Market Exit Rules - Principles Case Studies for Slovakia & Turkey

1. Kirkland & Ellis LLP Market Exit Rules - PrinciplesCase Studies for Slovakia & Turkey Why do Entrepreneurship Initiatives Fail Lessons from International Experience Cairo, Egypt 5 November 2006 Gordon W. Johnson Kirkland & Ellis LLP gwjohnson@kirkland.com

2. Kirkland & Ellis LLP 2 Context: Credit Environment Systems • Foster Commercial Confidence & Reliability • Markets more accurately price, manage, resolve risk • Establish reliable backdrop for negotiations • Reduce asset deterioration & promote credit access • Safety valve for corporate distress • Salvage viable businesses and preserve jobs • Efficient transfer of assets (bankruptcy) • Vital to balance in commercial relationships • Encourage responsible corporate behavior & governance • Penalize owners and managers who lack financial discipline or behave irresponsibly

3. Kirkland & Ellis LLP 3 Premise: The Starting Point • Credit is the lifeblood of modern commerce • Willing lenders & range of lending options • Reasonable, manageable repayment risk • Effective commercial and security laws • Increasing significance of collateral • Greater assurance of recovery • Requires broadest range of security (im) movable • Ineffective laws lead to underutilized assets Linkage to Financial System • Properly assess, price and resolve default risk • Basel II: Capital requirements based on risk weighting / loss exposures and unexpected loss (tied to legal systems)

4. Kirkland & Ellis LLP 4 Risk Assessment Continuum Increasing risk of financial distress Risk Evaluation Process Credit Access Risk Management Resolution / Recovery • Credit Assessment • Information • Identify Security • Negotiation • pricing • Contracting • Registry • Monitoring • Risk Assessment • Information • Identify Options • Negotiation • pricing • Amend Contracts • Possible action • Monitoring • Enforcement • Formal Insolvency • Liquidation, Rescue • Security Rights • Information • Negotiation (Plan) • Implementation • Monitoring

5. Kirkland & Ellis LLP 5 Scope: ICR Systems Reviewed Legal Systems Governing Commercial Relationships IPG A1-5 IPG B1-5 IPG C1-D9 Credit Access / Protection Credit Risk Management Enforcement / Insolvency • Compatibility of Systems • Collateral Systems (Im)movable • Registry Systems (Transparency) • Enforcement Systems • Public Auction & Collections • Credit Information systems • D & O Liability • Risk Management Practices • Workout Framework • Enabling Framework (i.e. tax treatment of bad debts, NPLs) • AMCs & systemic corrective measures • Corporate Exit Mechanisms • Liquidation • Rehabilitation • Quasi-formal restructuring • Implementation • Institutional Systems • Regulatory Systems

6. Kirkland & Ellis LLP 6 Systems in Action: Laws & Implementation

7. Kirkland & Ellis LLP 7 Context for Insolvency Fiscal & Monetary Governmental & Political Tax & other laws State Mortgage laws Bank Regulators Secured Creditors Collateral laws Environmental, Tariff & others Creditors Contract/Commercial Employees Labor laws Professionals Regulatory Enterprise Legal Company laws Insolvency System Securities laws Shareholders Administrative Directors etc Others laws Institutional Cultural & Social Economic & Commercial Bankr., Civil Commercial Agency Accounting & Auditing Corporate Governance

8. Kirkland & Ellis LLP 8 Overview of Insolvency Systems Common Law countries UK, Commonwealth (53) - Australia/NZ, HK, Malaysia, Singapore, South Asia, Sub-Saharan Africa, handful of Latin Am & Caribbean Civil Law countries Continental Europe, Asia, Francophone Africa (OHADA), Latin America Liquidation Centrally Planned FSU, China, Vietnam Sharia law countries Islamic & Arab nations United States DIP Reorganization model

9. Kirkland & Ellis LLP 9 Recent Reform Revolution • 1979 to mid-80s: Major reforms: US, France, UK • 1990s to date: FSU Transition & EU integration • New Europe, CEE, and Central Asia (The Transplant Decade) • 1990s: Rescue culture driven reforms: • Australia, Canada, Germany • Post-1997: Financial Crisis / Related Reform • Asian 5: Indon, Kor, (Mal), Phil, Thai / Japan • Post-2000: Russia, Mexico, Turkey, Brazil, Argentina, Bolivia, • Post-2000: Progressive reforms • China, India / S. Asia • EU - Spain, Portugal, Italy, others • Post-2001/2004: Age of Standards / Harmonization

10. AFR MNA Cameroon, Kenya, Mauritius, Morocco, South Africa, Uganda ASIA India, Nepal, Philippines, Sri Lanka, Vietnam ECA Czech Republic, Kyrgyz Republic, Lithuania, Romania, Russia, Slovak Republic, Slovenia, Turkey, Ukraine LAC Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador , El Salvador , Honduras, Jamaica, Nicaragua, Paraguay Kirkland & Ellis LLP 10 Lessons: ICR ROSCs 32

11. Kirkland & Ellis LLP 11 Lessons: Legal Framework & Registries • Creditor Rights Legislation • Secured Transactions on Real Estate: functional • Secured Transactions on Movable Assets: outdated • Registries • Inefficient & unreliable - Need to modernize and computerize • Need for registries for recording interests in movable assets • Insolvency Legislation • Frequently Antiquated & Inefficient • Unsupportive of modern businesses, especially lacking rescue procedures for financially distressed enterprises

12. Kirkland & Ellis LLP 12 Lessons: Court & Regulatory Practices • Weak / Inefficient Enforcement Proceedings • True of unsecured and secured claims • Lack of extra-judicial enforcement mechanisms • Outmoded procedural codes and regulations • Ineffective Court Systems • For enforcement and insolvency proceedings • Inadequate training among judges / inefficient case administration • Inconsistency in decision making / lack of transparency • System abuse and influence • Weak Regulatory Frameworks • Lax or absent procedures to qualify, license and supervise and discipline administrators and practitioners

13. Kirkland & Ellis LLP 13 Case Study - Slovakia • Privatization of Banks (2000-01) • Starting a new business (2002) • Corporate governance (2002) • Security/access to credit (2003) • Insolvency & Enforcement (2006)

14. Kirkland & Ellis LLP 14 Background – Starting a new business • Business unfriendly environment incompatible with economical reforms and their aims • Potential for corruption • Contrary to the idea of free and smooth entry into the market • Need to harmonise the law with the acquis communautaire in some aspects (e.g. publicity)

15. Kirkland & Ellis LLP 15 Background – Corporate governance • Unclear and hardly enforceable directors’ duties • Unclear rules for the protection of minorities often abused by both majorities and minorities • Lack of suitable capital protection rules (incl. financial assistance and related parties transactions) • Need to harmonise the law with the acquis communautaire

16. Kirkland & Ellis LLP 16 Background – Security/access to credit • Difficult to create security over a number of classes of assets (e.g. movables, receivables) • Difficult to enforce security • Access to credit stifled by most enterprises, but mostly SMEs • Unjustified priorities (state related claims)

17. Kirkland & Ellis LLP 17 Slovak: Key policies - Security/Credit Access • Wide definition of collateral (incl.future assets) • Non-possessory charges • Public register of charges • Out-of-court enforcement (private or auctions) • Removal of unjustified priorities

18. Kirkland & Ellis LLP 18 Background - Insolvency / Enforcement • Inefficient - 6-12 mos. to open, 3+ yrs to complete • Ineffective - low recovery rates (affecting both secured and unsecured creditors) • Lack of modern restructuring • No rules fostering responsible behaviour by stakeholders • No regulated profession of trustees • Enforcement - protracted and unpredictable

19. Kirkland & Ellis LLP 19 Slovak: Key policies - Insolvency • Consistent with World Bank Principles • Clearer rules governing stakeholders • Management of process transferred to trustees • New regulated profession of trustees created • More control shifted to creditors (secured creditors in particular) over realization of assets • New moratorium and restructuring concepts to give troubled businesses a chance

20. Kirkland & Ellis LLP 20 Case Study - Turkey (Background) • Financial Crisis 2000 • 13-18 failed banks (USD billions NPLs) • 90% lending secured - unconditional mortgage (by pass courts) • No security in moveable assets • Contested foreclosures (2-3 yrs or longer) • 99.5% of cases (est. 500,000) execution; • 0.5% insolvency cases; stigma; 3-5 years • No workout or modern company rescue law

21. Kirkland & Ellis LLP Kirkland & Ellis LLP 21 Turkey - Debt Recovery Procedures 1 yr 2 yr 3 yr Unconditional Mortgage (90% lending) Uncontested Public Auction 2-3 mos Contested Public Auction 2-3 years Judgment/Execution Uncontested Order 4-8 mos Contested Judgment/Exec. 2-3 years Liquidation (4-8 yrs) (Ave. 6 yrs) Declaration of Bankr (1 yr) Contested Decl. (2-3 yrs) Claims Resolution (3-5 yrs) Appeals from Declaration of Bankruptcy (2-3 yr) Secured Creditor Actions Exempt No creditors are stayed Concordat Procedure is rarely used

22. Kirkland & Ellis LLP 22 Turkey (Restructuring via Reconciliation) Istanbul Approach Out-of-court Restructuring BRSA Bank Restructuring Agency Bank Signatories Application < 75% but > 66% Approval by 75% Hearing on Plan Application Commercial Court 30 days Application Upon request Within 30 days Out-of-court Restructuring (prepackaged plan) Status conference Pretrial relief Court Judgment Affected Creditors * Approved Majority Approval 50+ number & 2/3 amt Injunction Dismissed Interim Supervisor Priority Financing Court Judgment Concordat Previously: 2-3 years Approved Amended: 3 months / 2 month extension = 5-6 months Denied Liquidation * Affected Creditors are those whose debts are in default or to be restructured.

23. Kirkland & Ellis LLP 23 Lessons and Trends • Today’s reality: Increasing convergence in practices and laws driven by changes in business, technology and the int’l factor • Vacuum tube issue: laws cannot be developed without reference to the culture and broader legal framework, nor without input from key stakeholders • Transplant issue: no ideal laws, only those that serve the needs of a country; models and transplants are difficult

24. Kirkland & Ellis LLP 24 Lessons and Trends • Old-wine-new-wineskin: laws easily change, practices do not • Implementation gap: good laws, weak capacity, lax regulation • Other challenges: labor, taxes, governance, accounting • Risk Management: Increased need for better risk management tools and models / across the board (Basel II)