Background
The Turkish economy entered 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 percent 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 then looked carefully at the existing legislation and practices related to non-performing debtors. As a result, 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 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 Abandonment of the Debtor's Assets ("Reorganisation") and Restructuring of Capital Stock Companies by Conciliation ("Formal Restructuring").
It was not only the attitude of the Turkish lawmakers that changed related to non-performing debtors. With experience gained through the financial crisis, financial institutions recognised that a knee-jerk reaction of enforcing security or starting insolvency proceedings related 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 take part in a restructuring with their customers experiencing financial difficulties instead of following conventional enforcement proceedings. A significant number of Turkish financial institutions entered a consensual framework agreement and signed 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 success of the Istanbul Approach, Anadolu Approach followed. Anadolu Approach was also a debt restructuring method similar to Istanbul Approach but, different in the sense that where Istanbul Approach aimed at restructuring the debts of major enterprises, Anadolu Approach aims at restructuring the 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 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. By 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 Reorganisation and Formal Restructuring, the implementation of such by the Turkish courts remains to some extent uncertain because these recently introduced procedures have been rarely used to date. Postponement has however been de facto applied under Turkish law even before its introduction into the EBL and is 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 is that usually a bankruptcy process and court involvement related 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, 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 damaging effect on the company's business and its realisable asset values. This often arises because of the view by a buyer 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 be 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 or because they could face disqualification from taking part in the future management of another company.
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 starting a bankruptcy process.
The key players in a restructuring
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. Therefore, 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 advisors help 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 conducted by a company before 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 duties. In accordance with capital markets legislation in Turkey (Capital Markets Board Communiqué numbered VIII/39) listed companies are under various disclosure duties e.g. to announce to the market related 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 duties 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 settled 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 decrease 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 in the event of a major reduction in the workforce of a company the company is required to notify certain governmental authorities.
Professional advisors
As well as the company and the creditors, professional advisors are likely to have a key role in the restructuring. We have already mentioned the need for the company and the management to have proper legal representation. The other parties to the restructuring 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 advisors will feature in many restructurings. The banks and bondholders may appoint their own financial advisors to help 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. If the company is listed, it will be subject to capital markets legislation which may, in certain cases, require shareholders' consent (e.g. Capital Markets Board Communiqué numbered I/31) where the restructuring plan involves a major asset disposal programme.
What are the principal steps in a restructuring?
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 " performing the plan
The organisational stage
For the company, this will involve appointing professional advisors (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 therefore form a steering committee. The lead or agent bank will be the bank which has been given that role in the original loan documentation and will often be the bank with the largest exposure or the bank which originally negotiated the loan before it was syndicated. The steering committee will consist of certain syndicate banks and will be authorised by the syndicate to decide on its behalf. For example, the committee will be mainly 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 (e.g. banks, bondholders) have organised their representation for participating in the restructuring process, the management will wish to meet with 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 taking part 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 will not during the standstill period take action to enforce security, to make demand or speed up 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. It should however be noted that 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 notwithstanding that it has agreed to waive or postpone such 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 because of such party's failure to comply with the terms of the standstill agreement. The risk of significant potential liability for any failure to comply hopefully will ensure full compliance by all parties to the terms of any standstill agreement.
- 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.
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 several reasons. 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 find out 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 about their estimated recovery in a bankruptcy procedure.
A restructuring plan may also involve new or restructured credit facilities, loss sharing arrangements among all or some of the creditors related to new facilities, raising money from the shareholders, subordinated debt, sale and leasebacks and other financial instruments.
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. The Istanbul Approach has enabled the financial institutions involved in such restructuring to recover most of their outstanding debts which they might not otherwise have been able to recover. 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 following formal proceedings related 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.