CEE – Corporate Debt Restructuring – Challenges and Opportunities

Willibald Plesser, Co-Head CEE/CIS

4th CIS Local Counsel Forum Kiev, 26 June 2009

Freshfields Bruckhaus Deringer LLPOur locations worldwide

Our international restructuring and insolvency group

Leading international law firm with a multi-disciplinary practice:

excellence across the board and strength in key jurisdictions

The clear market leader in global restructuring and insolvency:

we have acted on most of the high profile restructurings in recent years

top tiers for restructuring and insolvency, corporate, employment, pensions and benefits and tax in leading legal directories (Legal 500, Chambers)

Significant European and Asian expertise on workouts and restructurings:

we are currently acting on the most high-profile restructurings in Europe. We were also extremely active in the last Asian financial crisis

Legal Adviser of the Year

Institute for Turnaround Awards

2008

Legal Adviser of the Year

Institute for Turnaround Awards

2008

Banking and Restructuring Team

of the Year

Legal Business Awards

2008

Banking and Restructuring Team

of the Year

Legal Business Awards

2008

Banking and Restructuring Team

of the Year

The Lawyer Awards

2006

Banking and Restructuring Team

of the Year

The Lawyer Awards

2006

Restructuring Team and Deal of the Year

(Eurotunnel)

International Financial Law Review Awards

2007

Restructuring Team and Deal of the Year

(Eurotunnel)

International Financial Law Review Awards

2007

Past – a bit of historyPresent – the impact of the crisisFuture – challenges & opportunities

1989-2009

1989 – collapse of the iron curtain

“New” banking expands eastwards – Austria leads the charge

1989-2009

1990s recession in CEE – new bank entrants hold strong

1998 – Russian crisis

2000 -

Stabilisation

EU-15 banks enter in large numbers

Three large Austrian banks dominate: Raiffeisen, Erste, Bank Austria

2002-2003

Move towards retail markets

2006-2007

Increasing sophistication of products

Past – a bit of historyPresent – the impact of the crisis Future – challenges & opportunities

GDP forecasts in % for 2009 – changed permanently over past few months

-4

-3

-2

-1

0

1

2

3

4

5

Ap

ril

May

Ju

ne

Ju

ly

Au

gu

st

Sep

tem

ber

Octo

ber

No

vem

ber

Decem

ber

Jan

uary

2009

Marc

h 2

009

USA

Euroarea

CEE

Key CEE dependencies

FDI

Exports

CEE – The Ugly - Europe’s sub-prime?

Economic situation in CEE has deteriorated rapidly over the past few months.

Risk exposure to CEE loans is concentrated (85%) in a small number of Western banks, from a handful of countries: Austria (70 % of GDP), Belgium, France, Germany, Italy, Sweden (30 % of GDP)

Write-downs

CEE banks started taking write-downs last year

Most losses in the form of indirect lending = via bank subsidiaries (roughly 60% of total losses in the case of Austrian banks)

Most of local lending by subsidiaries done in local currencies, but some banks have material fx exposure in the region (eg Raiffeisen 50% of UA loans in US$, significant portion of HU loans in CHF)

CEE – The Not So Ugly – CEE leverage modest compared to Western Europe

Total Banking Assets in % of GDP

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%

Net

her

lan

ds

Un

ited

Kin

gd

om

Irel

and

Sp

ain

Po

rtu

gal

Gre

ece

Ger

man

y

Au

stri

a

Ital

y

Fra

nce

Bel

giu

m

Slo

vaki

a

Hu

ng

ary

Cze

chR

epu

blic

Po

lan

d

Slo

ven

ia

Bu

lgar

ia

Cro

atia

Ro

man

ia

Bo

snia

Ko

sovo

Alb

ania

Ru

ssia

Ukr

ain

e

Western Europe CE SEE CIS

Source: Raiffeisen

CEE – The Not So Ugly – Total CEE banking assets small compared to Western Europe

Total Banking Assets in EUR bn

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

Net

her

lan

ds

Un

ited

Kin

gd

om

Irel

and

Sp

ain

Po

rtu

gal

Gre

ece

Ger

man

y

Au

stri

a

Ital

y

Fra

nce

Bel

giu

m

Slo

vaki

a

Hu

ng

ary

Cze

chR

epu

blic

Po

lan

d

Slo

ven

ia

Bu

lgar

ia

Cro

atia

Ro

man

ia

Bo

snia

Ko

sovo

Alb

ania

Ru

ssia

Ukr

ain

e

Western Europe CE SEE CIS

Source: Raiffeisen

CEE – a diverse lot

5 Years CEE CDS Spreads

0

200

400

600

800

1000

1200

02.0

7.20

08

16.0

7.20

08

30.0

7.20

08

13.0

8.20

08

27.0

8.20

08

10.0

9.20

08

24.0

9.20

08

08.1

0.20

08

22.1

0.20

08

05.1

1.20

08

19.1

1.20

08

03.1

2.20

08

17.1

2.20

08

31.1

2.20

08

14.0

1.20

09

28.0

1.20

09

11.0

2.20

09

25.0

2.20

09

11.0

3.20

09

25.0

3.20

09

other countries

0

1000

2000

3000

4000

5000

6000

only Ukraine

Russia 5Y

Poland 5Y

Slovakia 5Y

Hungary 5Y

Slovenia 5Y

Czech Republic 5Y

Bulgaria 5Y

Serbia 5Y

Croatia 5Y

Romania 5Y

Ukraine 5Y

Group 1

(UA)

Group 2 (RS, RO, RU, BG, HU, HR)

Group 3 (PL, CZ, SK, SL)

Source: Raiffeisen

Current legal / regulatory themes in CEE

Preparation for bad bank structures in the region

Regulatory harmonization/avoidance of discriminatory measures by local governments

Restructuring-related issues (enforceability, foreclosure, etc.), but focus is not on preservation as a going concern

Forced M&A in many manufacturing industry segments

Later: Market consolidation/voluntary M&A in many areas (incl. banking)

Impact of crisis on CEE corporate sector

Worst problems for companies are:

reduced orders

worsening payment behaviour

financing difficulties

Corporate response to crisis

"Quick hit" measures dominate

Most strategic measures have been neglected so far – opportunities for us

Past – a bit of historyPresent – the impact of the crisisFuture – challenges & opportunities

Challenges

Insolvency laws

focused on insolvency process itself, less on rehabilitation as a going-concern

means that banks are very keen to avoid insolvency at all costs

survival of distressed corporate entities is rare

often trade beyond the point of no return

Number of jurisdictions, differences in national regimes

Often many jurisdictions involved even for mid-market companies with cross-border operations

Despite harmonization with EU law, widely different insolvency regimes throughout the region

Cultural attitudes toward restructurings also differ from country to country

Overview of restructuring solutions

Debt SaleUnwanted leverage tounsecured creditors

Crystallisesprovision/loss

Expensive, cumbersome

and very public

May requireunanimity acrossall stakeholders

Feasible?

Equity prefer “new deals” –see it as a “lender problem”

Need for committee (orunanimous) consensus

Pre-packaged salevia administration/

receivership

Reputationalimpact for

bank?

Very public, negative PR

Existing headroomavailability?

Treating symptomsrather thanthe problem

Some Solutions

New Equity/Shareholder

Loans

Court-sanction agreement

with creditors

Insolvency / other statutory

routes

Out of CourtAll-Parties

Restructuring

EnforceSecurity

New Money

cross default provisions

Freefall insolvencyWorst return for creditors

Conclusion

Focus on value preservation: create awareness of consensual options beyond waivers / amendments / enforcement / court insolvency process

2009 will bring more aggressive balance sheet restructurings across sectors in the region

Debris floating to the surface – many years to work it out

The more drastic the measures, the more focus on the legal docs

Each situation is different

People with cash and patience are the kings

Plenty of exciting opportunities

Contact information

Willibald PlesserCo_Head CEE/CIS

T +43 1 515 15 206E willibald.plesser@ freshfields.com

© Freshfields Bruckhaus Deringer LLP 2009

This material is for general information only and is not intended to provide legal advice.