009 compared to the prior year. Production and sales declined significantly in 2009, and have since rebounded to levels higher than before the crisis (Annex 2, Table 2.4). Since the end of 2008, growth of own funds was suspended, while short-term and long-term liabilities continued to grow (see Fig.4.1 above). Meanwhile, capital investments plummeted by 29% in 2009 compared to 2008 with the biggest shortfalls from local budgets, investment funds and individuals who contribute their funds to residential construction (Annex 2, Table 2.5). Although the corporate sector is slowly recovering, capital inflows continue falling, in particular, due to low activities of investors. Construction, one of the leading growth-generating sectors in Ukraine, experienced contraction in capital investments by more than twice the pre-crisis value, mostly due to lowered household contributions (Annex 2, Table 2.6). As a result, the overall construction industry declined by approximately 39% in 2009 (Annex 2, Table 2.7).

33. The corporate sector is straining under an increasing load of external and internal debt. As of January 1, 2011, total external debt of Ukrainian corporations has increased by 17% year on year. During 2010, the proportion of short-term debt to total debt for the corporate sector has increased gradually from 29.5% to 33.5% by the end of 2010, largely attributed to an increase in short-term trade credit and accumulation of overdue loans (USD 4.6 bn at the end of 2010 compared to USD 2.9 bn in 2009). As of year end 2010, total external debt amounted to USD 117.3 billion, of which the corporate sector held USD 56.7 billion (48.3%), banking sector held USD 28.1 billion (24%) and the public sector held USD 32.5 billion (27.7%). Overdue external loans in the corporate sector increased by 59% in 2010 and the corporate debt due in the next four quarters grew by USD 2.6 billion. Total equity in the non-banking corporate sector increased by 1.5% with a contraction of the share of equity in funding structure by 2 percentage points from December 2009 to October 2010.

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34. The corporate sector showed some signs of improvement in 2010, but continues to struggle from lower consumer confidence and high unemployment. In 2010, the volume of export increased by 30% particularly due to 40% increase in export of iron. Industrial production gained 11% in 2010 after plummeting by 22% following the crisis in 2009, which provoked widespread employee layoffs. The unemployment rate was reduced to 8.7% by 2010 YE after a significant upturn by the end 2009. 7 Meanwhile, consumption also declined significantly as consumers experienced a drop in real income in 1Q2009 by 12.9% YoY, an increase in unemployment and job uncertainty, and increasing debt burdens from high interest rate or foreign denominated retail loans that became even more expensive with a weakening domestic currency. The total cumulative profit after tax of the corporate sector amounted to 63.2 billion UAH in 2010 compared with the loss of 31 bn UAH in 2009.

35. The unemployment rate in Ukraine’s corporate sector continues to be excessive . Currently more than 10 million people are employed by the corporate sector with an average monthly salary of USD 274. Starting from the beginning of the crisis in 2008, the number of staff has dropped by 6%, with the unemployment rate reaching 9.6% by end 2009 according to ILO methodology (Annex 2, Table 2.8). Wage arrears escalated in 2008 as companies began to feel the pressure of the economic crisis. Employee wage arrears have been leveling out although the aggregate amount remains almost twice as high as before the crisis. Downsizing and reorganization of companies due to the economic crisis has been a primary reason for a rapid increase in unemployment (Annex 2, Table 2.9). Thus, the number of unemployed due to reorganizations doubled in 2009, as compared to 2008.

36. Notwithstanding some successful restructurings of larger enterprises, credit remains tight and suppliers have been squeezed by large enterprises for increasingly longer repayment terms. The vast majority of small and medium enterprises face even greater challenges in accessing credit and achieving meaningful debt resolutions due to their weaker bargaining power and the largely ineffective debt resolution mechanisms.

37. Ukraine’s enormous shadow economy masks the true state of the corporate sector and impact of the crisis. Various sources estimate the informal sector in Ukraine to range from 40-60% of GDP, one of the largest in the world. Reportedly, in 2009, the shadow economy represented approximately 45% of Ukraine’s GDP or UAH 420 billion.8 Sectors with the longest shadows were reportedly retail trade (at 50% of total transactions), followed by construction, real estate, the financial sector and agriculture. Retail trade alone accounts for 16% of GDP, which would amount to approximately UAH 32 billion. Local stakeholders reported an even higher reliance on the shadow economy in the aftermath of the crisis, potentially as high as 65% in some sectors, although no data or information has been provided to support these estimates. Contributing factors are said to include economic crimes, cumbersome licensing, over regulation, high taxation rates, lack of transparency and unaccountability. The significance of the shadow economy has played a dual role in the context of the crisis. First, it has helped to mask the true state of corporate sector profitability and distress. Second, tight or unavailable credit has driven many companies to rely on their shadow resources to sustain their business activities, while avoiding repayment to creditors.

38. Boosted by base effects and improved export prices, recovery is underway but remains precarious and is likely to be prolonged. Expansion rests largely on external factors, and a recent softening of steel prices may dampen growth. GDP accelerated by 4.2% in 2010. The production of steel in Ukraine in 2010 increased by 12.4% YoY (compared with the average of 11.2% in CIS), keeping the 8th place for Ukraine in the rating of major steel producers. In 2010, metallurgical export growth slowed

7 By year end 2009, the official unemployment rate reached 9.4% compared with 5.5% in 3Q2008. The official rate does not capture workers who have not applied for assistance or reflect a decrease in work hours or part time workers.

8 Estimates are based on research conducted by Ukrainian newspaper Delo. See Shadow Economy in Ukraine Nearly 50% of GDP, http://www.cipe.org/blog/?p=3854.

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down to 5.8% compared with last year. At the same time, import of steel products increased by 80% YoY. The level of accounts payable of Ukrainian metallurgical enterprises was boosted by 29% in 2010 along with the negative working capital in the sector. Together with these negative signs, growth across Europe has been downgraded due to the sovereign debt problems plaguing a number of EU member countries, a determination by the EU to concentrate on reducing budget deficits and adopting austerity measures, and by the continuing uncertainty of the global recovery.

C. Post-crisis enterprise restructuring efforts

39. Reported distressed loan figures among Ukraine’s banks are among the highest in the world and place an enormous strain on the financial sector. Official Statistics from NBU reflect corporate NPLs as of April 2011 at approximately 64.8 billion UAH, representing 12% of total corporate loans and a year on year increase of UAH 11.1 billion (20.7%) compared to April 2010.9 The industries with the greatest level of NPLs include the following (in order of magnitude): construction (18%); processing industry: (13%); retail and wholesale trade (13%); hotels and restaurants (13%); and real estate operations and leases (11%).10 Some banks report that distress in corporate NPLs is 50% or higher. More recently, we’ve heard reports of at least one bank with NPLs as high as 70%. Most of the leading banks report that they have adopted internal risk management procedures and have a corporate recovery strategy. Some of the smaller banks may still be less advanced in this area.

40. Most banks report that the typical process for resolving NPLs is by means of rescheduling, which postpones the realization of loss and does not involve any significant financial or operational restructuring of the company. A reported 19,744 corporate loans were reported by banks as restructured/rescheduled as of year-end 2009, amounting to UAH 156 billion. At year-end 2010, total restructured corporate loans on the balance sheets of banks were 17,760, amounting to UAH 197.8 billion, and by April 1, 2011, the number of restructured loans were reduced slightly to 17,554, with aggregate debt of UAH 201.1 billion. (Annex 1) The trend suggests a declining pattern in the number of restructured loans, but an increase in the total exposure, which may suggest accrual of interest. Many of the restructured loans will likely require a second or third round of restructuring in the future. Indeed, some restructured corporate loans already have gone into default.

41. All banks confirmed that the enforcement mechanisms were inefficient and ineffective, sometimes taking years to collect on a judgment. And all seemed unanimous in criticizing the insolvency process as little more than a shelter for bad faith debtors. The team circulated questionnaires to the top 10-15 banks requesting more details on the NPL status and recovery outcomes. Response was insufficient to accurately identify trends, although the general experience of the individual banks reporting was consistent with the findings in this note concerning the general obstacles encountered in resolving or restructuring NPLs (see Section III.D. above). Notably, statistics on aggregate business bankruptcies in Ukraine have remained relatively flat since 2007 (14,047 cases) through 2010 (14,595 cases), underscoring that the insolvency system has not been viewed as a reliable avenue for corporate distress resolution.

Table 4.3 Total Business Failures: 2006-2010

9 Official statistics include only loans that are doubtful and more than 90 days past due. NPLs as measured by the IMF methodology and taking into account loans rescheduled would yield a higher percentage. As of April 2010, 56% of the NPLs related to Kyiv and the Kyiv region. 10 In April 2010, total corporate NPLs amounted to approximately UAH 53.7 billion, with the following industries showing the largest percentage of NPLs: trading-cars/household appliances and repair items (39.3%); processing industry: (23%); construction (13.2%); real estate, leasing, engineering and services (10.6%); agriculture, hunting and forestry (6.5%). Fishing industry is the highest in both 2010 and 2011, but represents a small segment of the market.

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Year Total Enterprises Undergoing Bankruptcy

Total Bankruptcy Proceedings

Initiated During the

Year

Total Bankruptcy Proceedings Terminated During the

Year

incl. by means of

rest

ruct

uri

ng p

lan

amic

able

ag

reem

ent

Cre

dito

r se

ttle

men

t

liqui

datio

n

2006 12 167 10 528 n/a n/a 161 113 7 1032007 14 047 13 792 12 669 27 152 252 11 3482008 14 283 11 338 11 044 43 107 253 9 9012009 14 683 9 193 8 520 13 61 150 7 4132010 14 595 9 312 8 008 15 86 111 6 735

Source: Ministry of Economy, Department of Bankruptcy

42. Enterprise restructuring in Ukraine typically falls into three categories: companies with foreign borrowings and or high reputational risk; countries with no foreign borrowings and/or low reputational risk; and less viable small and medium enterprises (SMEs) with low reputational risk.

Large enterprises with foreign debt and high reputational risk have largely engaged in consensual restructuring applying western restructuring techniques, but only after considerable delays and posturing, enabled by shortcomings and inefficiencies in the enforcement and bankruptcy procedures that offer little leverage to creditors. Pressure by foreign creditors, reputational risks and potential exposure in foreign markets creates sufficient leverage and inducement for these enterprises to reach an agreement outside the court. Enterprises in this category are already largely involved in workout negotiations and probably would not benefit much from a purely “informal” out-of-court workout framework, other than establishing a clearer set of guidelines and structure within which to operate.

Large domestic enterprises with no foreign borrowings reportedly have the greatest difficulty in (or put up the greatest resistance to) reaching agreement due to the more limited options of local banks in trying to restructure, inability to access new financing, credit lines or working capital from their banks, or because banks are themselves concerned about the potential implications on their balance sheets by taking strong action against companies. For good customers, lenders first try to reach an amicable solution, which may entail a rescheduling of debt at a higher rate of interest, a voluntary turnover of collateral, granting of new collateral, or a debt for assets exchange to satisfy in part some of the debt. Banks rarely forgive principal and almost never engage in debt to equity conversions. Moreover, weak enforcement systems frequently contribute to an inability to make adequate and timely progress, and insolvency is often used as a final leverage point when a bank has determined that the likelihood of recovery is remote. Companies in this category, whether large or medium sized, would clearly benefit from an out-of-court workout framework.

Small and medium enterprises with little or no reputational risk have fewer options and are often the target of enforcement and insolvency proceedings. Confronted with fewer options, SMEs with low reputational risk try to

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manipulate the system to their advantage to avoid collection or seizure of assets as long as possible. Some SMEs would benefit from a formal out-of-court restructuring framework, while smaller enterprises might be better served through non-court mediation and dispute resolution centers, if such centers existed.

State-owned enterprises constitute a separate category which is described in more detail below. Due to the political nature of the process and the moratorium on liquidation of assets in bankruptcy for SOEs, creditors generally have a hard time negotiating with such enterprises. The large number of such enterprises in financial distress, and the political and legislative challenges associated with them, suggest that this category of enterprises might benefit well from a more structured workout framework designed specifically for the benefit of SOEs.

D. Framework for corporate restructuring

1. Corporate restructuring mechanisms

43. There is no formal framework in Ukraine to support non-judicial restructurings of corporate debt. As described above, the corporate restructuring process in Ukraine is largely an ad hoc process adapted by each bank to its own particular needs as determined on a case-by-case basis, although many of the banks have adopted an interim strategy of rescheduling repayment obligations to give borrowers more time for repayment. Where multiple banks are involved, they describe being able to cooperate or coordinate informally, and have established creditor committees in some cases where a larger number of banks are affected. While these procedures are necessary and give rise to an informal workout culture, the absence of a more formal framework coupled with deficiencies in existing resolution and recovery mechanisms create greater uncertainty and hinder the pace of restructuring.

44. The emergence and significance of out-of-court workout schemes. Most out-of-court workout schemes owe their genesis to the Bank of England’s out-of-court informal workout guidelines, known as the “London Approach”, containing a set of principles to guide banks and other creditors in their response to a company facing serious financial problems. The London Approach includes arrangements for an informal standstill, during which an independent review of the company's long-term viability and financing needs is carried out. The Bank of England, where invited to do so, acts as a mediator, facilitating discussions between debtor and creditors.

45. Following the Asian Financial Crisis and more recent crises, formalized workout frameworks modeled on the London Approach have been adopted. Such frameworks were first adopted in crisis affected countries in Asia - Indonesia, Malaysia, S. Korea and Thailand. These workout schemes contained common features, including: a standstill or moratorium; a process to review viability and meet interim financial needs; access to a facilitator/mediator as appropriate; and rules supporting majority approval and binding minority creditors to an agreement. Additional incentives were introduced to encourage restructuring and refinancing. A similar workout framework was adopted by the Central Bank in Turkey after its financial crisis, which is described below in more detail. In the context of the current global financial crisis, workout frameworks of varying degrees of formality have been developed in Iceland, Latvia and Serbia (in progress). In most of these countries, procedures were formalized and made mandatory to obligate banks to engage in restructuring and thereby accelerate the economic recovery. Annex 3 contains a description of Common Features of Workout Frameworks, and Annex 4 contains a comparative table showing the key differences in the design of formal frameworks adopted in Asia and Turkey.

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A Case Study of the Turkish Experience

46. The financial crisis in Turkey in 2001 had a far-reaching impact on the financial and corporate sectors. Of the more than 50 banks in the country, 19 were acquired by the State Deposit Insurance Fund (SDIF). The major state banks—Halk, Vakif, and Ziraat—were restructured at considerable cost to the government. Non-performing loans were estimated at USD 18 billion. Although most corporations were not necessarily overly leveraged before the crisis, the substantial devaluation of the Turkish lira left many corporate groups unable to service their debt. A number of reforms were adopted to address the corporate financial distress and to resolve the escalating levels of non-performing loans. Banking Law 4743 introduced a quasi-formal workout procedure in June 2002, known as the “Istanbul Approach”, the key features of which are described in Box 1 below. To complement the informal workout process among banks, Law 5092 amended the Execution and Bankruptcy Act to introduce a new “Restructuring Corporations and Cooperatives via Reconciliation” process that enabled stakeholders to receive accelerated approval of a reorganization plan within 30-60 days through the court system. The Istanbul Approach lasted only for 3 years and has not been replaced by another corporate workout framework.

Box 1: Turkey’s Workout Procedure – The Istanbul Approach

The Istanbul Approach followed workout models adopted in Asia. At its heart is a framework agreement signed by 34 financial institutions, including commercial banks, financial intermediaries, intervened banks, and state banks. The framework agreement addressed terms for selecting firms to participate or benefit from the financial restructuring, deferment of credits, granting of new loans and related matters, and enabled creditors to submit to a non-judicial resolution procedure. A separate creditors committee is appointed, directed by a lead bank holding the largest share of credits or as designated by creditors holding 75% of the claims. The committee has 90 days to reach an agreement, subject to extensions for a maximum of 90 days.

During the negotiation period a standstill is imposed on actions by creditors to collect on their debts or against collateral. If the approving creditors hold less than 55% of the total debt, the case is dropped from the process. If the plan is approved by creditors holding between 55–75% of total debt, the plan is submitted to an arbitration committee, constituted by the Board of the Turkish Bankers Association, which has authority to review and approve the plan. If the plan is approved by creditors holding more than 75% in value of the claims, it is submitted to final agreement and documentation.

47. The Istanbul Approach was particularly instrumental in helping to facilitate a resolution of corporate distress, especially in the first 18-24 months following its adoption, when most banks lacked adequate internal risk management and restructuring teams to address the problems of corporate distress. It is difficult to evaluate the success of the restructurings under the Istanbul Approach as most debt was rescheduled with long term maturity, most being approximately 15 years. While no assessments have been conducted to determine the status and success of enterprises having gone through the process, some banks estimate that 55-60% of the loans have been recovered or are performing. While most restructurings were debt reschedulings rather than operational restructurings, this approach is a common one in crisis impacted markets where workout frameworks have been adopted. Such restructurings often undergo further restructurings on maturity of the debt. As the Table 4.4 below illustrates, a total of 322 companies went through the Istanbul approach resulting in the restructuring of more than USD 6 billion of restructured debt.

Table 4.4: Istanbul Approach Results, 2002-2005

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Sectoral Distribution of Compananies Included

2002 2003 2004 2005 Total

Other Manufacture and Administration Activities

14 31 6 0 51

Textile and Textile Goods 26 12 4 0 42Food and Animal Products 27 11 2 0 40Tourism Entertainment 10 15 0 0 25Transportation, Storage and Communication 19 3 0 2 24Metal Products and Works 18 4 0 0 22Construction 11 8 2 0 21Financial, Leasing, Intermediation & Financial Services

17 1 0 0 18

Other Sectors 69 15 2 2 88Total 211 100 16 4 331Size of Companies Included Total Employees (number) 30,679 15,892 1,507 342 48,420 Total Export Volume (USD Million) 656 110 20 12 798 Total Current Volume (TL Million) 2,271 702 116 5 3,094 Total Value of Assets (TL Million) 6.574 1,004 187 53 7.818Contracted Companies [Number of Corporate Groups] [5] [19] [2] [4] [30] Large-Scale 68 116 21 16 221 Small-Scale 16 56 29 0 101 Total Companies 84 172 50 16 322Aggregate Restructured Debt Large-Scale 3,113 1,832 117 311 5,374 Small-Scale 227 337 83 0 647Total 3,340 2,169 201 311 6,021Source: Bankers Association of Turkey

48. The Istanbul Approach and the general process of restructuring financially distressed companies suffered from a lack of liquidity in the system and access to new money . The World Bank conducted a Corporate Sector Impact Assessment in 2001 and 2002 to determine the extent to which the corporate sector was affected by the crisis. A number of strategies were recommended (and adopted) to promote corporate renewal. In the midst of a liquidity crisis, the assessment team found that a key obstacle to restructuring was the lack of access to refinancing, new financing or recapitalization either through banks or the equity markets. This is not unusual in a crisis, as banks typically are constrained by their own distressed assets and in no position to provide new money to risky credits. Similarly, during crises, equity markets tend to be in decline and market participants are unwilling to buy newly issued stock. As difficult as it is for large companies to get access to new finance, small and medium enterprises have an even more difficult challenge. While efforts were made to establish a fund that would provide new financing to companies willing to go through the Istanbul Approach, these efforts did not materialize. Turkish practitioners acknowledged the lack of access by companies to financing, with sufficient protections for lenders, was a key constraint in achieving effective restructurings.

49. The Istanbul Approach was complemented by an accelerated approval process for approving reorganization plans in the court. To complement the Istanbul Approach, designed mainly for restructuring bank debt, the Turkish government amended the bankruptcy law to promote accelerated court approved restructuring plans whereby qualifying plans could be approved within 30 days. The new procedure was supported by implementing regulations and official forms to ensure that the process would be streamlined, simplified and standardized. Under the procedure, the court could grant protective

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measures as needed, such as an automatic stay, to protect the company pending consideration of the reorganization plan. The new procedures were modeled on the latest techniques applied for accelerated reorganizations, commonly referred to as “pre-packaged reorganization plans,” which were in common use in the United States and elsewhere. 11 The process was adapted to the needs of the Turkish market and designed in compliance with international best practices as set forth in both World Bank Principles for Effective Insolvency and Creditor Rights Systems and the United Nations legislative guide on commercial insolvency. For example, as an inducement to participation by banks, the statute required that the plan be pre-approved by the requisite majority as a condition to establishing jurisdiction. Where these requirements were not met, the court would have no jurisdiction to consider the case, which was an innovation not found in other laws. Since its introduction, the UK also has adopted prepackaged plan regulations, and other emerging market countries have adopted prepackaged reorganization plan procedures (e.g., Republic of Serbia).

Applying International Experience to the Ukraine Context

50. International experience shows that NPL resolution and corporate renewal are accelerated by an appropriate framework to incentivize parties to reach consensual agreements. Resolution of corporate distress tends to rely more frequently on non-court mechanisms than court procedures. Formalizing a corporate debt restructuring process could offer enhanced treatment to encourage stakeholder participation by offering tax incentives, access to new financing, and enhanced enforcement rights. Workout frameworks adopted by other countries during financial crisis have succeeded to varying degrees, although in nearly all of the emerging market models, restructurings initially took the form of a financial restructuring rather than an operational restructuring, and typically required a second more extensive operational restructuring once the market stabilized. Moreover, frameworks that incorporated strong regulatory oversight (e.g., Korea and Malaysia) typically realized greater success in early stages of the crisis, whereas those adopting more lax regulation often experienced gains at later stages of the crisis and at the point of economic recovery.

Key Features of Formalized Workout Models

A law and regulations to govern the workout process; A lead agency to supervise and drive the process; An implementing secretariat with adequate staff (i.e., in Turkey it was anchored under the TSKB, a

privately owned development bank owned by several large banks; while in Korea a special commission of retired executives with qualified technical staff handled this);

An arbitration panel or mechanism to resolve key issues if the parties could not reach agreement within the specified timeframe (typically 90-120 days, with prospect for a 30 day extension);

A Creditors’ Committee comprised of creditors involved in the restructuring (typically banks but sometimes other credit providers);

Strict time-bound procedures (e.g., 30 days for due diligence, 60 days for the process and a 30 day extension if needed);

Provisions allowing for a cramdown on minority creditors by a super-majority (e.g., Korea - 60-65% approval; Turkey - 75% approval, or arbitration if between 50-75%);

Provisions to compel parties to cooperate and possibilities for regulatory forbearance.

11 The “pre-packaged plan” was developed under US corporate reorganization law to expedite the plan approval process and minimize the amount of time that a company spent under court supervision, and thus the burden and stigma of bankruptcy. Under prior practice, notice requirements resulted in minimum time periods in bankruptcy of approximately 30-42 days. Amendments to the US Bankruptcy Code introduced in 2005 further shortened this period, so that approval can now be achieved within days or weeks of filing the bankruptcy petition. In the GM case, the fourth largest bankruptcy in history, the plan was approved in 36 days from date of filing.

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51. An enterprise restructuring framework in Ukraine is urgently needed and should be a priority, although it would not impact the currently proposed BL amendment (discussed below) . The framework may require introduction by means of regulation and amendments to NBU regulations, tax, enforcement and several other laws. Key features of a workout scheme in Ukraine might include: (i) a brief extendable standstill or moratorium period (30-60 days) to allow negotiation of a restructuring; (ii) a process for inter-bank coordination and access to a facilitator, as needed; (iii) timely access to relevant information on debtor’s business, assets and liabilities; (iv) protection of a collection account, permission for interim use of cash/cash collateral, and access to priority financing; (v) majority approval requirements and rules binding minority creditors; and (vi) incentives for participants, such as relaxed classification/provisioning rules and favorable tax treatment for restructured debt (e.g., debt forgiveness, debt equity swaps and for transferred assets). The workout scheme is generally embedded in a set of guidelines or a decision by the National Bank, an inter-creditor agreement among banks, and possible legislation or legislative amendments. For example, proposed amendments to corporate insolvency law to introduce expedited consideration of “prepackaged plans” (described below) should ensure that these laws complement the workout framework. Possible amendments and clarifications may also be required for laws governing provisioning, tax treatment on restructured debt, the pledge law (to clarify cash collateral protections), and corporate law (to introduce stronger sanctions for fraudulent transfers, and director/officer liability for engaging in fraudulent corporate conduct).

2. Renewal of the Debtor’s Solvency and Corporate Rehabilitation

52. The current Law on Renewal of the Debtor’s Solvency or Declaring its Bankruptcy (‘BL’) represented a significant improvement over the prior bankruptcy law. Adopted in January 2000, the BL upgraded Ukraine’s bankruptcy law of 1992, adding new procedures to permit corporate rehabilitation and amicable settlements. Rescue procedures drew on the US Chapter 11 reorganization model and experience, adapted to the Ukraine context. Notably, Article 53 of the law incorporated a debtor-in-possession option to allow debtor-managed restructurings, and was even construed to accommodate pre-packaged bankruptcy proceedings.12 Unlike the US process, the Ukraine law relied on the use of a trustee to ensure that creditor interests were adequately represented and protected, with the aim of making the process more balanced. The law adopted other modern features, as well, such as a broad moratorium, claims dismissal for failure to timely prove claims, specified tax treatment alternatives, debt forgiveness and debt-equity swap options, contract rejection and provisions for recovery of preferential claims and fraudulent transfers. It also tried to address the unique needs of the Ukraine context, such as transfer of social assets and dealing with state-owned enterprises (SOEs).

53. The insolvency process has steadily declined in performance since enactment. In the first year following its enactment, some commentators reported that the law was more effective than most of its post-Soviet contemporaries, excepting perhaps the Russian amicable settlement process, which had a higher number of settlements. The number of cases, though down from earlier years, demonstrated a reasonably successful outcome, with 15% ending in amicable settlement, creditor claims being satisfied in 22% of cases, and with approximately 63% resulting in liquidation.13

54. The World Bank’s FSAP Update Technical Note on Creditor Rights and Insolvency, prepared in 2008, found the BL’s general conceptual framework adequate, but identified a handful of problems of particular concern. First, certain provisions related to SOEs were found to create anomalies in the process preventing realization of assets in bankruptcy for SOEs in which the State has a

12 In practice, prepackaged bankruptcies have not been used as the law lacks any detail on the process and there is a general inexperience among professionals and the judiciary in handling such cases. 13 R Wolfe & G Glinka, Report of First Year of New Bankruptcy Law in Ukraine (2001). The report’s authors served as advisors on the development of the new law, and also examined preliminary data from cases in the second year following enactment of the law.

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greater than 25% ownership. Thus, if such enterprises filed for or were placed into a bankruptcy proceeding, absent a sanation or amicable agreement, they could be allowed to languish indefinitely in a liquidation proceeding. Second, the law excluded tax liabilities from the scope of amicable agreements for the year 2007, weakening the potential use and benefit of recovery. Third, the process was subject to numerous appeals creating unnecessary delays in many cases. Finally, reorganizations were infrequent, and the process was used mostly by SOEs to shield themselves in a liquidation, or by debtors to avoid tax and other creditor liabilities. Other enterprises accessing the process were typically unviable and thus not good candidates for recovery. More recent statistics suggest that overall efficiency is either declining or earlier reports were partial and overly positive.14

55. Market participants lack confidence in the efficacy of Ukraine’s insolvency and enforcement mechanisms, expressing the view that these systems are highly dysfunctional and subject to abuse. The insolvency process is criticized as serving only to benefit fraudulent debtors intent on avoiding repayment obligations, without conferring adequate protection on creditors during the process. Indeed, the worsening of the recent financial crisis and resulting rise in NPL levels was met with a reduction in the number of bankruptcy proceedings.15 Relatively few companies are restructured under the insolvency law, and most professionals characterized sanation and amicable settlement procedures as nothing more than a safe-haven for borrowers to escape repayment of their debts as long as possible. In one widely publicized case, an owner of an apparently solvent business was able to escape a substantial bank debt by allegedly manipulating the system by creating fraudulent claims, appointing a friendly administrator, and arranging for the assets of the business to be sold at discount to another connected company. Such practices are reportedly not exceptional.

56. The Ministry of Economy, Bankruptcy Department (“MoE BD”) began working on amendments to the bankruptcy law in 2009. Various drafts had been developed and discussed, including Draft Law No. 5281 to amend the BL and containing some consequential amendments to the Judicial Enforcement Law (‘JEL’). Efforts began anew following the elections in 2010 when MoE BD convened an intra-governmental Working Group – comprised of representatives from MOE, MOF, MOJ, State Property Fund, the World Bank Group and several NGOs – with the aim of developing a new draft insolvency law by the end of 2010. Objectives of the new law included, among others: (i) improving overall efficiency of the process; (ii) promoting restoration of solvency to viable enterprises in both private and public sectors; (iii) fostering restructuring of enterprises through out-of-court pre-negotiated and pre-packaged reorganization plans; (iv) rebalancing the interests of creditors, debtors and other stakeholders; and (v) establishing a regulatory framework to ensure higher transparency and accountability among insolvency professionals (e.g., administrators, trustees, etc.). The concept for the new law was approved by the Cabinet of Ministers in 2010. Rather than start from scratch, the new law’s design was based in part on the existing law, while incorporating a number of key concepts from a separate draft proposed law under development by the Fund for Efficient Governance (“FEG”). 16 At the request of the MoE BD, the World Bank had reviewed and commented on various stages of the drafts and made a number of proposed recommendations. Of particular note was the recommendation to incorporate

14 The World Bank’s annual business review of key business indicators ranked Ukraine 143rd out of 181 countries, finding that proceedings took on average 2.9 years, resulted in satisfaction of only 9% of creditor claims, and consumed 42% of asset values to cover the proceeding costs. Only 1% of cases reportedly result in rehabilitation. Contrast these recent results with earlier years when 37% of cases (15% amicable settlements) were said to be concluded successfully, taking on average about 6 months. 15 Total filings are down even more in the public sector, which may be attributed to state support for state-owned enterprises and an effort to avoid labor redundancies during an election period. 16 FEG developed the new law through a working group comprised of representatives and experts from the public and private sectors, including MoE BD. The group’s main objectives were to prepare a new insolvency law and propose changes to other laws affecting insolvency proceedings. A substantial new draft was prepared addressing a number of the concerns of the current MoE BD Working Group. The World Bank was provided a copy of the FEG draft law and provided comments in April 2010.

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provisions that would support the use of “prepackaged” plans to promote corporate renewal and restoration of solvency.

57. Current Status. Changes in the Ministry of Economy led to the transfer of the Department of Bankruptcy to the Ministry of Justice, which has taken over responsibility for the Draft BL. The Draft BL has been re-designated as Draft Law No. 8531 as of May 18, 2011 “On Restoring Solvency of a Debtor or Declaring a Debtor Bankrupt.” Draft Law No. 8531 has been submitted to the Committee for Economic Policy at the Parliament. On June 10, the Experts Department of the Parliament provided their comments to the Draft Law and recommended that it be presented to Parliament for a first reading with incorporation of comments prior to the second reading. On June 14, the Committee for Economic Policy discussed the Draft at its meeting with participation of MoJ DB, MoJ, members of Parliament and others. As the Committee could not reach a consensus on the Draft, submission for a first reading is suspended, possibly until the week of June 20. Assuming the Draft passes the first reading, it could take a month or more to incorporate changes before the second reading, making it unlikely the Draft would be ready for a second reading before the next session of Parliament. To date, a number of recommendations by the World Bank have not been incorporated into the Draft, including provisions supporting an accelerated approval process for pre-packaged reorganization plans. These recommendations would help facilitate the recovery, resolution and restructuring environment for enterprises.

58. A clearly defined process to support prepackaged plans could help to promote more restructurings rapidly and cost-effectively in the aftermath of the crisis. The “prepackaged plan”, adopted in the US and now in use in other countries (e.g., France, UK, Serbia and Turkey), supports the restructuring of companies by (i) simplifying the in-court process, (ii) reducing overall process time, (iii) increasing outcome certainty, and (iv) minimizing opportunity for abuse of process. In typical court proceedings, considerable time is spent under court supervision in an effort to determine whether the company is viable and then to negotiate and prepare a plan that can be supported by a majority of creditors. The prepackaged plan is more efficient and certain, as most of the steps in reaching an agreement under court supervision can be accomplished prior to the filing of a petition, so that the primary task remaining is for the court to consider and approve the plan. Because much of the negotiation is conducted out-of-court, the prepackaged plan procedure complements out-of-court restructuring by offering an additional tool to expedite resolution with a majority approval and to bind dissenting creditors through the court, which cannot be done outside of court absent a contractual and legal right to do this. The team provided the MoE BD with copies of relevant materials describing key features and process considerations of prepackaged plans, as described in Annex 5, and stands ready to collaborate with the MoJ BD in developing appropriate amendments to the BL and an implementing regulation to support this process, as necessary, for inclusion in the draft law prior to the second reading.

V. RESTRUCTURING OF STATE-OWNED ENTERPRISES

A. State-Owned Enterprise Sector Landscape

59. State-owned enterprises represent a significant share of Ukraine’s economy, playing a dominant role in sectors such as rail, transport, utilities, energy and telecommunications . Although difficult to find accurate statistics, it is estimated that approximately 22-25% of Ukraine’s GDP derives from SOEs. As such, these enterprises provide a significance source of revenue to the government and in turn receive fiscal support from the government in the form of budgetary allocations, issuance of

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guarantees for enterprise debt, facilitation of lines of credit and other financial instruments. Revenues help to support the government’s development agenda.

60. While significant progress has been made in transitioning to a market-oriented economy, major challenges remain with respect to effective oversight and governance of these enterprises .17 In the aftermath of the most recent crisis, financial, operational and managerial weaknesses present an even greater obstacle to profitability and create a corresponding drag on the financial system in the form of NPLs. The current weak fiscal position and tightening budget constraints underscore a pressing need for restructuring to improve performance and profitability both to increase contributions to the budget and to revitalize SOEs to undergo privatization with a view to maximizing sales proceeds.

61. In 2009, MOE figures show 3,589 SOEs (across 3 categories – unitary, kazenni and joint-stock companies where the state share exceeded 50%) operating in Ukraine (Table 5.1). The data on number of SOEs from the central government differs significantly from the records of the State Property Fund (SPF) Register of State Property. The SPF registry indicates that 4,184 state-owned companies operated in 2009 - the significant disparity in reporting reveals critical weak linkages in the government’s monitoring system and makes it difficult to assess the magnitude of potential restructuring problems among SOEs. The MOE reportedly is working together with the line ministries and other agencies to address how to reconcile these differences. In 2010, data reflects 3901 total SOEs with 3552 identified as reporting, of which 449 were reportedly in bankruptcy. Annex 6, Table 6.1 shows the breakdown by government agency. As of the first quarter of 2011, there were 645 SOE’s reported to be under SPF management, of which 150 (23.3% of the portfolio) were undergoing bankruptcy procedures. (Annex 6, Tables 6.2 and 6.4)

Table 5.1: Basic Data on the SOE Sector in Ukraine

2005 2006 2007 2008 2009

Number of SOEs in Ukraine, including:

3,981 4,086 3,209 3,546 3,589

Unitary SOEs 3,562 3,686 2.765 3,126 3,169

Kazenni 48 50 43 43 43

JSCs with state share exceeding 50%

419 400 444 420 420

SOE share of GDP no data no data no data no data no data

Number of employees in SOEs (percentage of total population employed)

21.0 21.0 15.4 15.3 no data

SOE share of total industrial production (percentage)

no data no data no data no data no data

Source: Ministry of Economy, Department of State Assets

17 While there are a host of issues affecting the overall performance and profitability of SOEs, this note primarily addresses issues and obstacles related to resolution and restructuring of financial distressed or insolvent SOEs. The World Bank has conducted more detailed studies identifying problems in the sector. See Ukraine – System of Financial Oversight and Governance of State-Owned Enterprises (2011 Report No. 59950-UA); Ukraine – Improving Inter-governmental fiscal relations and public health and education expenditure policy (2008 Report No. 42450-UA); Public Financial Management Performance Report (2007 Report No. 39015-UA); Creating Fiscal Space for Growth (2006 Report No. 36671-UA).

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62. There are significant additional fiscal linkages between Ukraine’s SOEs and the general government. First, direct gross annual inflows from SOEs to the budget contributed approximately 15% of total tax revenues to the budget in 2005, although accumulation of tax arrears has been frequent in the past. In addition, dividend transfers from SOEs have gained importance over time as a share of GDP and in terms of government revenues. Second, gross transfers from the budget to SOEs have grown recently (estimated at about 5½ percent of GDP in 2005-06). Third, Ukraine’s government has provided explicit and implicit guarantees to SOEs. Data on the stock of explicit government guarantees to SOEs is not available, since official figures on total state guarantees do not identify the party contracting the loan, but they provide an upper bound for guaranteed SOE debt.

63. State enterprises’ financial conditions are closely linked to the macro-fiscal risks they may generate. Data availability in this area is very limited, both for specific SOEs, as well as for the sector in aggregate. Existing figures suggest a mixed picture, hinting at an accumulation of risks. For example, with respect to SOEs managed by government agencies, asset values grew from UAH 351 billion in 2008 to UAH 442 billion in 2010, with equity increasing only slightly during the same period by UAH 25 billion. (Annex 6, Table 6.6) During the same period, accounts receivable nearly doubled from UAH 52.6 billion to UAH 98.8 billion, and accounts payable doubled from UAH 61 billion to UAH 120 billion, revealing a picture of delayed payments both by customers and by SOEs to suppliers and banks. According to statistics from the MoE, the number of profitable SOEs during this period was 1719 (2008), 1552 (2009) and 1589 (2010). For the profitable SOEs, in 2010, the level of accounts receivable has halved and the level of accounts payable has risen, although down significantly from 2009 levels. Wage arrears also have risen sharply in 2010 relative to 2009 levels.

64. Other factors contribute to the opacity of SOE performance, transparency and accountability. Key elements of the fiscal relation between SOEs and the government are discretionary, and SOE dividend transfers to the budget remain insufficiently clear. Transfer requirements have been frequently modified by the Cabinet of Ministers, enforcement has been poor, and vagueness in the framework has led to disputes. The same tax regime applies for the private sector and SOEs, but exceptions exist in practice. For example, Naftogaz enjoyed a special VAT zero-rate on imports and sales of gas to intermediate consumers before 2006. Further, the enforcement of SOE tax collection is weak, partly due to the inability of the State Tax Administration to seize assets from key SOEs.18

B. Restructuring of State-Owned Enterprises

65. Currently, a sizeable percentage of these enterprises are encountering problems of financial distress and require either informal or formal corporate restructuring. While some SOEs may become the subject of treatment under proposed amendments to the insolvency law, the vast majority likely will not be subject to either liquidation or restructuring under the formal process, making it difficult to restructure such companies on anything other than a totally consensual basis, which is complicated by political considerations and interventions. Most of the large SOEs with international debt have undergone some form of restructuring during the crisis, but these represent a relatively small proportion of the total SOEs and the general consensus is that a further round of restructuring will be needed for many SOEs. Notably, only a small fraction of the SOEs have undergone restructuring – 2008 (55), 2009 (130) and 2010 (106). (Annex 6, Table 6.6) This suggests a strong reluctance on the part of the government to address the systemic problems of financial distress, lack of profitability and operational under-performance among SOEs, ultimately weakening their ability to compete in a trade and market constrained environment.

66. SOEs have been exempt from the formal bankruptcy and sanation procedures and likely will endure an even slower recovery in the market. As of January 1, 2011, of the 3552 reporting SOEs 18 Leonov and Stetsenko (2007), “Analysis of Performance of State-Owned Enterprises.”

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operating under government agencies, approximately 94 SOEs were reportedly undergoing reorganization under the bankruptcy procedures, while a further 401 were undergoing liquidation. (Annex 6, Table 6.7). The majority of reorganizations applied to SOEs under Ministries for Industrial Policy, Infrastructure, Defense and Emergency, while the majority of liquidations were concentrated under the Ministries of Coal, Industrial Policy, Agriculture, Infrastructure and Education and Science. As Table 5.2 below shows, the insolvency procedure has been used only partially as a mechanism to address unprofitable or insolvent SOEs. Notably, fewer SOE bankruptcy proceedings have been resolved year on year since 2007. A similar decline is noted in SOEs managed by the State Property Fund. (Table 5.3)

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Table 5.2 SOEs undergoing bankruptcy proceedings: 2006-2010

Year Total Bankruptcy Proceedings

for SOEs Terminated During the

Year

incl. by means of Total Restructuring

Plans Reviewed by Department of Bankruptcy

for SOEs

Total Amicable Agreements Reviewed by

Department of Bankruptcy for

SOEs

rest

ruct

urin

g pl

an

amic

able

ag

reem

ent

Cre

dito

r se

ttle

men

t

liqui

datio

n

2006 n/a n/a n/a n/a n/a 15 n/a

2007 169 11 24 31 50 69 26

2008 145 30 16 16 58 44 14

2009 129 5 13 7 58 47 17

2010 114 4 12 3 48 44 22

Source: Ministry of Economy, Department of Bankruptcy

Table 5.3 SOE under SPF Management Undergoing Bankruptcy ProceduresIndicators 2007 2008 2009 2010 1Q2011

Total SOE in Bankr 248 212 194 158 150% Total SOE managed by SPF 27% 31% 25.6% 29.5% 23.3%

Receivership 55 47 32 30 26Rehabilitation 76 64 60 48 46Liquidation 117 101 102 80 78

Source: State Property Fund

67. As in the private sector, out-of-court turnaround and restructuring techniques have proven instrumental in returning SOEs to profitability and enhancing performance. Recovery for distressed SOEs can be accelerated by means of modern business techniques for turnaround and restructuring of distressed companies, adapted to state-companies. The World Bank has developed similar strategies and models for other countries in this area (e.g., China and CEE). A process can be introduced either informally or formally with state oversight, applying similar techniques used for non-judicial restructuring, complemented by established business turnaround practices and techniques (business management, accounting, finance, tax, etc.). Such a strategy may be developed as part of the broader integrated strategy of the Government for structural reforms to the SOE sector, and would typically interface with reform objectives and plans for privatization.

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VI. RECOMMENDATIONS

Based on obstacles and impediments to NPL resolution and restructuring for corporate and state-owned enterprises, the following preliminary recommendations are suggested:

NPL Resolution and Restructuring

Adopt legislative reforms to promote a secondary market for troubled bank loans and assets, and to facilitate the transfer of troubled assets to third parties, including amendments to licensing requirements related to foreign exchange transactions for non-bank institutions, tax favorable or tax neutral treatment on NPL write-offs and asset transfers.

Authorize the formation of private sector special purpose vehicles or asset management structures with appropriate regulatory and tax incentives to facilitate the transfer of troubled assets from the balance sheet of the banks. Notably, the Bank does not view the establishment of a public AMC/bad bank as a viable solution at this stage of the crisis other than for banks that have been recapitalized by the government, in which case outsourcing to independent private sector companies, under autonomous private sector management should be considered.

Introduce independent debt dispute resolution panels/tribunals that can operate administratively, independent of the court system, staffed with independent professionals, and offering resolution assistance, mediation or arbitration assistance on disputed debts.

Strengthen formal enforcement, execution and collection mechanisms to provide for swift and unbiased enforcement decision-making.

Corporate sector restructuring

Introduce a quasi-formal workout framework pursuant to a regulation of the NBU to promote debt restructuring among banks, corporate debtors and other key stakeholders, containing features similar to other tried and tested models adopted in the context of other crises. Such a framework might be coupled with appropriate incentives for new borrowing on a priority basis, regulatory forbearance, and favorable tax treatment for debt restructuring under the framework. The framework ought to provide for a linkage to an accelerated approval procedure in the economic court where necessary.

Adopt Draft Law No. 8531 On Restoring Solvency of a Debtor or Declaring a Debtor Bankrupt, with additional changes as recommended in the World Bank’s prior comments, including in particular the introduction of a new accelerated, streamlined procedure for approving pre-negotiated restructuring agreements.

SOE Sector Restructuring

Develop a comprehensive, integrated plan for SOE restructuring and privatization, that provides for restructuring or liquidation of loss-making SOEs, restructuring of under-performing SOEs for privatization, and to enhance overall SOE performance for strategic SOEs and those that the GoU intends to maintain in its portfolio.

Strengthen SOE management governance and skills through formation of executive and management training programs to enhance turnaround expertise for SOEs in need of transformation and renewal.

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Such a program should be carried out in partnership with applicable agencies involved in managing, privatizing, restructuring and liquidating SOEs.

Adapt formal bankruptcy procedures and remove the moratoria related to SOEs to allow for liquidation and disposition of assets of insolvent and unviable SOEs through the bankruptcy process. Consideration should be given to identifying which SOEs of strategic significance or that impact the health, welfare and safety of citizens should be excluded or be subjected to special regulatory measures before being consigned to formal bankruptcy.

Consider introduction of an independent restructure fund to facilitate debt refinancing and restructuring of SOEs.

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ANNEX 1FINANCIAL SECTOR DISTRESS: NON-PERFORMING LOAN DATA 2006-2010

End 2005

End 2006

End 2007

End 2008

End 2009

01.4.2010 01.7.2010 01.10.20

10End 2010 01.04.2011

NBU FSI (in 2005-2007 - includes 4 categories; in 2008 - to date - 2 categories (doubtful and loss)NPLs , UAH mln (incl. accrued interest) 90,688 159,709 238,675 30,744 102,387 99,294 105,586 119,257 120,386

NPLs to capital (adjusted for LLP), % 326.0 378.5 321.9 9.2 32.0 29.1 28.4 29.4 N/A

NPLs to gross loans (unadj’d for LLPs) % 58.0 59.2 49.2 3.9 13.7 13.7 14.7 16.3 15.3

Loan impairment coverage ratio 10.3 8.3 8.5 157.5 119.6 125.3 128.0 119.9 123.6NBU monthly accounting (BS) data (includes only overdue loans and loans on which enforcement/foreclosure action was initiated)Impaired loans* UAH mln 3,379 4,456 6,357 18,015 69,935 71,776 77,591 86,507 84,851Impaired loans to gross loans, % 2.2 1.7 1.3 2.3 9.4 9.9 10.8 11.6 11.2Loan impairment coverage ratio 277.3 298.2 317.6 268.7 175.1 173.4 174.1 167.8 164.6IMF DATA (IMF definition includes 3 categories (substandard, doubtful and loss))NPLs, UAH mln 30,651 48,004 64,087 137,875 300,434 288,451 280,879 296,816 291,995NPLs to gross loans, % 19.6 17.8 13.2 17.4 40.2 39.0 40.3 41.2 40.3Loan impairment coverage ratio 30.6 27.7 31.5 35.1 40.8 41.4 48.1 46.5 47.8REFERENCE DATA FOR BANKING SYSTEMLLPs 9,370 13,289 20,188 48,409 122,433 124,441 135,109 138,079 139,627

gross assets 223,024 353,086 619,004 973,332 1,001,626 998,622 1,019,703 1,064,10

31,090,24

8net assets 213,878 340,179 599,396 926,086 880,302 875,267 885,572 745,864 842,088Loans 156,385 269,688 485,507 792,384 747,348 722,664 717,299 745,864 755,030Capital 25,451 42,566 69,578 119,263 115,175 126,731 127,162 132,802 137,725* Overdue loans, as defined by NBU, are loans with non-repayment of interest and principal of more than 90 days. This data doesn't include accruals. NBU FSI reporting: 2005-2007 - NPLs include all loans classified as watch, substandard, doubtful and loss under NBU Reg. 279;

2008-2010 - NPLs include all loans classified as doubtful and loss under NBU Reg. 2

RESTRUCTURED AND TRANSFERRED/SOLD LOANS End 2009

End 2010 01.04.2011

Restructured loans, # of contracts 183,836 208,070 212,079

of which Corporate Loans 19,744 17,760 17,554

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Restructured loans (UAH bln) 204 249.4 256.7 of which Corporate Loans 156.7 197.8 201.1Transferred/Sold Loans 83,278 128,659 29,547Transferred/Sold Loans (UAH bln) 1.6 9.3 1.7

Source: NBU

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ANNEX 2

CORPORATE SECTOR DATA 2008-2010

Table 2.1 Corporate Financials by Sectors as of 31-Mar-2011 (in UAH bln)

SECTORS ASSETS share % EQUITY share % LT DEBT share% ST DEBT share %

Agriculture 4 0.14 2 0.19 0 0.04 1 0.10Industry 1,192 40.77 410 41.68 177 35.65 574 42.23Construction 76 2.61 13 1.32 15 2.93 43 3.14Retail & wholesale 595 20.36 34 3.41 92 18.65 465 34.26Hotels & restaurants 16 0.55 7 0.72 4 0.83 4 0.33Transport/ communications 299 10.24 167 16.96 46 9.25 73 5.36Financial activities* 106 3.62 33 3.40 17 3.48 47 3.49Real estate operations, rent 590 20.19 298 30.31 137 27.66 139 10.23Education 1.8 0.06 1 0.14 0 0.02 0 0.03Health/social protection 8 0.27 4 0.42 2 0.33 2 0.12Utilities, culture, sport 35 1.19 14.216 1.44 6 1.17 10 0.70TOTAL 2,923 100 984 100 495 100 1,358 100Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)Notes: LT = long-term (over 1 year) / ST = short-term (up to 1 year) / * excluding banks

-35-

Table 2.2 Foreign Corporate Debt  

USD mln 1/1/07

1/1/08

4/1/08

7/1/08

10/1/2008 1/1/09 4/1/09 7/1/09 10/1/

2009 1/1/10 4/1/10 7/1/10 10/1/2010

1/1/2011

4/1/2011

TOTAL CORPORATE EXTERNAL DEBT

26,676

33,581

37,905

40,290 43,969 41,255 41,547 40,959 41,468 43,441 44,787 45,967 47,598 50,840 52,387

Short-term 8,747 8,954 11,830

12,931 14,496 10,924 12,497 13,188 13,561 14,301 16,141 17,456 17,622 19,032 20,783

Money market Transactions 0 0 0 0 0 0 0 0 0 0 0 0 0 7 7

Loans 736 838 655 912 1,082 800 844 1,021 707 525 556 652 508 790 761

Trade Credit 7,277 7,463 10,481

11,242 12,526 9,006 10,266 10,413 10,354 10,870 11,536 12,585 12,546 13,595 15,141

Other debt 734 653 694 777 888 1,118 1,387 1,754 2,500 2,906 4,049 4,219 4,568 4,640 4,874

Long-term 17,929

24,627

26,075

27,359 29,473 30,331 29,050 27,771 27,907 29,140 28,646 28,511 29,976 31,808 31,604

Bonds/securities 1,963 2,124 2,166 2,051 1,935 1,634 1,474 1,439 892 2,462 2,455 2,826 2,810 3,380 3,230

Loans 13,575

21,286

22,752

24,187 26,509 27,963 26,936 25,761 26,777 26,483 25,775 25,382 26,899 28,195 28,155

Trade Credit 2,391 1,217 1,157 1,121 1,029 734 640 571 238 195 416 303 267 233 219

Intercompany Debt 1,943 3,079 3,339 3,727 4,685 4,249 4,196 4,977 5,209 5,078 5,006 5,134 5,437 5,893 6,111

GROSS EXTERNAL DEBT

54,512

79,955

87,802

94,868

102,439

101,659 99,524 100,76

0104,79

5103,39

6102,91

4104,63

6111,62

8117,34

3120,49

8Share of Corporate Debt in Gross External Debt, %

48.9 42.0 43.2 42.5 42.9 40.6 41.7 40.7 39.6 42.0 43.5 43.9 42.6 43.3 43.5

-36-

Table 2.3 Corporate Earnings Before Tax by Sectors in 2006-2011 (UAH bln)

SECTORS 2006 2007 2008 2009 2010 1Q 2011

Agriculture 2.7 7.6 6.0 7.9 11.4 0.0Industry 34.7 43.7 20.2 -4.7 26.5 5.4Construction 1.6 1.6 -6.8 -5.2 -0.5 -0.9Retail and whole sale 10.3 16.8 -28.1 -8.7 8.0 -2.5Hotels and restaurants -0.1 0.0 -1.4 -0.6 0.0 -0.2Transport and communications 8.5 11.3 4.5 10.3 11.4 1.0

Financial activities 11.7 22.6 25.0 -32.7 7.0 1.3Real estate operations, rent 6.1 31.7 -8.8 -5.2 -15.0 -2.1Education 0.1 0.1 0.1 0.1 0.1 0.0Health and social protection 0.0 0.0 -0.1 -0.1 0.1 -0.1Utilities; culture and sport 0.5 0.4 -1.8 -3.5 -2.5 -0.8TOTAL 76.2 135.9 8.9 -42.4 46.5 1.0

Figure 2.1

2006 2007 2008 2009 2010

-100

-50

0

50

100

150Dynamics of Corporate EBT in 2006-2010, bln UAH

Table 2.4 Corporate Statistics - Dynamics of Production and Sale

  2006 2007 2008 2009 2010Retail Sales (mln UAH) 129,952 178,233 246,903 230,955 274,600Industrial Production (mln UAH) 460,372 600,054 779,127 668,956 891,170

Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

-37-

Table 2.5 Capital Investments by Sources of Funding (in UAH bln)

  2006 2007 2008 2009 2010 2009 vs 2008, %

TOTAL 149 222.7 272.1 192.9 189.1 (29.1)state budget 9.6 15.1 15.4 8.4 11 (45.5)local budgets 6.7 9.4 12.5 5.9 6.4 (52.8)companies' own funds 89.1 130.5 161.3 127.4 115 (21.0)foreign investors 5.1 7.3 8.1 8.2 4.1 1.2 investment funds 2.3 4.2 5.7 2.7 N/A (52.6)households' contribution to real estate funds N/A 9.9 9.5 4.8 4.6 (49.5)

households' funds and individual residential construction

5.1 8.5 11.6 5.5 16.1 (52.6)

banks' loans and other debt 21.3 33.9 43 25.6 23.3 (40.5)other sources 9.8 3.9 5 4.4 8.6 (12.0)

Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

Table 2.6 Capital Investments Sectors (in UAH bln)

Year Total

incl.

Agr

icul

ture

Indu

stry

Con

stru

ctio

n

Ret

ail a

nd

who

le sa

le

Hot

els

and

rest

aura

nts

Tran

spor

t and

co

mm

unic

atio

ns

Fina

ncia

l ac

tiviti

es

Rea

l est

ate

oper

atio

ns, r

ent

Publ

ic

Man

agem

ent

Educ

atio

n

Hea

lth a

nd

soci

al p

rote

ctio

n

Util

ities

; cul

ture

an

d sp

ort

2006

125,254 7,309

44,804 6,300

11,655

1,483

20,329

2,386

24,026

1,054

1,163

1,835

2,854

2007

188,486 9,519

64,341 9,107

17,779

2,614

31,709

4,165

39,415

1,572

1,651

2,518

4,061

2008

233,081

16,890

76,618

12,469

24,695

3,222

32,558

4,636

48,840

1,819

2,322

3,531

5,421

2009

151,777 9,382

57,658 5,325

14,091

2,589

24,555

3,359

25,678 894

1,484

1,932

4,809

2010

171,092

12,231

58,558 4,966

11,830

3,072

29,085

2,859

37,189

1,295

1,873

2,754

5,315

Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

Table 2.7 Completed Constructions

  2006 2007 2008 2009 2010Completed Construction (in thous. sq.m.) 8,628 10,244 10,496 6,400 9,339

Change in %, y-o-y 110.4 118.7 102.5 61 145.9Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

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Table 2.8 Corporate Sector – Labor Market  2007 2008 2009 2010Employees (mln people) 11.4 11.4 10.6 10.7Unemployment Rate (UKR methodology, %) 2.3 3.0 1.9 2.0Unemployment Rate (ILO methodology, %) 6.9 6.9 9.6 8.8Total Arrears of Wages (mln UAH) 745.1 1736.7 1641.0 1340.0

Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

Table 2.9 Corporate Sector – Reasons for Unemployment

  2007 2008 2009 2010TOTAL 642,3 844.9 531.6 544.9Unemployed for <1Y 562,0 737.1 487.8 478.1

reorganization/downsizing 36.2 30.5 59.0 34.4voluntary resignation 72.0 88.7 65.6 63.4alumni 15.0 22.6 22.7 32.6other reasons 438.8 595.3 340.5 347.7

Unemployed for >1Y 80.3 107.8 43.8 66.8Source: Statistics Department of Ukraine (www.ukrstat.gov.ua)

-39-

ANNEX 3

KEY FEATURES OF INFORMAL RESTRUCTURING MECHANISMS

A functional workout process includes a number of common features, including:

1. Enabling Framework . A functioning restructuring environment depends on a legal framework that facilitates the restructuring plan, such as allowing debt-equity swaps, forgiveness of bank debt and taking of collateral, and authorizing priority financing for new money. The legal framework must also provide proper incentives for the parties to accept treatment that will render the restructured business viable (e.g., favorable offsetting tax treatment for debt forgiveness and debt-equity swaps).

Common features of a Restructuring Framework

Criteria for debtor participation (access thresholds) Venue or forum for resolution Designation of a lead creditor Creditor participation mechanisms (e.g., committees) Creditor standstills and moratoria (need, protections, duration, extensions) Creditor appointment of advisors for due diligence; who pays Form and content of restructuring proposal Threshold for creditor approval Financial disclosure obligations Valuation and viability assessments of sustainable debt, cash flow projections; sales of

non-core assets to reduce debt Treatment of non-sustainable debt (e.g., converted into convertible bonds or equity) Priority and protections for new money Rules for resolution of inter-creditor impasse Enforcement of inter-creditor arbitration decisions (e.g., fines by designated authority) Default in case of failure

2. Neutral forum : a ‘forum’ in which both debtor and creditors can initially come together for the purpose of exploring and negotiating an arrangement to deal with the financial difficulty or insolvency of the debtor. This might include a forum favorable to mediation, similar to the approaches adopted in Asia, the Istanbul Approach or elsewhere, as opposed to one in the courts.

3. Participants : the workout process should involve all key constituencies, generally the lenders group, and sometimes other key creditors who may be affected by the restructuring or are critical to the resolution.

4. Coordination : to better coordinate negotiations, a ‘lead’ creditor should be appointed to provide important leadership, organization, and administration. The lead creditor typically reports to a committee that is representative of creditors to assist the lead creditor and to act as a provisional sounding board toward proposals.

5. Stabilization : parties need to promptly stabilize the business operations and provide for a negotiation period, which is generally reflected by a ‘standstill’ agreement (a contractual agreement to suspend adverse actions by both the debtor and the main creditors) that endures for a relatively short period. This may be compared with the ‘moratorium’ or stay of actions which is a feature under the Companies Act or in bankruptcy.

-40-

6. Liquidity and Access to New Money : liquidity is essential to stabilize the business, and may be more difficult to provide in informal workout procedures. This is because formal bankruptcy laws frequently provide for a ‘priority’ for on-going funding of a debtor, but that law does not extend to informal arrangements. In these cases, creditors need to devise a contractual priority by means of an ‘inter-creditor’ agreement, which clarifies that emergency funding by one or more creditors will rank for repayment in advance of their other respective entitlements.

7. Information : access to reliable and accurate information on the business is essential to reaching a consensual agreement, including its business activities, trading position, and general financial statements. This is comparable to the statutory requirement for the provision of similar disclosure found in formal rescue regimes.

8. Negotiation, Agreement & Voting : negotiating, agreeing and implementing the restructure plan is generally based on agreement among the creditors and the debtor as to the terms and conditions for the restructuring, and acceptance by a requisite majority of creditors. The percentage approval necessary may vary depending on the specific acts undertaken during the restructuring (for example, 75-90% for restructuring, 75% for moratoriums, 66% for capital expenditures, credit draws and asset sales, and 100% for new money). In the case of new money, obviously no lender could be forced to extend new financing against its will. It is recommended that majority thresholds be fair, while at the same time low enough to encourage maximum potential for rehabilitation (e.g., simple majority).

9. Legally Binding : the final restructuring agreement is made legally binding on a dissenting minority, provided they are party to an inter-creditor agreement that contractually binds them to the majority decision. Parties who have not bound themselves contractually would not be bound by the decision of majority creditors, raising a risk that the restructuring could be rendered meaningless by independent action of minority and holdout creditors. In formal proceedings, the statute creates the mechanism for binding minority creditors. Solutions should be considered to provide for a formal binding approval, where needed, such as by use of the prepackaged plan provisions in the insolvency law.

10. “Safe harbor” rules: Public bank staffs are generally reluctant to agree to corporate debt restructuring (especially second restructurings) or to extend credits, out of concern that a loss to the bank may result in liability to the staff. “Safe harbor” rules alleviate these concerns by addressing: (i) conditions under which staff of public banks can agree to corporate debt restructuring (e.g., viable debtor, with positive EBIDTA); (ii) acceptable debt restructuring terms (e.g., anything accepted by similarly-situated private banks; and (iii) conditions for extending new credits or rolling over credits (e.g., positive EBITDA, enforceable security, covenants).

11. Tax, legal, and regulatory impediments : Even when a debtor and its creditors are willing to reach a corporate restructuring agreement, implementation could be impeded by a host of other factors – e.g., tax treatment of debt reduction; transfer taxes; tax treatment of non-cash corporate reorganizations (e.g., mergers, spin-offs); insufficient opportunity to transfer net operating losses; creditor review for proposed mergers; constraints from legal lending limits; limits on the ability of foreign creditors to own real property; and capital market protections for public shareholders.

-41-

ANNEX 4

COMPARATIVE COUNTRY EXPERIENCE – WORKOUT FRAMEWORKS

The following Chart compares key features contained in quasi-formal workout procedures adopted during financial crises in other countries.

Indonesia Republic of Korea Malaysia Thailand Turkey

Name of arrangement

Jakarta Initiative Task Force (JITF)

Corporate Restructuring Agreement

Corporate Debt Restructuring Committee

Corporate Debt Restructuring Advisory Committee

Istanbul Approach

Basic approach

Forum selected with time-bound mediation

Framework for debtor-creditor negotiations and resolution of inter-creditor differences

Forum for negotiation Forum for facilitation; superseded by contractual approach, that is, “Debtor-Creditor Agreements”

Coordination Secretariat; Framework for debtor-creditor negotiations and resolution of inter-creditor differences

Default for failure to reach agreement

JITF may refer an uncooperative debtor to government for possible bankruptcy petition

Receivership or liquidation

Foreclosure, liquidation, or referral to Danaharta Asset Management Company with super-administrative powers

Less than 50% support for proposed workout, Debtor-Creditor Agreements oblige creditors to petition court for collection of debts

Less than requisite majority approval, application to Arbitration Committee; parties may pursue other rights

Resolution of inter-creditor disputes

No special procedures After three failures to obtain 75% creditor support, plan goes to seven-person Coordination Committee for arbitration

Persuasion by central bank

Mediation, per inter-creditor agreement, if only 50–75% approval; but any bank with large exposure (for example, a foreign bank) could opt out

Arbitration if majority approval is not reached; large firms (55-75%); SMEs (less than 75%)

Role of central bank

None None. But strong support from Financial Supervisory Committee

Secretariat support Not mandated, but central bank can use influence

None; but strong support from BDDK which administered process

Support from legal system

None Credible threat of receivership or liquidation

Credible threat of foreclosure or liquidation encourages good faith by debtors

75% creditor threshold both for workouts and court-supervised reorganizations; cram down by court possible

Credible threat of foreclosure or enforcement; court supervised proceeding with cram-down

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-43-

ANNEX 5

REGULATORY CONSIDERATIONS FOR PREPACKAGED REORGANIZATION PLANS

I. Statement of Purpose: elaboration of primary goals of prepackaged plans and regulations

II. Definitions or terms: referenced in Regulation

III. Criteria for Prepackaged Reorganization Cases: Elaboration of Process RequirementsA. Contents of Petition and related Submission B. Disclosure Criteria for Prepackaged PlanC. Contents of Prepackaged Scheduling MotionD. Applicability of Reorganization Plan provisions to Prepackaged PlansE. Applicability of Regulation to Cramdown cases involving unimpaired classesF. Scope of Prepackaged Plans G. Guidelines governing the role of parties in the prepetition period

1. Directors and Officers duties [need for independent advice]2. Professional and Expert Advisors to the Debtor 3. Interim Administrators appointed prior to the filing of an application4. Ad Hoc Creditors’ Committee 5. Duties and Obligations to Creditors in the Pre-appointment period [potential liability for

representations causing creditors to incur debt]H. Plans: elaboration of reorganization plan contents

IV. Notices and Pre-filing Notice requirementsA. Notices to creditors

1. Where and when to inspect the proposal for prepackaged reorganization2. Invitation to interest parties regarding objections to disclosure, prepackaged plan,

proposed treatment or classification of claims, or other aspects of the prepackaged plan approval process

B. Notices to the Court / Court ClerkC. Notice of initiating preliminary proceedingsD. Other Notices

V. Opening of Preliminary Proceedings/Scheduling Conference Motions and OrdersA. Purposes for Request of Entry of Immediate Orders or ReliefB. Timing of Hearing to Open Preliminary Proceedings and consideration of Requests for

Immediate ReliefC. Requests for Protective Measures - MoratoriumD. Typical Requests for Immediate Relief

1. Request for Prepack Scheduling Motion [Attach form of Scheduling Motion]2. Request for Joint Administration of cases, if more than one case is involved3. Request for Order authorizing Notices, limited notices, or special notices4. Request for Order waiving or extending deadlines for filing schedules of claims and

setting a bar date for discharge of claims5. Request for Order setting deadline for submission of claims6. Requests to employ professionals and experts and to appoint Administrators7. Request for order establishing procedures for compensation of professionals8. Requests for authorization related to bank accounts and cash management systems9. Requests for interim authorization to use cash collateral or obtain post-petition financing

-44-

10. Requests for authorization to pay prepetition wages, salaries, commissions and benefits in the ordinary course [considerations: whether to cap priorities at statutory limits]

11. Requests to pay vendors, suppliers or others for post-petition obligations in the ordinary course of business

12. Requests to reimburse employees for business expenses in the ordinary course13. Requests to pay contribution or pay claims to pension/benefit plans [not exceeding caps]14. Requests to pay prepetition claims of creditors whose claims will be paid in full in cash

under the plan15. Requests authorizing debtor to honor prepetition customer claims (e.g., refunds, etc.) and

warranties, not exceeding specified amounts stated in the request16. Requests authorizing continued performance of executory contracts and leases without

assumption17. Requests authorizing or directing utilities to continue to provide services to the debtor18. Requests to establish auction dates and approving procedures in cases involving sales

E. Requests for related relief filed by single motion F. Requests are not exclusiveG. Objections or complaints by creditors or other parties in interest

VI. Voting Period, Ballots, Multiple Votes, Notice Presumptions, and Vote TabulationA. Voting period guidelines for public or non-public securities, and other claims and interestsB. Shortening or extending voting periodC. Balloting [process addressed by regulations or law]

1. Use of Official Balloting forms for accepting or rejecting a prepackaged plan2. Use of Official Master Balloting Forms for beneficial owners of record3. Information included in addition to Official Ballot Forms, such as (i) votes on exchange

offers, (ii) consents to or votes on benefit plans, (iii) making of elections called for in the plan, and (iv) consents related to exchanges or transfers that may be required by law (e.g., assignments of claims, interests or receivables to third party purchasers).

D. Multiple voting by creditors holding more than one claim, or claims in multiple classesE. Notice Guidelines pertaining to transmission of plan or notice of plan to creditorsF. Nature of prepetition voting commitments and signed statement of majority of creditorsG. Voting and tabulation of votes at the hearing/meeting

VII. Organizational meeting for Creditors Committee prior to Preliminary Meeting

VIII. Proof of Claim Filing Deadlines and Handling of Contingent or Unliquidated ClaimsA. Deadlines and effect of failure to file by deadlinesB. Consideration and treatment of late filed claimsC. Estimation of contingent or unliquidated claims for voting purposesD. Treatment and reservations for unliquidated or contingent claimsE. Claims reservations and trusts

IX. Notice, Service and Hearing pertaining to the Debtor’s Plan and Disclosure Statement

X. General Disclosures (illustrative matters)A. Source of proposed investment, financing or acquisitionB. Activities and extent of involvement by key stakeholders (e.g., debtor, administrator,

creditors, investors) prior to the petition dateC. Marketing activitiesD. Valuations obtained and the extent and nature of the valuationE. Alternative courses of actions explored and explanation of possible financial outcomesF. Details of requests to potential financers for working capital or other financing

-45-

G. Efforts made to consult with major creditorsH. Details and dates of any significant transactions (e.g., assets involved, consideration paid,

purchasers/investors, connections between purchaser and owners, directors or officers) I. Names of any prior directors involved in ownership or management of purchaser or

prospective purchasers/investorsJ. Guarantees by directors to prior financers of the debtor and whether such financers are

financing new purchaser/investorK. Options, buy-back arrangements or other conditions that are linked to the sale of debtors

assetsL. Any other material facts that could affect the integrity of the process or success of the

reorganization, or impact the ability of the debtor to meet its obligations under the plan.

XI. Organization of the Preliminary Meeting of Creditors

XII. Combined Hearings

-46-

Table 6.1 Total State-Owned Enterprises and data for 2009-2010

Ministries

Tot

al N

o.

Ent

erpr

ises

Tot

al

Rep

ortin

g where Assets Equity Wage Arrears

Debt to Suppliers

Net Profit/Loss

RO

A, %

RO

E, %

Ass

ets

D

epre

ciat

ion

oper

atin

g

non-

oper

’g UAH mln UAH mln UAH mln UAH mln UAH mln

2009 2010 2009 2010 2009 2010 2009 2010 2009 2010

TOTAL for Ukraine 3901

3552

2510

1042

407,635

443,943

209,771

203,372 274 386 104,63

2120,32

5 1,638-

18,519

     

Cabinet of Ministers 1 1 1   1,364 1,651 426 798 0 0 569 531 0 -17 -1.1 -58.4

46.1

Central Government 2316

2216

1383 833 374,8

07395,9

68193,55

5185,94

4 224 283 96,000 110,689 1,305

-18,42

3     

Ministry of Agriculture 484 465 333 132 6,349 6,960 2,883 2,835 21 18 2,294 2,851 51 -56 -0.8 -1.1 60.

4Min of Reg. Dev. & Constr. 40 41 34 7 294 303 170 169 0 1 113 128 15 -7 -2.3 -1.8 54.

6Min of Pub. Utilities & Services 24 26 21 5 89 86 47 49 0 0 33 34 0 3 3.4 2.5 51.

4Ministry of Internal Affairs 52 48 33 15 279 308 179 179 0 0 92 98 10 23 7.9 7.8 34.

8

Ministry of Coal 285 372 118 254 29,894

32,925 2,906 3,664 39 42 14,361 13,960 -

3,692 -136 -0.4 -0.5 54.8

Ministry of Economy 18 19 14 5 76 77 569 565 0 0 8 8 0 4 4.8 6.0 49.0

Ministry of Culture 65 67 48 19 676 668 569 565 0 0 62 44 -8 -3 -0.4 -2.8 57.2

Ministry of Defence 200 184 129 55 6,007 6,001 3,941 4,075 22 28 1,681 1,605 20 205 3.4 6.8 42.1

Ministry of Educ. & Science 91 17 16 1 343 337 237 223 3 2 1 6 -17 -13 -3.8 -4.2 57.

5

Ministry of Health 53 35 28 7 1,558 1,632 150 150 0 0 264 192 2 12 0.8 4.9 52.8

Ministry of Env. 53 53 46 7 2,681 2,942 1,003 1,001 16 5 249 287 -27 -12 -0.4 -1.1 84.

-47-

Protection 6

Ministry of Fuel and Energy 112 110 57 53 174,5

33177,2

08 88,168 75,077 0 0 44,956 57,884 2,666-

20,112

-11.4

-18.1

56.9

Ministry of Labor 30 31 24 7 457 462 0 0 0 0 20 30 14 15 3.2 6.4 23.9

Ministry of Industrial Policy 422 424 251 173 26,14

329,36

5 11,742 11,065 119 182 10,404 9,380 -375 -506 -1.8 -3.7 76.5

Ministry of Infrustructure 310 254 174 80 118,6

70129,5

12 78,959 84,370 1 3 21,015 23,768 2,599 2,120 2.7 3.0 97.6

Ministry of Emergency 34 30 28 2 5,397 6,084 996 1,000 1 0 295 363 -6 -2 0.0 -2.8 48.

3Ministry of Family & Youth 25 24 14 10 554 319 384 243 0 1 13 3 -2 -5 -1.2 -6.4 41.

2

Ministry of Finance 11 11 11   689 627 558 592 0 0 121 24 47 44 6.7 7.2 42.5

Ministry of Justice 5 3 2 1 119 151 93 122 0 0 20 23 9 3 2.1 0.6 45.8

Ministry of Foreign Affairs 2 2 2   0 0 0 0 0 0 0 0 0 0 11.1 1.7 80.

7State Cmte/Other Exec Auths 998 782 724 58 24,49

638,87

8 9,977 11,729 44 98 7,235 8,129 331 -54      

Local Government 84 85 48 37 428 669 127 214 2 2 251 350 -5 -22      Academies of Science 459 425 332 93 6,283 6,515 5,464 4,465 3 2 550 591 6 -3      Others 43 43 22 21 256 261 222 221 1 0 27 34 0 1      Source: Ministry of Economy

ANNEX 6 - DATA AND STATISTICS ON STATE-OWNED ENTERPRISE SECTOR

Note: of the 3552 Reporting enterprises, 449 are in bankruptcy. See Table 6.6 below.

-48-

Table 6.2. Types of SOE with Share of State less than 100%                          

Type of SOE

Total number of SOE including with the share of state in equity:

<10% 10-24.99% 25-49.99% >50%

2008

2009

2010

1Q’1 1

2008

2009

2010

1Q’1 1

2008

2009

2010

1Q’1 1

2008

2009

2010

1Q’1 1

2008

2009

2010

1Q’1 1

Incorporated through privatization or corporatisation

497

434

367

350 99 82 72 66 80 71 57 56 15

9135

114 106 15

9146

124 122

State holding companies and national JSCs

30 31 29 29 0 0 0 0 0 0 0 0 0 0 0 0 30 31 29 29

Incorporated by State Property Fund 98 91 83 82 29 27 28 28 9 11 11 11 42 37 30 29 18 16 14 14

LLCs 83 77 75 74 13 13 10 9 20 19 20 20 31 26 25 25 19 19 20 20JSCs controlled by other executive authorities

103

118

110

110 0 0 0 0 0 0 0 0 5 8 7 8 98 11

0103 102

TOTAL 811

751

664

645

141

122

110

103

109

101 88 87 23

7206

176 168 32

4322

290 287

Source: State Property Fund

Table 6.3 Financials of SOE with Share of State >50% managed by SPF (UAH mln) Table 6.4 SOE under SPF Management Undergoing Bankruptcy Procedures

Indicators 2007 2008 2009 2010 1Q2011 Indicators 2007 2008 2009 2010 1Q2011

Net Profit 388 -1,077 55 -424 -62 Total SOE in Bankr 248 212 194 158 150

Net Income 13,854 16,301 4,485 14,921 3,377 % Total SOE managed by SPF 27% 31% 25.6% 29.5% 23.3%

Earnings Before Tax 917 -566 136 -347 40 Receivershi

p 55 47 32 30 26

-49-

Accounts Payable 4,486 4,179 1,217 2,988 4,382 Rehabilitation 76 64 60 48 46

Accounts Receivable 2,092 2,619 1,056 2,533 2,325 Liquidation 117 101 102 80 78

Total Revenue 333 496 222 280 235 Source: State Property FundLiabilities 9,330 9,981 1,938 7,311 8,571Equity 13,670 12,371 4,199 11,310 10,764Source: State Property Fund

-50-

Table 6.5 Aggregate Statistics on Business Failures in Ukraine in 2006-2010

Year

Total Enterprise

s Undergoin

g Bankruptc

y

Total Bankruptc

y Proceedings Initiated During the

Year

Total Bankruptc

y Proceeding

s Terminated During the Year

incl. by means of Total Bankruptc

y Proceedings for SOEs Terminated During the Year

incl. by means of

rest

ruct

urin

g pl

an

amic

able

agr

eem

ent

Cre

dito

r se

ttle

men

t

liqui

datio

n

rest

ruct

urin

g pl

an

amic

able

agr

eem

ent

Cre

dito

r se

ttle

men

t

liqui

datio

n

2006

12 167 10 528 n/a n/a 161 113 7 103 n/a n/a n/a n/a n/a

2007

14 047 13 792 12 669 27 152 252 11 348

169 11 24 31 50

2008

14 283 11 338 11 044 43 107 253 9 901 145 30 16 16 58

2009

14 683 9 193 8 520 13 61 150 7 413 129 5 13 7 58

2010

14 595 9 312 8 008 15 86 111 6 735 114 4 12 3 48

Source: Ministry of Economy, Department of Bankruptcy

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Table 6.6 SOE Financial and Restructuring Statistics – 2008-20102008 2009 2010

SOEs Managed by Government Authorities      

number of enterprises 3380 3580 3855assets (UAH '000) 351,015,460 407,745,574 442,868,885equity (UAH '000) 177,987,990 212,034,679 202,557,078Staff 1,356,817 1,289,194 1,272,040debt      

accounts receivable 52,619,715 68,464,307 98,780,809accounts payable 61,186,047 90,165,057 120,384,583wage arrears 308,054 274,136 385,317

SOE under restructuring      number of enterprises 55 130 106Assets     13,867,026Equity     9,373,561Staff     50,667debt      

accounts receivable     266,083accounts payable     72,202wage arrears     841

Profitable Enterprises      number of enterprises 1719 1552 1589Assets 284,593,743 326,637,448 271,099,458Equity 152,323,038 185,378,983 161,946,278Staff 977,539 877,196 1,044,810debt      

accounts receivable 44,787,270 57,914,280 28,052,164accounts payable 40,651,925 64,460,880 46,946,228wage arrears 66,257 26,049 86,327

number of profitable SOE 1833 1655 1686share of profitable enterprises 97.2 97.8 97.9

       Unidentified enterprises * 3782 3438 3269

Source: Ministry of Economy

* Unidentified enterprises are those that do not report or account to a particular ministry and have an uncertain status or accountability.

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Table: 6.7 Information on Ministerial SOEs under different stages of bankruptcy as of 1-Jan-2011   

MINISTRIES

Number of SOEs

Bankruptcy Stages Bankruptcy Procedures Current

Status

Iden

tifie

d

Uni

dent

ified

Initi

ated

Term

inat

ed

Rec

eive

rshi

p

Sana

tion

Initi

ated

Li

quid

atio

n

Am

icab

le

Agr

eem

ent

Reo

rgan

izat

ion

Liqu

idat

ion

TOTAL 1669 1281 171 38 81 53 71 8 94 401

Ministry of Agriculture 87 0 46 8 13 1 5 72

Min. of Reg. Dev. & Constr. 41 2 7

Min. of Pub Util. & Srvcs. 24 100 1 1

Ministry of Internal Affairs 66 1 5 22

Ministry of Coal 256 2 19 3 3 6 23 1 6 85

Ministry of Economy 5

Ministry of Culture 63 93 2 6

Ministry of Defence 242 3 4 1 2 7 2 0 16 16

Ministry of Educ. & Science 95 203 1 1 1 32

Ministry of Health 53 127 4

Ministry of Env. Protection 51 34

Ministry of Fuel and Energy 7 5 5 3 2 2 1 14

Ministry of Labor 30 41 1 6

Ministry of Industrial Policy 429 516 45 25 18 23 23 4 30 84

Ministry of Infrastructure 301 137 9 4 4 3 7 0 17 40

Ministry of Emergency 1 10 8

Ministry of Family and Youth 0

Ministry of Finance 11 4

Ministry of Justice 5 17 1 1

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Ministry of Foreign Affairs 2 1

Source: State Property Fund 

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