Background
The Turkish economy entered into a financial crisis in November 2000 and 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 per cent of its value against the major trading currencies and interest rates rose spectacularly overnight. As result of this crisis a significant number of Turkish companies became bankrupt.
As the Turkish economy was recovering, the Turkish government at that time looked very carefully at the existing legislation and practices in relation to non-performing debtors. As a result, new laws were introduced enabling non-performing debtors, in certain cases, to avoid bankruptcy and also 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 (EBL), which is the principal legislation setting out enforcement proceedings. These amendments introduced the following new procedures into the EBL: Postponement of Bankruptcy (Postponement), Reorganisation by way of Abandonment of the Debtor's Assets (Reorganisation) and Restructuring of Capital Stock Companies by way of Conciliation (Formal Restructuring).
It was not only the attitude of the Turkish lawmakers that changed in relation to non-performing debtors. With experience gained through the financial crisis, financial institutions recognised that a knee-jerk reaction of enforcing security or initiating insolvency proceedings in relation to 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 their customers experiencing financial difficulties instead of pursuing conventional enforcement proceedings. A significant number of Turkish financial institutions entered into a consensual framework agreement and executed separate debt restructuring agreements with debtors to restructure their debtors' unpaid debts. This consensual debt restructuring arrangement was known as the "Istanbul Approach".
Following the Istanbul Approach was the Anadolu Approach. The Anadolu Approach was also a debt restructuring arrangement similar to the Istanbul Approach but unlike the Istanbul Approach which focused on the restructuring of debts of major enterprises, the Anadolu Approach focused on the restructuring of debts of small and medium-size enterprises.
What Is Debt Restructuring? Why Restructure?
Debt restructuring (otherwise known as "turnaround" or a "workout") describes a process whereby a company facing financial pressure will agree with its lenders and principal creditors a new contractual framework for financial support involving a restructuring and/or rescheduling of the company's bank facilities and other debt obligations. By way of comparison, under the Postponement, Reorganisation 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 Reorganisation and Formal Restructuring, the implementation of such by the Turkish courts still remains to some extent uncertain because these procedures have been rarely used to date. Postponement has however been de facto applied under Turkish law even prior to its introduction into the EBL and is currently the most commonly used formal procedure to avoid bankruptcy. Postponement therefore may provide an alternative to consensual restructuring. However, Postponement will require an application to the court for the company to be declared bankrupt and a subsequent decision by the court to postpone such bankruptcy.
An important feature of a contractual debt restructuring process is that usually a 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 fundamental changes to its cost base and business.
By avoiding a bankruptcy process, and choosing debt restructuring over other formal procedures the following advantages can usually be expected:
- adverse publicity associated with a bankruptcy may well 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 therefore the buyer has increased bargaining power. There may 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
- the costs associated with running a bankruptcy or court-driven rescue process such as Postponement, Reorganisation or Formal Restructuring can be high and the procedures time consuming
- directors and management may face financial ruin in a bankruptcy process either because all their wealth is tied up in the bankrupt company or because they have given personal guarantees to creditors
- economically workouts can be more beneficial to creditors especially during times of financial crisis. In Turkey, the sale of a debtor's assets for the benefit of creditors is conducted by enforcement offices. Usually the amount of the proceeds received from a sale conducted by an enforcement office in Turkey is very low when compared to the real value of the asset sold. This is because Turkish enforcement offices are authorized to sell an asset if the bid at the first auction for such asset is at least 60% of its appraised value and if not sold at the first auction, the bid at the second auction is at least 40% of its appraised value. Bearing in mind that during a financial crisis asset values will as a rule fall and sometimes dramatically, any "fire sale" of an asset will generally not be in the best interest of creditors and workouts become a more attractive option also when compared to formal insolvency proceedings.
Are Debt Restructurings Suitable In All Cases?
If a debt restructuring is to have a prospect of success, creditors must be able to come to an informed view that it will give them a better return compared to other alternatives. There may 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 In A Restructuring Process
The Company And Its Directors
The company's management play a key role in a restructuring. Their task is to win over the creditors who are going to be asked to give up or vary their contractual claims. If the current management is not up to the task, they (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 may 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 the drafting and negotiation of the restructuring documentation but they will also advise on directors' duties and responsibilities, an area which assumes a special importance where the company is facing possible bankruptcy. Under Turkish law, transactions entered into by a company prior to the company being declared bankrupt can be reviewed in a bankruptcy process and can be challenged and then in certain cases overturned. Directors may also face personal liability for making the decisions that they did while the company was under financial hardship and was negotiating a restructuring. For those reasons, proper legal advice is essential.
Management may also need to ensure that, where 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 numbered VIII/54) listed companies are under various disclosure obligations e.g. to make announcements to the market in relation to any matters which 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 Principal 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 may be a complex array of banks each having exposures under different facilities and in different currencies, there may be domestic and foreign banks, those which are secured and unsecured.
Many companies now seek debt financing outside the established banking community. Since bond financing (e.g. Eurobonds and medium-term note programmes) is becoming increasingly used in Turkey, bondholders will now require a place at the negotiating table. The importance and prelevance of bondholders can be seen in some of the largest of the restructurings around the world. Those of note include 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 will 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 may 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 Turkish Labour Law provides that in the event of a major reduction in the workforce of a company the company is required to notify certain governmental authorities.
Professional Advisers
In addition to the company and the creditors, professional advisers are likely to have a key role in the restructuring process. We have already mentioned the need for the company and the management to have proper legal representation. 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 may 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 may 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 Turkish capital markets legislation pursuant to which certain activities may require shareholders' consent (e.g. Capital Markets Board Communiqué numbered I/31).
What Are The Principal Steps In A Restructuring Process?
Most debt restructurings involve the following stages:
- the organisational 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 Organisational Stage
For the company, this will involve appointing professional advisers (in particular lawyers) and, possibly, a CRO.
The bank group will need to organise themselves to conduct the restructuring negotiations. The lead or agent bank will take on the role of Co-ordinator and if the number of banks involved is sufficiently large may also form a steering committee to help it in its role as Co-ordinator. The Co-ordinator will often be the bank with the largest exposure or the bank which originally negotiated the loan before it was syndicated. The Co-ordinator will often be the same bank as the agent in the syndicate, but the role is different and will nearly always be performed by different people within the bank. The role of Co-ordinator is far more proactive than that of agent. The Co-ordinator and, if there is one, the steering committee will be authorised by the syndicate to and will be primarily responsible for negotiating the standstill agreement and the restructuring documents and liasing as necessary with the other banks. Neither the Co-ordinator nor the Steering Committee will have any authority to bind the other banks.
If there are banks outside the syndicate with bilateral positions they too may agree to be represented by the Co-ordinator and may wish to be represented on any Steering Committee.
Once the participants in the restructuring (e.g. banks, bondholders) have organised their representation for participating in the restructuring process, the management will wish to meet with the various creditors' representatives 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 which will usually be covered by a standstill agreement are as follows:
- 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 may 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 during the standstill period will not be able to enforce security, make demands for or accelerate payment of loans or other debt claims or bring legal proceedings against the company;
- events of default which will cause the standstill period to end early;
- there may also be an agreement concerning emergency short-term financing to be made available to the company.
Sometimes the standstill arrangements may be informal (a gentleman's agreement) not to take precipitous action, etc. without a formal legal document being signed. From the debtor's point of view it is preferable to have a formal standstill agreement.
What Does A Debt Restructuring Plan Look Like?
Once the standstill agreement has been signed, the next stage is to negotiate the final restructuring deal. At the same time as this is being done, the company should provide due diligence materials to the creditors. A thorough and well-organised 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 if 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 may also involve new or restructured credit facilities, loss sharing arrangements amongst all or some of the creditors in relation to old or new facilities, raising money from the shareholders, subordinated debt, sale and leasebacks and other financial instruments. Contractually any new money will have to be given priority status over existing debt.
The Future Of Debt Restructuring In Turkey
As Turkey continues to attract foreign investment, those investing in the Turkish market will expect a system which supports their expectations in dealing with a defaulting customer. With this in mind, the Turkish governments have taken significant steps since the 2000/2001 financial crisis to create such a system by introducing the Postponement, Reorganisation 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. Considering the current global economic crisis and its impact already at this point in time, there is every reason to believe that Turkish companies and financial institutions will continue to recognise the benefit that consensual restructuring can provide as an alternative to pursuing formal proceedings in relation to non-performing debtors.
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. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
