The Turkish economy entered into a financial crisis in November 2000. In February 2001 the crisis peaked and triggered a collapse in the value of the Turkish lira. Over a few days, the Turkish lira lost more than 40% of its value against the main trading currencies and interest rates rose spectacularly overnight. As result of this crisis, a number of Turkish companies became bankrupt.

As the Turkish economy recovered, the Turkish government looked carefully at the existing legislation and practices in relation to non-performing debtors. New laws were introduced, enabling non-performing debtors, in certain cases, to avoid bankruptcy and providing certain advantages to creditors. These new laws were introduced in 2003 and 2004 by way of amendments to the Turkish Execution and Bankruptcy Law (the EBL), which is the principal legislation setting out enforcement proceedings. These amendments introduced new procedures into the EBL: postponement of bankruptcy, reorganization through abandonment of the debtor's assets, and restructuring of capital stock companies through conciliation.

It was not just the attitude of the Turkish lawmakers that changed in relation to non-performing debtors. Learning from the financial crisis, financial institutions recognized that the knee-jerk reaction of enforcing security or initiating insolvency proceedings against a defaulting debtor is not always the best solution. It became clear to financial institutions during this crisis that it can at times make more commercial sense to participate in a restructuring process with customers experiencing financial difficulties than to pursue conventional enforcement proceedings. A number of Turkish financial institutions entered into a consensual framework agreement and executed separate debt restructuring agreements with debtors to restructure their unpaid debts. This consensual debt restructuring arrangement was known as the Istanbul Approach. The Istanbul Approach was the first large debt restructuring experience in Turkey and was so successful that, by the end of 2004, the ratio of unpaid debt to total outstanding debt diminished from 29% to 6%.

What is debt restructuring?

Debt restructuring (otherwise known as turnaround or a workout) describes a process whereby a company facing financial pressure will agree with its lenders and principle creditors a new contractual framework for financial support involving a restructuring and/or rescheduling of the company's bank facilities and other debt obligations. Under the postponement, reorganization and formal restructuring procedures, parties must comply with the applicable framework of the EBL, which is less flexible than consensual debt restructuring and, in the case of reorganization and formal restructuring, their implementation by the Turkish courts remains uncertain because these recently introduced procedures have been rarely used. Postponement was, however, de facto applied under Turkish law before its introduction into the EBL and is the most commonly used formal procedure to avoid bankruptcy. So postponement could provide an alternative to consensual restructuring. However, it will require an application to the court for the company to be declared bankrupt and a subsequent decision by the court to postpone bankruptcy.

In a contractual debt restructuring, the bankruptcy process and court involvement in relation to the company is avoided. The company continues to trade, often with a view to implementing a new business plan under which it will make big changes to its cost base and business.

There are certain advantages to avoiding a bankruptcy process, and choosing debt restructuring over other formal procedures.

Adverse publicity associated with a bankruptcy might have a detrimental effect on the company's business and its realisable asset values. This often arises because of the perception by a purchaser that the company is desperate to sell and so the buyer has increased bargaining power. There might also be adverse publicity for a lender if, for example, it pushes a high-profile, nationally significant customer into a bankruptcy process.

Termination rights found in the company's contracts and licences are less likely to be exercised, and the costs associated with running a bankruptcy or court-driven rescue process such as postponement, reorganization or formal restructuring can be high and the procedures time consuming.

Also, directors and management face potential financial ruin in a bankruptcy process, either because all their wealth is tied up in the bankrupt company, because they have given personal guarantees to creditors or because they could face disqualification from taking part in the future management of another company.

Is it suitable in all cases?

If a debt restructuring is to be successful, creditors must be able to come to an informed view that it will give them a better return compared to other options. There might be some circumstances where the prospects of a successful debt restructuring are doomed from the start. For example, when the problems of the company are too severe for a recovery to be feasible or the business of the company is not economically viable. In these cases, the creditors' interests would be best served by enforcing security or commencing a bankruptcy process.

The key players

The company's management plays a pivotal role in a restructuring. Its task is to win over the creditors who are going to be asked to give up or vary their contractual claims. If the management is not up to the task, it (or the creditors) should consider bringing in specialist expertise. For instance, in many jurisdictions, companies in complex restructurings will engage a chief restructuring officer (CRO), who will represent the company in the restructuring negotiations with the creditor group.

The management will also have the responsibility for preparing the business plan in which the financial weaknesses of the company are to be addressed in an acceptable timetable. For this purpose, the company and management might need the services of accountants or turnaround specialists who will be able to advise it on its business and how its financial performance and profitability can be improved.

The company and management will also need legal advice. Not only will the legal advisers assist the management with drafting and negotiating the restructuring documentation, but they will also advise on directors' duties and responsibilities, an area that assumes a special importance when the company is facing possible bankruptcy. Under Turkish law, transactions entered into by a company before the company being declared bankrupt can be reviewed in a bankruptcy process. They can be challenged and in certain cases overturned. Directors might also face personal liability for the decisions they made while the company was under financial hardship and was negotiating a restructuring. For those reasons, proper legal advice is essential.

Management might also need to ensure that, if the company's shares are listed on a stock exchange, the company complies with its listing obligations. In accordance with capital markets legislation in Turkey (Capital Markets Board Communiqué VIII/39), listed companies are under various disclosure obligations, for example, to make announcements to the market in relation to any matters that could have a material impact on the share price and as to any substantive debt restructuring arrangements. The disclosure process and satisfaction of listing obligations will need to be carefully monitored and handled.

The creditors

The banks and bondholders

In most restructurings, the bank lenders to the company are at the centre of the process. Almost certainly, there will be several lenders either under separate facility arrangements and/or because a particular facility has been syndicated among a number of banks. There might be a complex array of banks, each having exposures under different facilities and in different currencies. There might be domestic and foreign banks, those that are secured and unsecured, and there might also be different tiers or layers of bank debt.

Many companies now seek debt financing outside the established banking community. Bond financing (for example, Eurobonds and medium-term note programmes) is becoming increasingly used in Turkey, so bondholders now require a place at the negotiating table. The importance and prevalence of bondholders can be seen in some of the largest of the recent restructurings around the world, including the restructuring of NTL, Marconi, Parmalat, British Energy and the Republic of Argentina.

Other creditors and employees

A restructuring is less likely to involve other creditors such as the tax authorities, social security department, landlords and suppliers. The restructuring process will usually contemplate that these creditors be paid in full. It is also unusual for employees to be involved in a restructuring. However, they can be indirectly affected by it even if their consent to it is not required. The company's business plan might involve a reduction in the workforce or an adverse change to employees in their terms and conditions of employment and certain laws will need to be considered. Article 29 of the Labour Law in Turkey provides that if there is a big reduction in a company's workforce, the company is required to notify certain government authorities.

Professional advisers

In addition to the company and the creditors, professional advisers are likely to play a role in the restructuring process. The company and management's need for proper legal representation has already been mentioned. The other parties to the restructuring process are also likely to need legal advice to represent their individual and separate interests in the restructuring. The lawyers acting for the different sets of creditors are likely to be involved in legal due diligence, agreeing confidentiality agreements, drafting and negotiating the restructuring documentation (including new facility and security agreements) and advising on plan B strategies, such as advising on bankruptcy processes and methods of enforcing security.

Other professional advisers will feature in many restructurings. The banks and bondholders might appoint their own financial advisers to assist them in understanding the company's financial information and prospects, and to advise them on the financial implications of the company's restructuring plan.

Shareholders

It might seem strange to mention shareholders as a party in a restructuring. They will often be the last people to receive a return in a bankruptcy process. If the company is listed, it will be subject to capital markets legislation that might, in certain cases, require shareholders' consent (for example, Capital Markets Board Communiqué I/31) if the restructuring plan involves a large asset disposal programme.

The main steps in the process

Most debt restructurings involve the following stages:

• The organizational stage.
• Signing confidentiality agreements and negotiating the standstill agreement.
• Agreeing the restructuring plan and negotiating the restructuring documents to effect the plan.
• Implementing the plan.

The organizational stage

For the company, this will involve appointing professional advisers (in particular, lawyers) and possibly a CRO.

The banks will need to organize themselves to conduct the restructuring negotiations. The lead or agent bank will form a steering committee. The lead or agent bank will be the bank that has been given that role in the original loan documentation and will often be the bank with the largest exposure or the bank that originally negotiated the loan before it was syndicated. The steering committee will consist of a number of the syndicate banks and will be authorized by the syndicate to make decisions on its behalf. For example, the committee will be primarily responsible for negotiating the standstill agreement and the restructuring documents (although in both cases, the documents will usually have to be made conditional on each member of the bank syndicate obtaining its own necessary internal approvals).

Once the participants in the restructuring (for example, banks, bondholders) have organized their representation for participating in the restructuring process, the management will wish to meet the various creditors' committees as a matter of urgency.

Confidentiality and standstill agreements

Confidentiality agreement

An early step in the restructuring process is for the company to agree confidentiality agreements with the creditors participating in the restructuring process. Once the confidentiality agreements are signed, the company can start sharing information with the creditors about its business and affairs and about the other participants' claims against the company.

The standstill agreement

The next critical step is to agree the standstill agreement. The purpose of the standstill agreement is to give the company and the creditors a defined window of opportunity to agree a restructuring deal and for the creditors to carry out due diligence work without the risk of the process being undermined by creditors exercising their remedies or forcing the company into a bankruptcy process.

The main areas usually covered by a standstill agreement are:

• An undertaking by the creditors to continue the facilities on the terms and the limits available at a specified date (the standstill date).
• Repayment of interest to the creditors will be dealt with in some way. It might be that creditors will waive or defer interest for the standstill period.
• An agreement that the creditors will not take any further security to improve their position.
• A standstill period will be specified, with the ability to extend it with appropriate consent.
• Crucially, there will be an agreement by the creditors to enter into a stay or moratorium. This will mean that the creditors will not, during the standstill period, take action to enforce security, to make demand or accelerate loans or other debt claims, to bring legal proceedings (including any insolvency proceedings) against the company and possibly, not to exercise rights of set-off. A standstill agreement will not prevent a party exercising its rights under general Turkish law and in particular under the EBL, including initiating any bankruptcy proceedings or enforcing any security interest. This is because a party can still exercise its rights under Turkish law despite its agreement to waive or postpone these rights under a standstill agreement. However, a party could expose itself to breach of contract claims from the other parties to the standstill agreement if they suffer damages as a result of that party's failure to comply with the terms of the standstill agreement. The risk of potential liability for any failure to comply should ensure full compliance by all parties to the terms of any standstill agreement.
• Events of default that will cause the standstill period to end early.
• There might also be an agreement concerning emergency short-term financing to be made available to the company.

The debt restructuring plan

Once the standstill agreement has been signed, the next stage is to negotiate the final restructuring deal. While this is being done, the company should provide due diligence materials to the creditors. A thorough and well-organized communication process between the company and the creditor body is essential. When it comes to negotiating the detail of the restructuring plan, there are no hard and fast rules. The deal, if it is to work, will have to reconcile a number of factors. The company will need a realistic period to turn around its business and address its financial weaknesses. What is realistic will depend on the depth of the problems and the steps needed to resolve them. Financial protections, cashflows and valuations will be vital information that needs to be taken into account to enable creditors to determine whether the company needs new money to survive. Creditors will also want to know that the deal will leave them with a better result compared to alternatives. In particular, they will want a view as to their estimated recovery in a bankruptcy procedure.

A restructuring plan might also involve new or restructured credit facilities, loss sharing arrangements among all or some of the creditors in relation to new facilities, raising money from the shareholders, subordinated debt, sale and leasebacks and other financial instruments.

Looking to the future

As Turkey continues to attract foreign investment, those investing in the Turkish market will expect a system that supports their expectations when dealing with a defaulting customer. With this in mind, the Turkish government has taken big steps since the 2000/2001 financial crisis to create such a system by introducing the postponement, reorganization and formal restructuring procedures into Turkish law. However, these formal procedures can be time consuming, costly, inflexible, at times uncertain in their implementation and do not always provide the best solution. Consensual debt restructuring can be more responsive to the needs of the market. The Istanbul Approach has enabled the financial institutions involved in restructuring to recover most of their outstanding debts, which they might not otherwise have been able to recover. As a result of this experience, Turkish financial institutions are negotiating another restructuring framework agreement, known as the Anadolu Approach, to restructure the debts of small and mid-sized enterprises. There is every reason to believe that Turkish companies and financial institutions will continue to recognize the benefit that consensual restructuring can provide as an alternative to pursuing formal proceedings in relation to non-performing debtors.