INTERNATIONAL NEWSNEWS A message from TMA’s VP of International Relations

Third Quarter 2005 Vigorous Articles international • Around the Horn: Perspective on Latin American restructurings activity . . . . . . . . . . .. . . 3 prompts chapter • Restructuring challenges restructuring in Russia ......  . .20 by William Skelly • TMA Japan Chapter granted full charter t the TMA Board of Direc- current chapter setup to a licensing status......  . .24 agreement structure with its affili- tors meeting held June 3, 2005, International Task ates outside the United States and Events Calendar AForce II was given the go-ahead to Canada. • Australia......  . .26 proceed with a remodeling of TMA’s • Canada......  . .26 If approved, the change is expected • U .K ......  . .26 international chapter structure. to give prospective international After extremely careful and consid- chapters greater flexibility as they ered discussion, the Board agreed go through the start-up process and with the recommendations of Task grow into vibrant and productive Force II that TMA needed to find TMA organizations in their respec- a way to accommodate the legal, tive regions. economic, political and sociologi- We expect that the Board of Direc- cal nuances of its chapters outside tors will be asked at their October North America. 2005 meeting to approve the new Task Force II will now investigate structure and that the dues for the possibility of changing its international affiliates/licensees will INTERNATIONAL be reduced from their current status. Certain We continue to receive inquiries about NEWS services provided by TMA headquarters that forming TMA chapters from all parts of the are not found to be as valuable or practical world. outside of the United States and Canada will The International Committee has asked likely be reduced or eliminated. Howard Brownstein, CTP, to spearhead an effort to establish a chapter in Hong Kong. Restructuring our chapter South Africa is also close to becoming a model will enhance TMA’s role chapter in formation. Taiwan is experienc- as the voice of the turnaround ing growth in its membership. Continental industry worldwide. Europe will likely see the formation of one or two more chapters in the next 12 months. The stated vision of the Turnaround Man- And it goes on and on. agement Association is to be the pre-eminent If you, as one of our international members, voice of the turnaround industry worldwide. would like to become more involved in Restructuring the TMA chapter model will TMA’s International Committee, please drop help us attain that goal. me a line at [email protected]. 1 * * * * * * * * * * * *

TMA’s chapters in France and Japan were granted full chapter status during the June Bill Skelly is a Partner at the Canadian law firm of Heenan Blaikie LLP. He is a former Board of Directors meeting. We congratulate President of the Northwest Chapter and an the hard-working members who have suc- ardent supporter of TMA’s global expansion. ceeded in establishing these chapters.

TMA International News is a publication of Turnaround Management Association, 100 S. Wacker Drive, Chicago, Illinois 60606. Published quarterly, it serves TMA’s non-U.S. members and focuses on topics of major interest to the international community of corporate renewal professionals. © 2005 Turnaround Management Association.

Editorial Advisory Board William E. J. Skelly – VP TMA International Relations Ward Mooney – TMA Chairman Linda M. Delgadillo – TMA Executive Director Donna Steigerwald – Managing Editor

TMA International News 3rd Quarter 2005• INTERNATIONAL Panel discussion at TMA 2004 Annual Convention NEWS Around the horn: Perspective on Latin American restructurings omprised of investment bankers, U.S. with failures. Panel members explored divergent and Mexican counsel and distressed views of creditor and debtor negotiating strategies debt investing specialists, this panel and leverage points. They also debated dueling Cmet in a session at TMA’s 2004 Annual Conven- perspectives of borrowers and creditors of implemen- tion to provide a first-hand perspective on how to tation options. bring about a successful financial restructuring in What follows are excerpts from that discussion. a difficult environment—one that is often littered

Moderator: Neil Augustine Panel: Jason Cook, Richard J. Cooper, Fernando E. del Castillo

Augustine: Collectively, I think we on this exactly why it got into trouble, and whether panel believe there’s a recipe for a success- or not the current situation is a permanent or ful financial restructuring, which includes temporary impact from a cash flow perspec- several ingredients. tive. One ingredient is knowing the process and You need to understand what the value what you need to have to be successful from fundamentals of the business are in order to a process perspective. You need a well-man- allocate it in a way to get buy-in from your aged process, a transparent restructuring creditor constituencies. You need to under- game plan in terms of how you’re going stand what the capital structure looks like and to deal with all the creditors. You need to each of the debt securities within it. make sure that your stakeholders are orga- You need to understand what the creditors’ nized and have the appropriate professional position would be in various negotiations advice. Some people might take a different and whether they have certain leverage over perspective on whether or not it’s good to other creditors, over the company. You also have them organized or not, whether or not need to understand what their weaknesses are. you should pay for their professionals or You need to understand who exactly is going not. Those will be some of the items we will to form the basis of these different creditor highlight. constituencies that you’ll be negotiating with. The other key component for a successful Later, Rich and Fernando will talk about the restructuring is the knowledge base. You legal environment, whether you’re going to need to understand the borrower extremely try to consummate this restructuring through well. You need to understand its capabili- ties to service debt. You need to understand TMA International News 3rd Quarter 2005• “Around the horn” panel discussion (continued from pg. 3)

INTERNATIONAL the U.S. courts, through the Mexican courts in pulling together the business plan, and or some other foreign jurisdiction. investment bankers who would assist in NEWS negotiations with creditors in structuring First and foremost, particularly in Mexican the transaction. You need to understand restructurings, knowing the shareholder and who your key constituencies are, who you’re management objectives up front are really going to be dealing and negotiating with. the keys to success. In the U.S. system, it’s And they need to pull together their team of the creditors who are really calling the shots, advisors, legal and financial. particularly in an insolvency situation. That’s One must have a road map—how you’re going to get from point A to point B in this In Mexican restructurings, process. And you need to make sure you knowing the shareholder and have stakeholders who have bought into the management objectives up front process so you can have good faith negotia- are really the keys to success. tions. I’d like to open it up to the panel to discuss the following: How transparent should a borrower be with its creditors, and should not the case in Mexico. It will be interesting the company pay for creditors’ professionals? to debate that topic later in terms of who As we represent companies, the management has more leverage. Does the borrower, who’s team always asks, “Are we better off having typically the management team and the them organized or not organized, represent- shareholders, have more leverage over the ed or not represented?” Rich, maybe you can creditors or vice versa? kick that one off with your perspective. You also need a good understanding of what Cooper: I think there’s a trend in emerging the requirements will be for a successful markets, not just in Mexico, for certain stan- structure. Is it just a leverage issue, or is there dards of how to conduct the process. You something fundamentally wrong with the see it in Argentina these days where there business? have been a number of restructurings, and in In developing the game plan, the first thing Mexico as well, where companies generally that needs to be done is to establish the agree to pay for legal and financial advi- company’s advisory team—forming the basis sors for creditors, particularly once they’ve of this knowledge requirement, understand- become organized. I think the real question ing the business and the cash flows, and how isn’t whether you should or shouldn’t, if you’re going to recapitalize the company. The you’re the borrower; the question is when legal advisor team would include both local you should or shouldn’t. My own experi- and foreign counsel. With a much more ence has been the earlier the better, but the liquid marketplace for distressed securities, key issue will be whether the debtor itself is creditors of Mexican corporations could be organized. in the U.S. or Europe, so you need to make I remember working with a company that sure you have the appropriate counsel to was literally running out of cash. They were address those issues. talking to their operating company lenders From a financial advisory perspective, you to increase working capital and trying to need turnaround consultants, crisis managers get the cash to keep the business going. who would focus on assisting management We missed a debt payment on the holding TMA International News 3rd Quarter 2005• company debt, and the question became: to take steps to try to put some pressure on INTERNATIONAL what should we do; how should we talk to the debtor to engage, including beginning holding company creditors? litigation, which is a last resort for us, but NEWS was necessary in this case. At that time, we ourselves didn’t have a good enough handle on our own situation and Augustine: Fernando, we mentioned that what our objectives were. So we ended up typically companies engage both U.S. and going to a bondholder meeting relatively Mexican counsel for dealing with a Mexi- early in the process and saying “We’ve got can corporation in a financial restructuring operating company issues; we’ve got work- with U.S. creditors, and the creditors do ing capital problems. We need to sort that the same. How critical do you see that to a out first. Once we do that, we’re going to successful restructuring—that you have both come back to you and start serious discus- angles covered? sions about how to fix the holding company del Castillo: Particularly when it comes to issues.” Latin America, it’s critical that you have a lo- We didn’t go back to the holding company cal advisor involved right from the beginning creditors for some time because the operat- of the case. You were mentioning a couple ing company issues took so long to sort out. of elements when you were organizing your But when we did go back, we, in fact, helped process. That one element, for example, is organize those creditors who, at that point, leverage that you get with your creditors. were rather disparate, and we offered to pay Latin American countries are somewhat for their advisors. I think the issue is not so much should you, but when—and that’s sort of a fact-specific decision. Augustine: Jason, maybe you can touch this from a creditor’s perspective. What do you do when you’re a large bondholder in a situ- ation where a company’s missed an interest payment, in default, has gone through the grace period, and the company in essence doesn’t want to talk to the creditors and won’t pay for professionals. How do you address that situation, and how do you deal formulistic when it comes to establishing with the company? securities, rights or remedies for creditors. Cook: That’s a problematic situation that we When you try to litigate in Mexico—and it’s run into every once in a while. I can think true everywhere in Latin America—you face of one in particular. When they just won’t a lot of formalities. So you need to involve engage, it’s a problem—especially in Mexico your local advisor as soon as possible to where you just don’t have the same kind of understand where your remedies and lever- legal remedies and rights as in the U.S. as a age with creditors are. creditor. In the specific case of the company For example, when it comes to paying I mentioned earlier, we found another large advisors, you don’t have that requirement in bondholder to work with to share some of Mexico. You normally don’t have that legal the expenses. We hired our own legal counsel requirement anywhere in Latin America. So and were paying it out of pocket. We began TMA International News 3rd Quarter 2005• “Around the horn” panel discussion (continued from pg. 5)

INTERNATIONAL when you try to build trust as a debtor with to do is end up paying for someone to liti- your creditors, that will be one of the things gate against you. So there are different ways NEWS that you’ll want to agree upon right from the you can handle that so you can make sure beginning. It’s very formal in Mexico, and that if you’re representing a debtor, you’re you need to understand those formalities only funding those activities that are part of when it comes to your creditors’ securities the consensual effort. and your own position in litigation, and how But those issues come up all the time. Some- that is established. times they prevent parties from agreeing on Cooper: One of the issues that comes up your early process issue. You see creditors repeatedly in the context of the question of and debtors fail to make progress on is- helping organize and finance the activities of sues like that, and it usually is unfortunate, your creditors when you’re a debtor is, how because they really are manageable issues. are the creditors going use that information? Cook: Just a couple of real quick comments So a couple of issues generally come up. One on the importance of advisors from the is confidentiality. Are the creditors willing to creditor perspective: you often have very get restricted for some period of time—par- different creditor constituencies with dif- ticularly distressed type funds who hold ferent objectives. Having an advisor for the positions, but sometimes trade positions? committee—or for us, from the creditor The company often asks when they are point of view—can often help resolve those thinking of paying for creditor advisors, differences among the creditor groups. If you whether they should require some type of have different creditors speak to each other standstill arrangement with the creditors face-to-face, it is often counterproductive who are going to be part of the process. because emotions become involved. It’s bet- My own views on that are that asking for a ter to have the advisors handle those types of standstill for a limited period of time may be intra-creditor discussions. OK. Anything longer than that is not really Augustine: You’ve heard here that in most worth it, if you’re representing a debtor. At situations on both sides of the table, you the end of the day, you’re either going to have crisis managers, investment bankers, have a successful process or you’re not. U.S. counsel, and Mexican counsel. I’d like Often, litigation is an important part of to bring to the table the question of the in- creditor strategy. You have to acknowledge tegration of these teams. Is it always seamless that as the debtor. One thing you don’t want from both perspectives? You have people who are specialists in one jurisdiction, know something about the other jurisdiction, but clearly don’t have as much of an understanding of what it takes to get to the other side. Maybe there are hidden agendas, maybe not. If I do it in the United States, effectively I can run the bankruptcy process with my team of lawyers internally. Do people think it’s counterproductive to have these maybe hidden agendas, different perspectives; or is that what a borrower really needs to make the ultimate determination, TMA International News 3rd Quarter 2005• if seeking the solution in the U.S. court or the foundation of the financial restructuring INTERNATIONAL a Mexican court is of ultimate benefit from in dealing internally on your side in setting having these various layers of professionals? strategy in discussions and negotiations with NEWS your creditors. Cook: We take a very hands-on approach as creditors in restructuring processes, and from One needs to take that long-range business the borrowers’ point of view, you have to ac- plan and determine what the value of the tively manage your advisors. You want both company is from your traditional evalua- local and U.S. counsel, because you do need tion methodologies: comparable company, the advice. But you have to be an intelligent precedent M&A transactions, discounted consumer of that and not let those agendas, cash flow analysis. If you’re a holding com- which can exist, override. You have to look critically at the advice and make sure that You want both local and U.S. some other agenda is not driving it. counsel, because you do need the Augustine: I’ve been involved in situations advice . . . but you have to be an where everyone gets on the same track intelligent consumer of that. relatively quickly, and we get headed down a path where everyone has bought into what the solution is ultimately going to be. There pany creditor and this company liquidates, are other situations where they’re going in you’re probably in a situation where you different directions, and there are competing have little or no recovery. Therefore, you interests on the same team in terms of the want to make sure you do a liquidation strategy to ultimately implement the restruc- analysis to use as leverage against your turing. creditors to bring them to the table and to We don’t want to lose sight of the company negotiate the right deal. that is there and hopefully will be success- Because most people are familiar with the fully restructured in order to repay debt and U.S. system, I’d like to compare the U.S. sys- create value for the shareholders. So first and tem to the negotiations that typically occur foremost, we talk about the need to focus for restructurings of Mexican corporations. on cash flow. Cash flow is ultimately what’s I would like to raise the issue of whether or going to determine value, your debt capacity not buy-in is required on the business plan and how one can put into place an appropri- and whether it is required on the valua- ate capital structure pro forma for the trans- tion. Something that is very traditional and action. typical in the United States in dealing with We start with the evaluation of the company the creditors is that you must get buy-in on financials and understand whether or not the a business plan. You might not get people to company is currently in its predicament due ultimately agree on that valuation, but you to temporary or permanent issues. Is it a raw can structure a deal around that valuation. material or a commodity swing that’s putting Maybe, Jason, you can give your perspective pressure on margins that one believes is more as a creditor. short term? Or is it a fundamental change Cook: My first comment will be that we in the way the business and the industry tend to take a fairly jaded view of the busi- is currently performing? You need to take ness plans and projections that come out that evaluation and construct a long-range of companies in Mexico in restructurings. business plan, which is really going to be TMA International News 3rd Quarter 2005• “Around the horn” panel discussion (continued from pg. 7)

INTERNATIONAL They consistently show that this company creditor, to see if the company coming out is will never ever make anywhere near as much going to be relatively overleveraged for cash NEWS money as it used to make. If results continue flow and debt service capabilities, but not to be published during the negotiation much else. period, they always look incredibly horrible. I think the market for distressed securities Then the first quarterly report right after in emerging markets is really dominated restructuring, all of a sudden, is amazingly by a handful of players at this point. There good. are five to ten very large funds that have an So, no, you don’t have to get buy-in on active portfolio, and their focus in recoveries the business plan, I think, for the most is to get instruments with MPV that meets part, because the creditor groups dealing in their needs and that they can exit out of Mexico in emerging markets generally do within some short period of time. So they not expect to be provided a business plan are not focused on long-term business plans. that makes Cook: I think part of that is—not to make much sense. In the volatile Mexican economy, it sound completely opportunistic—but the regardless of the business plan, The other reality of the emerging markets is that it’s a banks know they’re eventually going point on that very volatile marketplace. The underlying to renegotiate the deal. is that I think economics of these countries and companies that the way are such that any projections you make that restructurings are longer than two years—maybe three in a occur in Mexico more stable economy—are completely shots or in emerging markets are so much different in the dark. You don’t know what’s going to than in the U.S. Chapter 11 system, where happen in Brazil or in Mexico three years equity will have some sort of recovery, and from now. Economic growth could be 12 the shareholders will retain control of the percent, or it could be negative 12 percent. company most of the time. But you just can’t Projections that far out simply aren’t cred- force their hand as you can in Chapter 11. ible. That’s the other limiting factor. Any equity that you are granted as a creditor Augustine: Jason, you brought up the tends to be less in control, and we tend to interesting point that every business plan look at that as an option value and not as that you’ve seen from a Mexican borrower our main source of recovery. We try to maxi- has been conservative. I don’t disagree with mize that through a debt claim. So I think that, because you start with the foundation the legal strictures are so much different that that shareholders aren’t going to do a deal it makes the valuation in the business plan a unless they retain control of the company. lot less of a critical feature. So in essence, you know you’re going to have Cooper: I would just underscore that with control. You also want to make sure it’s not the last point you made. I think that the just an option value, and you want to have reason it’s an important issue in the U.S. financial flexibility, so you bring down the context is that equity is on the table and has projections. real value. That is not as much the case in But here’s the question. Because you’re the emerging market context. It is viewed typically dealing with secured banks and generally as kind of an option value type unsecured bonds, there’s a point in time when you get it. Therefore, what you’re re- where being too conservative could cause ally looking at is a business plan, if you’re a you a problem in dealing with some of the TMA International News 3rd Quarter 2005• Mexican banks. Maybe, Fernando, you willing to come on board to a consensual INTERNATIONAL can talk about this from a Mexican bank’s deal. One way is to create different classes. perspective. They have a secured debt Get an impaired class to accept the plan, NEWS instrument. They see projections from a and cram down upon the other class that company that had historically done $200 is not accepting. What I’d like to pose to million EBITDA that now has a five-year Fernando and Rich is how creative can one business plan that says the highest they’re get in structuring those securities in regard ever going to achieve is $50 million. They’re to creditors that have the same rights? secured by the stock of all the operating del Castillo: Very little. You can’t be companies and by all the assets. What is that creative when it comes to a concurso their response in terms of stretching out setting and classification of creditors. The their claims? law establishes a pretty straightforward del Castillo: Typically the banks, when classification of credits, and there’s not much they have all the security and assets of the room to move to classify creditors. company, tend to think that they are going Basically, you have your super-privileged to stick to security and really don’t pay much creditors, which are employees. They have attention to the business plan that stretches the constitutional rights and always come that far away. They know that, in a volatile first in anyconcurso setting. Then you have economy, no matter what business plan is the expenses of the state, the managing of presented, they’re eventually going to get the expenses of the actual proceeding of the back to the table and renegotiate and recut concurso. Then come your secure creditors the deal. That is typical for Mexican banks who collect on their own security. Then in a scenario where they’re dealing with you have privileged creditors, which for distressed companies. They know that the some reason hold the retention rights, like company is not going to make money like it warehouses. Then you have your unsecured used to, once there are problems. Typically, claims that are all the rest. they simply go with the company and retain their security to negotiate a deal. You cannot be creative when it comes to unsecured debt, which is eventually the one Augustine: Next we can chat about the that is going to confirm your plan or not in different security features that exist in a lot a concurso setting. You cannot really classify of Mexican financial restructurings. We have them. They are all secured, and you need to inter-company claims versus third-party deal with them. If you have enough support claims, claims of banks, bondholders, and and enough percentage to confirm the plan promissory notes. We have structural and with your secured creditors, that’s fine. Oth- contractual subordination. You have collat- erwise, you’ll have problems, and you cannot eral and liens, some better than others, that force them or cram down on the creditors we could talk about, and benefits of stock using a classification that is virtually not versus hard assets in Mexico. foreseen in the concurso process. But I’d like to start the conversation around Cooper: For those who have been involved the different security features by posing the in U.S. bankruptcies, one of the real crafts of question to Fernando. Call it classification the bankruptcy process is classifying claims creativity—for those of you who know the in a way so as to facilitate restructuring, U.S. system quite well, there are ways to use both for purposes of confirming a plan and the code to cram down creditors that are not of constructing the right balance sheet. As TMA International News 3rd Quarter 2005• “Around the horn” panel discussion (continued from pg. 9)

INTERNATIONAL Fernando mentioned, in Mexico, it’s less companies, they may be setting themselves important, and you don’t have the ability up so they can effectively become the major- NEWS to do what you could in the United States. ity creditors to the company. That makes the For example, if you have secured claims in process illegitimate and problematic going the U.S. and the value of the collateral is forward. such that they are undersecured, you can use One of the failings of concurso is that it does that to effectively carve out a different class not allow for substantive consolidation. You of creditors and therefore potentially cram cannot take the holding company and its down classes that don’t approve. operating companies and address them as The flip side of that is in the U.S., you have if they are one. You have to fileconcurso on the absolute priority rule, and that protects every one of those companies, which is ef- junior classes from being crammed down. fectively a sort of mutual assured destruction You don’t have that in Mexico; so you can, strategy. So, no, I don’t think they should by a simple majority vote of your unsecured be able to, from the point of view of what I creditors, approve a plan. You can have 49% think is appropriate. However—Fernando of the class disapprove the plan, but it will will correct me if I’m wrong—the law looks go through. You can do that and have the like it is allowed. equity retain 100% of their position. You del Castillo: Yes, again, this concurso law is can’t do that in the United States. new. It was established in 2000 to replace Therefore, going back to the different agen- the old bankruptcy and special payments law das point, there’s always discussion when that dates back to 1943. Intentionally or not, you’re advising Mexican companies with the there’s no provision, as it was in prior law, ability to do a Chapter 11 plan whether they that intercompany debt can vote and can should go through a Chapter 11 process or a actually be used to confirm the plan. The law concurso process. Depending on what type of doesn’t say you can use your intercompany credit you have, secured debt, holding com- claims to confirm the plan, but still it doesn’t pany debt, or different types of claims, there prohibit it. In the relatively short experience are pros and cons to each of those processes. that Mexico has had with concurso, it’s been done. So the objective answer to that is that Augustine: Here in the U.S. Chapter 11 you can use your intercompany claims to process, intercompany claims don’t have the confirm the plan. ability to vote. They might be a class in a plan, or they’re effectively terminated as part Cooper: And it’s tremendous leverage at of the plan. That is not the case in Mexico. times. We were involved in a situation where Jason, do you think intercompany claims we had holding company debt and operating should have the ability to vote and partici- company debt, and the operating company pate in a concurso mercantil process? debt had holding company guarantees. We worked out a deal with our operating com- Cook: No, absolutely not, especially because pany creditors who had guarantees at the if you have intercompany claims, as you’re holding company. We told the holding com- going through this negotiation process, pany creditors that, based on the guarantee things may not be particularly transpar- claims we had from our operating company ent. They may be running up those claims lenders and our intercompany claims against and increasing them artificially in order to the holding company, we could effectively be able to cram their creditors down. By creating the shareholders who control these TMA International News 3rd Quarter 2005•10 confirm aconcurso at the holding company in a proceeding. Those are open to challenge, INTERNATIONAL level. not in respect to the ability to vote, but in respect to the legitimacy of the claims and NEWS So if you’re a holding company creditor, whether they are real or not. keep in mind that if you object to our plan, we think we have the ability to do a plan Augustine: We talked about creativity and without all of your support. Who knows on classification, and ultimately concluded that the margin whether that affected anyone, in a concurso mercantil, there’s not a lot to but we certainly went through the process, do. But I want to pose the question to Rich. and it was more than just conversation. In your view, if you have two unsecured creditors sitting up at a holding company, We actually had an agreement with our op- one with the benefit of the guarantees and erating company creditors for what was then the other without, is the guarantee ultimate- a prepackaged plan at the holding company ly really worth anything if you don’t have the level. It was based on the guarantee claims ability to get creative in a concurso plan, and that the operating company creditors had then you don’t have the ability to facilitate or against the holding company and a number implement this plan through a Chapter 11? of intercompany claims that the operating companies had against the holding company. Cooper: Going back to something Fernando So it was certainly useful leverage. said, the law is relatively untested, certainly with big public companies. I think that although it would appear that you’re somewhat limited in how you can classify credit, if you see more of these cases, I think you’re likely to see the system become more sophisticated about these issues. In Argentina, where you have a similar process and you can go through a prepackaged restruc- turing and get it done relatively del Castillo: The fact that you can use quickly, you now see a number of large intercompany claims to confirm the plan public companies going through these proce- doesn’t mean that, at the end of the day, a dures. As you would expect, you see the law company will have a big amount of debt developing on how claims get treated and against a holding company such that you classified. So I suspect that, if this becomes can then use it to confirm a plan. That you a more user-friendly mechanism to resolve can do it is one thing; the other thing is the corporate financial issues, you’re going to see legitimacy of those claims. You have to pay a more developments in the law and perhaps lot of attention to that, and it comes back to people pushing the limits a little. the fact that you need to retain local advisors Augustine: I guess the other question, going here so that when you do have intercompany from a guarantee, is really about the collat- claims, and you’re going to use them to eral. Fernando and Jason, if you’re a secured confirm the plan, you know that those are creditor and had a choice of either the stock legitimate claims that will eventually stand of the operating company’s subsidiaries or TMA International News 3rd Quarter 2005•11 “Around the horn” panel discussion (continued from pg. 11)

INTERNATIONAL the fixed assets of the subsidiaries, which one actually accessing the assets. As Jason was would you prefer and why? mentioning, there are mechanisms whereby NEWS you can relatively easily get access to shares Cook: I’d rather have the shares for a in proceedings more quickly than you would number of reasons. As we have discussed, if you worked against the fixed assets. So as a shareholders have extraordinary power in creditor, you always want to have the shares emerging markets, certainly in Latin Ameri- placed as collateral rather than anything else. ca, specifically to maintain their interests. If you have the shares as collateral, you’ve got Augustine: Let’s talk a little bit about the composition of the different creditor con- It’s better to you have creditors stituencies that we’re faced with. Typically, organized when you’re using the local banks have long-standing relation- ships. As Fernando mentioned, most of these the concurso law to confirm a are businesses that have been in the family restructuring plan. for many years and have strong relationships with their bankers. The banks are typically secured or at the them pretty well in hand. You can put fear operating company level and have guarantees into the shareholders at that point. It’s easy from the holding company. to exercise, you can get it, and nobody can argue that you’re disrupting the business by Then you have traditional institutional inves- taking away critical assets. tors, which would include high-yield and crossover investors, that typically don’t want It is a much cleaner, easier way to exert lever- to get involved in the workout. Their objec- age over existing shareholders if you have tive is, “Just make the problem go away. I the shares as collateral as opposed to a plant. don’t want to get involved in this process. I I have no desire to go and rip a plant up or don’t want to deal with the uncertainty of a anything. I can take the shares, sit in New possible bankruptcy in Mexico.” York and I now own a company. Or I can at least get the shareholders to cut a reasonable Then you have the more traditional emerg- deal. ing market investors, which can include mutual funds or hedge funds. They’re more del Castillo: I would agree. From the trading oriented. They’re not necessarily creditor’s perspective, you want to have secu- workout players, either, and they’ll evaluate rity over the shares and not the assets. We’ve whether or not they’re going to sell into the been saying that the concurso law doesn’t market or actually ride through the process. really give creditors the power to eventually get a hold of the shares, so the shareholders In a lot of the Mexican restructurings, the can retain their interest and cut a deal. Many bond deals were sold into the retail market- Mexican businesses—and this is normal in place. These investors lack information on Mexico—are family businesses where they the one hand. On the other hand, it’s very take the value and understand the shares as hard for the company that has a bond that’s their own patrimony. So it creates leverage been issued through a number of retail inves- for creditors if they want the shares. tors to get the process organized in a way to facilitate negotiations if it’s widely dis- If you go for the assets, Mexican companies persed. Typically, we see these holders riding know that they’re going to keep you in litigation forever in Mexico prior to your TMA International News 3rd Quarter 2005•12 through the restructuring and not necessarily restructurings where you can take this bond INTERNATIONAL participating. with the higher coupon and a big haircut and some equity kicker and something else, NEWS Lastly, probably more important, are the dis- and then there might be a par bond with a tressed investors, the folks like Gramercy— low coupon and that sort of thing. That’s where their approach is to get in to make why you often have a Chinese menu type of money as quickly as possible, and it’s all an approach to the restructuring. IRR game. They’re into market-to-market. They’re not into the regulatory markdown Cooper: Just an observation or two about at all. They take an opportunistic approach that: One of the reasons these deals get done to the business. They will get their hands is the different objectives and the ability dirty. They will chair, lead and facilitate the through a menu approach to address them. organization of the bondholder committee. Sometimes the MPV differences between Their objective is to maximize the net pres- the par bond option and the discount bond ent value of their investment relative to the option or the cash option are quite signifi- buy-in price. In this part of the panel, I’d like to discuss from everyone’s perspective, who drives the process from the creditor’s side, and in particular, from the bondholder’s side? Cook: It does tend to be funds more like Gramercy, the distressed investors, for a number of reasons that you’ve already touched upon, including the fact that these tend to be much larger parts of our portfolio than for your typical dedicated or cross- institutional investor who may have 2% of their portfolio, at most, in any one of these cant. That’s used by the company and often situations. We’ve run into situations where by those who are driving the process, the large institutions barely even knew they distress players, to get a deal done. owned the thing before it went into default. In many places, for example Argentina, the So it tends to be worth more to us as a MPV differences are quite significant. If you percentage of our portfolio. look at the world from an MPV perspective, By virtue of being willing to put in the I think that retail holders are subsidizing the time and effort, we also end up driving the restructuring. Because they’re not as well process by default. The other part of it is that organized, that’s their lot; on the other hand, we have a better knowledge base. We spend it’s also consistent with their objective. So time to learn the ins and outs of the laws and that’s one of the reasons these processes are how to do this. often successful. Having said that, if you have large hold- Another reason is that often the dynam- ers who are par buyers, who are traditional ics of the process are such that positions institutional investors, who are banks, you change. Now, for example, you see a much have to respect their needs. Often, that’s why more active secondary market for bank debt we end up having a couple of options in in Latin America. You see the distress type

TMA International News 3rd Quarter 2005•13 “Around the horn” panel discussion (continued from pg. 13)

INTERNATIONAL players holding secured bank paper or even the time it takes to get the deal done, either sometimes trade claim type situations, where consensually out of court or consensually NEWS you never saw that three or four years ago. in court, where typically you would take a That’s going to affect the process quite a bit, long time to cut a deal. So when you have because traditionally it was distressed players a scenario with creditors that are organized holding parent company unsecured debt. In and are in the process, it’s a much better that situation, they had some leverage. It’s situation. a different dynamic when you have them Augustine: Let’s kick it over to the legal holding loans that are secured, which are environment—the differences between governed by loan agreements, as opposed to Chapter 11 and concurso mercantil. Obvi- indentures. We’ll see where that drives a lot ously, both alternatives are evaluated by most of these processes. Mexican companies undergoing a financial Augustine: Staying on the subject for a restructuring. minute, would you rather be representing a Everyone spends a significant amount of company whose creditors are concentrated time figuring out which alternative provides and organized and have the skill set and the highest certainty of successful implemen- willingness to dig into the situation like a tation and which one has the most uncer- Gramercy? Or would you rather have a situ- tainty. These companies are controlled and ation where you’re representing a company managed by families who typically are more with a very dispersed group of creditors comfortable in the home court than with the where no one has more than two or three uncertainty of a Chapter 11 system. percent of the issue? What would your preference be? First, talking about the confirmation vote, in Chapter 11, the secureds typically are not del Castillo: My preference would be the voting in the process; so you have an unse- first, of course, when you have creditors cured pool of claims, and you must achieve a organized, and you know what the game 51% acceptance on that unsecured class. plan and the rules are. It’s a much better Point number two is classification. Rich brought up the issue of absolute priority rule. This is the big difference between what typically happens in the United States and what happens in Mexico. Both restructurings start out with a significantly different thesis. On the concurso mercantil side, or the Mexican restructurings, you start with the thesis that the family that is controlling the business before the restructuring is going to control the business after the restructur- ing. It’s typically why the families can’t get comfortable using the U.S. system, because situation, particularly in the scenario where of this control aspect. It’s very hard given the you’re using the concurso law to confirm absolute priority rule to prove what you need the plan, because that makes the process to prove to implement most of these Mexi- swifter and better. One of the things that is can restructurings in a U.S. court system. always present in Mexican restructuring is TMA International News 3rd Quarter 2005•14 Secured creditors are typically in a concurso it’s going to be contested, that’s going to be INTERNATIONAL mercantil not subject to a concurso plan. an issue for the creditors and therefore an is- They continue to get paid currently while sue for you as a debtor. Conversely, the U.S. NEWS the concurso is ongoing, but they’re really not process offers a lot more certainty. If you part of the voting constituency or recognized have the requisite votes to confirm a plan, creditors under a concurso. Obviously, in a you could be in and out of a bankruptcy bankruptcy in the United States, they carry court within 30 days. So there are some real a significant amount of weight and leverage advantages. through adequate protection orders, which The disadvantages from a U.S. perspective allow them to get paid currently, typically are that the voting requirements are more for interest only. DIP financing is well-estab- lished in the United States, but not necessar- ily something that has even been considered DIP financing is not in a concurso mercantil process. necessarily something that Rich and Fernando, when you’re sit- has even been considered in a ting down with your clients to discuss concurso mercantil process. implementing a particular transaction that you’ve negotiated with your creditors, what thoughts and guidance do you give your difficult to meet, the confirmation require- clients about the certainty of being able to ments are more difficult and the process implement the transaction through one or is more expensive. It allows for annoying the other? discovery and related processes that some- times family-run businesses in Mexico would Cooper: I have to start off with a couple rather avoid. of assumptions, one of which is that we’re talking about a consensual plan and that So there’s a whole series of pros and cons. you’re a Mexican or emerging market Ultimately, it comes down to weighing each company that can access U.S. courts to of those, understanding the credits that confirm a prepackaged Chapter 11 plan. you’re dealing with—secured or unsecured, How do you weigh the various options? the possibility of substantive consolidation— all of those kinds of things. It’s a difficult I start out from the perspective of: can you analysis. get your creditors to support a concurso plan, particularly if there’s even a small chance of del Castillo: There are other issues when it being contested? That’s a difficult thing you’re dealing in a concurso setting. For to get creditors to accept, for the simple example, I think that the concurso law is fact that the law is untested. The process, eventually going to work, but it’s going to if it’s in a contested proceeding, could go work particularly for holding companies. on for years. Their claims are immediately When you’re dealing with operating compa- converted into non-interest-bearing claims nies, concurso is almost a killer. Because when once you’ve filed aconcurso , and the dollar you’re dealing with a variety of creditors and debt instruments are effectively converted to a lot of them, the process can very easily get peso inflation-adjusted instruments. out of control. So the starting point is that if there’s a prob- None of the operating companies that have ability or likelihood that what you think is a filed forconcurso have emerged from it with consensual plan, but there’s a possibility that a consensual deal or a plan confirmed in a TMA International News 3rd Quarter 2005•15 “Around the horn” panel discussion (continued from pg. 15)

INTERNATIONAL disputed scenario. I think that’s one of the you’re advising a company whether to go to big assumptions, because the concurso law concurso or not. NEWS says you have six months that can be ex- Augustine: Why don’t we talk a little tended two times up to one year to confirm bit about shareholder and management a plan. If you don’t confirm a plan within objectives, which is what ultimately drives that year, then you are effectively and imme- this process in Mexico—unlike what you diately into liquidation. So there is a sword typically see in the United States. So first hanging over the company’s head, which and foremost, you need to understand is saying, “You either finish thisconcurso the motivations of management and the process within a year, or you’re done.” shareholders, who effectively in almost Again, you need to understand your credi- all circumstances are one and the same. tors and have sufficient leverage, and most of There’s always a tradeoff to make—financial it negotiated, if you’re going to go to concur- flexibility versus equity ownership. so. That’s one of the things you should advise Clearly, what we’ve seen in most of the companies when you’re dealing with this. transactions that we’ve been involved in You can file for a holding companyconcurso , is that the 50.1% of the post-restructured for example, but you equity is critical. Along don’t immediately Shareholders have a lot with that, in order to get protection for get astute investors the subsidiaries. more leverage in Mexican like Gramercy on You have to put the restructurings over their board, you’re going to subsidiaries, as well, creditors than they would in have to notch up the in concurso. That’s the United States. amount of leverage where the problem that you’re taking comes, because your post-restructuring. suppliers and all the people they have re- Rich mentioned the difference between a lationships with on the operating level get tender offer at one price and the MPV of a scared. They believe they’re not going to pay package of restructured securities on another. them. Immediately they come to cash terms. Typically, these companies are cash-starved. This is typical in Mexico when a company Where do you get the cash? goes to concurso. Suppliers immediately want cash terms, and that creates problems. One of the things we say is that management and shareholders need to redefine what core You don’t have the kind of protection that business means when you get into a finan- you have in the United States. Although at cial restructuring. You might have to make first sight, the requirements for confirming the determination that something that you a plan might look like it’s the better way always considered to be core is now non-core to do it, or the ability to use the company in order to finance and fund that tender claim is a better way, you have to be thinking offer. The other thing is the comfort level of whether your subsidiaries are open for chal- the management team and the shareholders lenge or attack from creditors. In that case, in terms of the implementation tool. you might prefer a U.S. setting where you would get immediate protection for those Shareholders have a lot more leverage in companies and your own company. Those Mexican restructurings over their creditors are the elements you need to play when than they would in the same situation in the

TMA International News 3rd Quarter 2005•16 United States. I think everyone takes that for take over the company. What will be left INTERNATIONAL granted. Here’s the real question. Most of the of the company at that time is an entirely transactions that we’ve dealt with and have different question. You can’t remove manage- NEWS recently closed or are in the midst of negoti- ment under concurso. They’ll run it into the ating aren’t significant equitizations. They’re ground and strip assets. That’s our view. But putting in place the maximum amount of it is a threat and a valid threat. I think that debt that the company can service, maybe over time, as concurso becomes more tested, plus $50 or $100 million. becomes less uncertain, you will probably see use of and the amount of equitization Jason, given your comment about the un- increase as a recovery mechanism in these certainty of projections in the business plan, negotiations. given the macro-economic events in a lot of these countries, are we setting up companies to default again with these types of capital structures? Cook: We might be. But that’s the tradeoff for the shareholders. That’s the risk they have to assume and that we assume to some degree, because we can’t access the equity. There’s no other way to maximize our claim and get what we deserve other than to take a debt instrument. Minority equity in Latin America, par- ticularly in emerging markets, overall is Augustine: I guess, Rich and Fernando, undervalued. All you have to do is look at typically, we’re representing companies that the relative performance of the debt indices are setting up these capital structures that versus market equity indices in emerging one might consider to be relatively tight. markets to realize that debt performs much Should we be doing a job to get them to fo- better in emerging markets. cus more on the dollar value of what they’re receiving in that controlling stake in the So, yes, we might be setting up companies equity versus the equity ownership post-re- to default again, but I’d like to point out structuring—the question of the dollar sign that that’s a big criticism of the U.S. Chapter versus the percentage? 11 process, as well—that companies tend to emerge overleveraged. The one comment Cooper: There’s a very tight-knit com- I want to make is that the concurso law is a munity of large and powerful families that vast improvement over the old dispención de run businesses in Mexico. When we were pagos law. There’s a company in Mexico that’s trying to establish the mechanics for the been in dispención de pagos since 1954 and post-restructured company to have a truly has never emerged. independent board, we looked around at every public company in Mexico, and guess We believe that under concurso, as investors, what? There is no independent board in any it may take us two or three years because of Mexican public company, because, in fact, various legal challenges that can be mounted, they are controlled either by large families or but we do believe that, at the end of the day, foreign strategic players. we can wipe out the shareholders’ value and

TMA International News 3rd Quarter 2005•17 “Around the horn” panel discussion (continued from pg. 17)

INTERNATIONAL Just the simple mechanic of having a share- real control to run the company in a profes- holders meeting where you could have a true sional manner, the equity hasn’t value. NEWS public vote of your shareholders is some- Augustine: Do you think in the not-too- thing that’s a little foreign. distant future there’s ever going to be a In Argentina now, it is the case that you will mechanism in place for creditors to unseat see equity give-ups. That’s because they’ve the family and change the management done a number of restructurings in the last team? couple of years, and there’s a sensitivity to Cook: I don’t believe so, because corporate overleveraging companies going forward. Mexico is controlled by two dozen families. You need to try to align interests, and one They also happen to be related to, or fund, of the ways is to give creditors equity and the politicians, so they have absolutely no allowing the company to deleverage and vested interest in allowing that to happen. to share distributions with creditors. The Augustine: We talked about the different problem that some shareholders will have creditors that are at the negotiating table and with that is that Jason’s going to be sitting providing them with a package of securities across the table and, at least for the first few in order to entice them to vote and accept years, he’s not going to value that equity very a plan on a consensual basis. There’s been highly. Until creditors value it more highly, some reference to the banks’ receiving float- it’s going to be less likely that shareholders ing rate amortizing paper, which is typically are going to give it up. the structure, the bonds getting a higher Cook: One of the reasons we tend not to coupon fixed rate instrument with a bullet value equity highly in emerging markets is amortization and typically an equity kicker that the governance is so poor. The value in in order to get those two instruments equal the company tends to be stripped away by on an MPV basis. the owner/managers through overhiring, We talked a little bit about the tender offer perks, the corporate jet fleet (my particular being provided and that cash is being pro- favorite—$500 million revenue companies vided at a discount to the net present value with two corporate jets), and 43rd cousins of the securities that are being offered in a on the payroll who don’t really show up for package. work, and so forth. Until we can fix that problem, until we can have governance and In the U.S. system, there’s an easier way to give non-pro rata allocations of those securi- ties. Fernando, maybe you can talk a little bit about the difficulty of providing that in a concurso mercantil. del Castillo: Theconcurso law says that once you have 51% of your creditors confirming a plan, that becomes binding to every creditor, and you effectively cram them down. You have people who come and sign off the deal and those who won’t, either because they are against it or they don’t care. You need to en- force that part of the deal to those creditors.

TMA International News 3rd Quarter 2005•18 To confirm and actually bind those creditors INTERNATIONAL who did not sign the agreement, you need to Neil Augustine is a managing director with give them equal treatment. You must keep in Rothschild Inc., an international investment NEWS mind that whenever you’re going to do that, banking firm in New York. With one of the lead- those dissenting creditors, as they’re called— ing restructuring groups on Wall Street, the firm though they may not be effectively against the plan—will receive the same treatment has a high market share in representing compa- as the most preferred creditor in the plan. If nies in Latin America, particularly in Mexico. a creditor who receives less value or receives Richard J. Cooper the worst treatment signs off the deal, it’s is a partner based in Cleary fine. But the creditor who does not sign off Gottlieb’s New York office. His practice focuses the deal needs to receive treatment equal to on domestic and international corporate restruc- the most preferred creditor in accordance turings and mergers and acquisitions. Cooper with the terms of the plan. has represented debtors, creditors, buyers and Cooper: In Argentina, that issue has come sellers of distressed companies and securities, up quite a bit, because typically there is a creditor committees, DIP lenders and other menu of choices. Creditors, when they’re participants in out-of-court and in-court bank- negotiating these restructurings are focused ruptcy proceedings. In recent years, Cooper has on the discount bond, which has the highest MPV. In order to maximize the amount of worked on a number of complex and significant discount bonds that they get, they will, when restructurings in Latin America, representing negotiating a plan, say, “For those holders both debtors and creditors in Argentina, Colum- who don’t show up and participate, we want bia, Brazil, and Mexico. to deem them to take the par option, or the cash option.” And so the plan will often Fernando E. del Castillo is a partner in the provide for that. Mexico City office of Santamarina y Steta There’s a similar kind of equal treatment S.C. He joined the firm in 1993 and became a concept in Argentina, and the issue that partner in January 2002. del Castillo focuses his courts have looked at is, “Is that equal treat- practice on civil and commercial litigation, as ment?” If in fact you’re deeming them to well as commercial arbitration. take the par option or the like. Courts have come out and said no; you’ve got to go out Jason Cook is with Gramercy Advisors, a hedge and give them a choice. fund that invests in distressed debt in emerging After the plan has been confirmed, you’ve markets. In Mexico, the firm has been involved got to go back and effectively resolicit, not in several high-profile restructurings, including a the entire thing, but just for those holders cellular phone company. Cook has been cover- and offer them the same choice. That’s an ing emerging markets since 1996, both as an example of an issue that, over time, you will see the Mexican courts address and deal investment manager and as an analyst at UBS with, where, in Argentina, now they have a publishing research. year and a half or so of experience dealing with that. 1

TMA International News 3rd Quarter 2005•19 INTERNATIONAL NEWS Restructuring challenges in Russia by Svetlana Parshina ince the fall of the Soviet Union, Rus- weeks before the banking crisis, Russian sian legislators have worked on creat- legislators enacted a revised bankruptcy law. ing an effective bankruptcy system. According to the new law, judges had the SThough Russia is making significant progress discretion to appoint someone to prepare a developing a bankruptcy system, bankruptcy first creditors meeting and to overrule credi- remains a foreign concept to many in Russia. tors’ decision for liquidation if the debtor passed formal criteria of being “socially Creating an effective bankruptcy system important.” takes more than just establishing laws and procedures. It takes time to test the laws and The number of bankruptcies went up dra- establish traditions. Within two decades, matically. Some 11,000 companies went Russia is trying to accomplish what has bankrupt in 1999, 10 times the number taken the United States over 200 years. in 1995. Only a few out of thousands of bankrupt companies were actually restruc- The History tured. Instead, bankruptcy became a favored takeover method. The 1998 bankruptcy law Russian legislators introduced the first proved to be inefficient. bankruptcy-related regulations in late 1992; On December 2, 2002, the Russian Gov- just months after the Soviet Union fell. Ac- ernment enacted the new Federal Law “on cording to the regulations, companies could Insolvency (Bankruptcy)” to accommodate easily avoid bankruptcy, no matter how the interests of insolvent debtors and prevent insolvent they were. creditors from abusing their rights. The For example, a company’s debts had to 2002 bankruptcy law is currently in effect. exceed the total book value of its assets to Though the new bankruptcy law has been initiate bankruptcy proceedings. To avoid well received both by Russia and the inter- bankruptcy, management of the companies national business community, it seems that could simply issue worthless debt to some revisions need to be made to make it their companies at a high face value, work more effectively. thus increasing the nominal asset Inez M. Markovich, a Turnaround Manage- value. ment Association Philadelphia Chapter In August 1998, member and an attorney at Frey, Petrakis, Russia suffered a Deeb, Bloom, Briggs & Mitts, P.C., special- financial crisis. izes in commercial finance transactions with Six of the top an emphasis on representing creditors in cor- ten banks in the porate Chapter 11 and Chapter 7 cases. She country went has advised Western lending institutions bankrupt. dealing with Russian companies on how to The ruble was structure lending transactions to minimize devaluated. Just the potential negative impact of the Russian TMA International News 3rd Quarter 2005•20 bankruptcy law on the lender’s ability to Current challenges INTERNATIONAL enforce its rights against the borrower in the It’s essential for specialists dealing with event of a default. NEWS restructurings in any country to understand Markovich believes that the main problem why companies start the restructuring with bankruptcy and restructurings in process and the challenges they face in the Russia is the continuous failure of its turnaround process in order to be able to bankruptcy system to protect creditors’ help these companies. rights while providing for the equitable and Elena Kapoustina is an associate in the Mos- reliable reorganization or liquidation of cow office of Skadden, Arps, Slate, Meagher, economically inefficient companies. & Flom, LLP. “Russia’s Law of Insolvency of 1998 was She com- infamous as the legal backdrop for rampant mented on the Russia’s Law of Insolvency hostile takeovers disguised as involuntary main reasons of 1998 was infamous as the bankruptcies,” Markovich said. “Under the for a com- legal backdrop for rampant old law, one could easily manipulate the pany to start a hostile takeovers disguised as bankruptcy process by influencing biased restructuring involuntary bankruptcies. and often corrupt bankruptcy administra- process. “First, tors. a company will think of restructuring in order to become “The new bankruptcy law of 2002 sought more attractive to potential investors if it is to correct the existing problems by making planning to go public or organize a private involuntary bankruptcy filings more oner- sale of its shares.” ous, transferring some of the administrators’ powers to the arbitrazh courts and raising The company’s actions will include measures the requirements for administrators. How- to improve its operations, its management ever, the problems are too deeply ingrained and corporate structure, review (and possibly in the environment to go away as a result of change) its contracts that may not work for this enactment.” a public company. This will require a lot of work and effort from both the company and She pointed to the 2004 example of the its advisors. municipal court of the City of Dzerzhinsk convicting the former administrator of “The second reason for restructuring,” she a bankrupt company for selling its stock said, “is when a company faces financial valued at 300,000,000 roubles for a mere difficulties and wants to prevent bankruptcy. 50,000,000 roubles, thus causing damages Unfortunately, there are no developed laws to the company’s creditors in the amount of in Russia that would establish restructuring 250,000,000 roubles. procedures in cases other than bankruptcy.” “Unfortunately, successful workouts are im- Kapoustina points to a number of challenges possible in a system so susceptible to preda- that a company will face in such an uncer- tory practices,” Markovich said. “In order tain legal environment: to overcome this type of abuse, the Russian • How will the restructuring affect arbitrazh courts must closely monitor and, if the company’s relationships with its necessary, sanction bankruptcy administra- creditors? tors.”

TMA International News 3rd Quarter 2005•21 Restructuring challenges in Russia (continued from pg. 19) INTERNATIONAL NEWS • Will the restructuring trigger an event companies for their roles in last year’s forced of default under any of its contracts? sale of Yagansk. • How can the company streamline its Other companies about the same size as payroll and solve potential staff issues? Yukos that may be not so high profile and “A company will have to attract various are involved in less complex cases, face advisors to solve these and other problems, similar problems. It’s almost impossible which may become costly,” she added. for a business operating in Russia to make profits, if it pays all the taxes according to No matter what reasons lead to restruc- the current tax laws. Thus, many Russian turings—and how, where and when re- companies play the “Catch me if you can” structurings game. Many Russian companies occur—one im- play games with the portant factor While legislators are working to improve current laws, some businesses continue government, making use of an plays a crucial making profits only because their owners undeveloped system of law. role in making it a civilized decide to stay away from politics and use and more or creative accounting techniques. less successful process in any country. This According to Oleg I. Berger, a partner, and factor is government. Egor B. Boyarkin, a senior associate at LeB- In Russia, government still has the ultimate oeuf, Lamb, Greene & MacRae, in Moscow: power to create and change laws to fit its “Much has been said about the need for an needs. Many Russian companies play games overhaul of the system governing bankrupt- with the government making use of an unde- cies and restructuring in the Russian Federa- veloped system of law. Some companies win, tion. The shortcomings lie primarily in the and some companies lose the game. existing legislative gaps that fail to deal ad- equately with the following abuses: fictitious One of the best examples of such a costly bankruptcies and fraudulent conveyance.” game between the government and a com- pany is the Yukos case. Once Russia’s richest In the first instance, they said, interested man, Mikhail Khodorkovsky, owner of this parties drive an otherwise healthy company oil giant, became heavily involved in politics, that may be suffering temporary financial openly complaining about corruption and difficulties into bankruptcy for the purpose funding opposition parties. Despite Yukos of acquiring its assets at an undervalue. The being considered one of Russia’s best-man- law does not provide sufficient safeguards aged companies, its owner was arrested for to enable the company to rehabilitate its fraud and tax evasion and remains in prison financial condition. today, having repeatedly been denied bail. In the case of fraudulent conveyance, it The government seized Yukos’ main produc- remains too easy for companies facing the tion arm, Yugansk, and sold it to a state-run prospect of bankruptcy to spin off its assets oil group, saying that Yukos owed $27 bil- at well below market, hence depriving credi- lion in back taxes. Yukos filed for Chapter 11 tors of actual value. bankruptcy in the United States in Decem- “Until adequate legislative solutions are de- ber 2004. In February 2005, it sued four veloped and implemented, creditors (under TMA International News 3rd Quarter 2005•22 INTERNATIONAL the loan documentation) and shareholders mostly caused by underdeveloped laws and NEWS (via e.g. shareholders agreements) should poor governance. A great deal still needs to take particular caution in structuring their be changed to make restructuring a civilized transactions,” Berger and Boyarkin warned. process. But, the first steps have been taken, “They should ensure that sufficient contrac- and Russia is making progress.1 tual and security mechanisms are in place that will prevent companies and interested parties from artificially depleting value and Svetlana Parshina, a native of Russia, is a diverting assets from its rightful owners and public relations consultant in New York City claimants.” and public relations chair for the New Jersey Chapter of the Turnaround Management As- Conclusion sociation.

Though restructuring is a relatively new term ______in Russia, more restructurings are occurring This article first appeared in Financier each year. Some restructurings are caused by Worldwide’s UK & European Restructuring bankruptcy filings; others happen because & Insolvency Series 2005. © 2005 Financier the companies want to become more attrac- Worldwide Limited. Permission to use this tive to potential investors. reprint has been granted by the publisher. Although significant progress has been For further information on Financier World- made in establishing a civilized law for the wide and its publications, please contact restructuring processes, specialists working James Lowe on +44(0)845 345 0456 or by e- in the restructuring industry in Russia still mail: [email protected]. face many challenges. These challenges are

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TMA International News 3rd Quarter 2005•23 INTERNATIONAL NEWS TMA Japan Chapter granted full charter status by Howard Brownstein, CTP

t its meeting in Chicago on June 3, During the TMA Annual Convention in the TMA Board of Directors unani- Colorado Springs in 2002, a subcommittee mously voted to elevate the TMA was formed to promote the formation of AJapan Chapter from provisional to regular a TMA Chapter in Japan. The group was chapter status. Now 110 members strong, headed by Howard Brod Brownstein, CTP, a the TMA Chapter in Japan is the second Principal of NachmanHaysBrownstein, Inc. largest outside North America. in Philadelphia. The history of the TMA Japan Chapter is a In May 2003, an official delegation of the story of close collaboration between leaders Japanese Ministry of Economy, Trade & in the Japanese corporate renewal commu- Industry (METI) visited TMA headquarters nity and TMA members and staff. From the in Chicago. Leaders of Chicago’s corporate beginning, the Chapter’s purpose has been to renewal community, along with TMA staff help the Japanese in their efforts to revital- and leadership met with the delegation dur- In May 2003, an ize their economy’s institutions and create a ing their two-day visit. official delegation strong capability for corporate renewal. of the Japanese The Japanese group then visited Boston Ministry of Economy, and New York where its members met with Trade & Industry (METI) visited TMA headquarters in Chicago . From left: Shunichi Maeda, then of Mitsubishi Finance in New York; Motoya Kitamura, then of Mitsubishi Research Institute in Japan; Hiroaki Okahashi of METI; TMA Executive Director Linda Delgadillo; Howard Brownstein .

TMA International News 3rd Quarter 2005•24 INTERNATIONAL NEWS

corporate renewal industry leaders Wilbur business community among its officers and Ross, Holly Etlin, Professor Harlan Platt directors, including Professor Kazuo Noda, of Northeastern University, Professor Paul President Emeritus of Tama University, who Marshall of Harvard Business School, Fleet served as the first President and Chairman Bank Workout EVP Paul Kennedy, and of the TMA Japan Chapter, and Profes- many others. sor Yoshinobu Konomi of Keio University Later that year, more than 25 delegates from Graduate School of Business Administration, Japan attended the 2003 TMA Annual Con- Professor Minoru Ochiai of Meiji University vention in San Francisco. They were treated Graduate School of Global Business, and to a special session on corporate renewal Hon. Tsutomu Shiozaki, Professor of Law in the United States and Japan hosted by at Hosei University and former Judge of the Howard Brownstein and TMA Chairman Tokyo High Court, serving as Directors. John Rizzardi. The entire session was simul- Shunichi Maeda of Lehman Brothers in taneously translated into Japanese—a service Japan served as an important advisor to the that was provided for the Japanese delega- Chapter. tion throughout the convention and a first The April 2004 event in Tokyo featured a for TMA. keynote address by Kaoru Yosano, a member After months of planning by a core group of of Japan’s House of Representatives and a corporate renewal professionals in Japan led former Minister of Economy, Trade and by Shogo Tachikawa, a leading turnaround Industry. Another segment of the event was a professional in Japan, and Eiten Inamura, discussion of professional responsibilities by Managing Partner of ASG/Grant Thornton a panel of Japanese turnaround specialists. in Japan, a formational meeting of the Japan Howard Brownstein also delivered a keynote Chapter of TMA was held in Tokyo on April address at the April meeting on “Corporate 5, 2004. Renewal in the USA.” Drawing contrasts Approximately 500 members of the Japanese and comparisons between Japan and the corporate renewal community, including United States, he noted that corporate turnaround professionals, accountants, renewal was crucial for Japan to successfully attorneys, government officials, lenders and recover from a decade of adverse effects from others attended the meeting. The half-day the “bubble economy.” event featured programs on turnaround Since its inception as a provisional chapter management and the Japanese economy, as of TMA in June 2004, the TMA Japan well as the formal signing of articles of incor- Chapter has held meetings not only in poration for the TMA Japan Chapter. Tokyo, but also in other large Japanese cities The then-provisional Japan Chapter boasted where corporate renewal has not been as well prominent members of the academic and developed. 1

TMA International News 3rd Quarter 2005•25 INTERNATIONAL NEWS 2005C a l e n d a r 4 — United Kingdom – Leeds – Chapter meeting – “Business Turnaround: The Credit Insurers Perspective” – Irwin Mitchell Solicitors, 21 Queen Street – 5:45PM [email protected] 5 — Canada – Vancouver – “TMA Vancouver Kick-Off to Summer,” Members only – Joe Fortes Rooftop Patio, 777 Thurlow Street, Vancouver – 4:00PM 13 — United Kingdom – London – Chapter meeting – “Receivables Management: from generating cash in a crisis to implementing sustainable process improvements” – PricewaterhouseCoopers, 1 Embankment Place – 6:00PM [email protected] 13 — Australia – Sydney – July Networking Evening – Guest speaker: Ross Griffiths, General Manager, Credit Management, Com- monwealth Bank of Australia – 6:00–8:00PM, Ferrier Hodgson, Allianz Building, Level 17, 2 Market Street. For more informa- tion, contact: Christine Kinsela, TMA Aust. Administration, 0438 653 179, [email protected]

15 — United Kingdom – London – 2nd Joint Conference of R3 and INSOL Europe – “Current Trends in European Rescue and the Impact of the European Insolvency Regulation” 9:00AM- 5:00PM, Copthorne Tara Hotel 20 — United Kingdom – South Hampton – Chapter meeting – For more information, contact: Kat Cooke, TMA UK Southampton Co-ordinator, [email protected]

1–30 — Canada – Toronto – Education Program. For more information, contact: Sue Anderson, Chapter Administrator, 416/867-2300, [email protected] 5 — United Kingdom – Leeds – Chapter meeting – 5:45PM Leeds@ tma-uk.org 13 — United Kingdom – Midlands – Chapter meeting – 6:00PM [email protected]

To place information on the calendar regarding events in your area, please contact Donna Steigerwald at [email protected].

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