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.
Company biography |
Guner Law Office
Guner Law Office was established in 1996 and has
since grown into one of the major corporate, M&A,
banking, litigation, energy and TMT practices in
Turkey. The office is headed by Ece Guner. The firm
works with international law firm Denton Wilde
Sapte.
Guner Law Office
Levent Caddesi
Alt Zeren Sokak No:7
34330 Levent
Istanbul, Turkey
Tel: + 90 (0) 212 282 43 85
Fax: + 90 (0) 212 282 43 05
Email: info@guner.av.tr
|