WORKOUT GROUPS: WHY THEY SUCCEED, WHY THEY FAIL

1. WORKOUT GROUPS: WHY THEY SUCCEED, WHY THEY FAIL • Moderator: Jim Kaddaras, Partner, Developing World Markets • Introduction of panelists and panel topics: • Why MFIs get into trouble: MirzaHalilovic, responsAbility—overview • The composition of the lenders group and debt restructurings: UdoSchedel, independent financial advisor • The nature of the MFI: a) from a governance perspective: Doug Leavens, ACDI VOCA; Chairman, KredAqro, Azerbaijan; b) from a management perspective: DajanaLegin-Dedic, head of Planning and Analysis, Sunrise, Bosnia • Outcomes: a) Winding-Up and Bankruptcy, and b) Successful endings to workout groups: Jim Kaddaras, DWM • Follow-Up Questions, including audience participation

2. Why MFIs get into trouble • Indicators for upcoming challenging situation • These are only indicators and normally it is a combination that pushes an institution into a challenging situation. • Asset Quality : • Assessing loan portfolio value • Analyzing non-loan assets • Capital structure: • What trends in CAR should be expected going forward? • What impact could a trend have on equity? • Profitability: • What policies should be clarified to assess whether earnings figures accurately represent business performance?

3. Why MFIs get into trouble • Indicators for upcoming challenging situation • Liquidity: • Is the institution generating enough cash from its operations in order to service its liabilities? • Corporate Governance: • Any changes in mission, strategy or business plan? • How are the BoDand management structured? • What are the control mechanisms stakeholders have? • What is the level of transparency? • Macroeconomic environment: • How can a deterioration in the political or economic environment influence the performance of an institution?

4. The composition of the lenders group and debt restructurings • What needs to be done by whom and when • 1) Form a lenders’ group -> diversity of participants/members: • Social mission vs. commercial interests • Social funds vs. commercial banks • 2) Decide on the lead in the group -> speak with one voice -> work load on the leader • 3) Agree on a stand-still for a limited period-> a three- to six-month breathing space

5. What needs to be done by whom and when (cont’d) • 4) Stand-still period: • Enable all parties to have the same picture -> reduce the risk of acceleration • MFI/consultant: to develop scenarios of debt restructuring, to be discussed with the lenders and building the basis for the inter-creditors agreement • Seniority of debt • Collateral • Maturities • Waterfall principle

6. What needs to be done by whom and when (cont’d) • Prime objectives: (i) keep the MFI alive and (ii) ensure timely servicing of new re-payment schedules • 5) Liquidity planning with scenarios: • -> decrease of interest rates, • -> waiver of penalty interest, • -> stretching of maturities, • -> suspension of interest payments (for a limited period) • The different collateral positions: • secured vs. unsecured • senior vs. subordinated • - Legal and financial implications 

7. CASE STUDY: KredAqro, Azerbaijan • 1. How did KredAqro get into trouble? • Grew quickly – attracted many social investors • Growth peaked in 2008 with assets of $50 M • 2008 recession squeezed Azeri economy • Portfolio shrank - debt paid back • No new loan capital in 2010 • By early 2011 - new funding needed

8. 2. Tipping Point • KredAqro unable to pay its scheduled maturities in June 2011 • Local bank pulled its line of credit - swept KA’s accounts • Liquidity crisis created • DWM convened inter-creditor group to discuss next steps • Long, slow process of restoring trust and stabilizing the company began

9. 3. From Potential Liquidation to Standstill and Restructuring • Creditors gave KredAqro time to catch up on missed payments • After five months, creditors created a restructuring plan • Loans were rescheduled over a 30-month period • Inter-creditor agreement (ICA) signed in late 2011 • KredAqro came back to life

10. 4. Steady Progress, Strengthened Governance & Management • “Right-sizing” the institution, retaining the best employees • Improving portfolio quality and product diversification • Maintaining customer base • Reassuring creditors and government agencies alike • Complete change of management, plus technical assistance • Strengthening of the Board of Directors

11. 5. New Funding Obtained, Workout Concluded • KredAqro obtained new funding from new sources in 2012, a key requirement of the creditors under the ICA • With a final creditors’ call, all agreed ICA’s conditions met • ICA expired at the end of 2013 in accordance with its terms • Some old investors have offered new funds • New investors are lined up - fresh funds coming in • Creditors’ faith restored !!

12. 6. Lessons Learned • Restore transparency • Maintain owner’s presence on site • Demonstrate serious concern and commitment • Update creditors regularly • Provide independent consultant oversight • Shrink the portfolio to pay debt if necessary

13. CASE STUDY: • Microcredit Foundation Sunrise, Bosnia • Creation of the Lenders’ Group and Agreements Reached • Reasons: portfolio quality, and failure to comply with certain covenants of the original loan agreements • The situation in the financial market/sector in Bosnia and Herzegovina during 2009, 2010 and 2011 • Description of the Standstill Agreement and the Restructuring Agreement

14. 2. Cooperation between the Group of Lenders and Sunrise • Negative Aspects • Communication problems – Sunrise - Group of Lenders (from confusing communication to resolution of all uncertainties) • Lack of Group’s trust in Sunrise • Sunrise’s perception of a lack of trust among the lenders themselves • Large number of group members, different missions, methods of work and outstanding loan amounts • Hiring of an audit company to assess portfolio collections; • the activities of the consultant aimed at preparation of the Business Plan;

15. 3. Cooperation between the Group of Lenders and Sunrise • Negative Aspects (cont’d) • increase in the interest rate under the Restructuring Agreement; • increased repayments and prepayment of two loans that led to: • significant reduction of the portfolio, • reduction in the number of clients, and • high cash balances sitting in bank accounts instead of being disbursed to the clients

16. 4. Cooperation between the Group of Lenders and Sunrise-cont’d • Positive Aspects • Extension of the repayment terms by most lenders (Sunrise used time to improve portfolio quality and to achieve positive business results) • Activities of two consultants and the representative of the Group of Lenders on the Governance Board • Successful survival of the crisis, resolution of issues and concerns regarding business cooperation with foreign investors, primarily social funds.

17. Winding-Up and Bankruptcy • Out-of-court winding-up: why and how does this occur? • Mechanics—budget, escrow account and cash waterfall • How do you know when it’s over? • In-court winding-up: what is bankruptcy and what is insolvency? • Voluntary vs. involuntary • Reorganization vs. liquidation • Role of the bankruptcy court and trustee/administrator • Creditors rights and priority of payments • How long does it take?

18. Successful Endings to Workout Groups • Expiration of intercreditor agreements • When is it safe to lend again and how do lenders know it? • Lender psychology and the collegiality of social investors • How might lenders’ support to MFIs change after a workout? • What might MFIs do differently after a workout? • Follow-Up Questions, including audience participation • THANK YOU !