NEWSLETTER

ON ENTERPRISE RESTRUCTURING

#9 May 2001

Dear reader,

Financial Restructuring Project (FRP) continues its mission in disseminating information on the Law “On Restoration of Solvency of the Debtor or Declaring It Bankrupt” and mechanisms of its application. In the previous issue we discussed the opening of the National Training and Advisory Bankruptcy Center in Kiev. The Center held two training seminars in May at the President Hotel. In this issue we offer a detailed report on the seminars’ programs and objectives, organizers, and participants.

Being aware of the great interest generated by the Corporate Restructuring Model (CRM), and responding to numerous requests of our readers, we offer an article that is entirely devoted to this model and its advantages over other similar software products. The main purpose of the model is to provide a financial restructuring tool to insolvent enterprises and bankruptcy practitioners. With the help of the model a good practitioner can identify the best possible way for restoring the solvency of an enterprise and developing a realistic schedule of debt payments to the creditors. The model also offers a visual means of demonstrating to the creditors the advantages of reorganization over liquidation.

In the next issue we shall continue our traditional dialogue between practitioners and arbitration managers, for which we have already received materials from our readers. We hope that you will continue assisting us in preparing our next issues.

 Cordially,

 Olga Makara

News & Media Coordinator

Financial Restructuring Project (FRP) continues its mission in disseminating information on the Law “On Restoration of Solvency of the Debtor or Declaring It Bankrupt” and mechanisms of its application. In the previous issue we discussed the opening of the National Training and Advisory Bankruptcy Center in Kiev. The Center held two training seminars in May at the President Hotel. In this issue we offer a detailed report on the seminars’ programs and objectives, organizers, and participants.

Being aware of the great interest generated by the Corporate Restructuring Model (CRM), and responding to numerous requests of our readers, we offer an article that is entirely devoted to this model and its advantages over other similar software products. The main purpose of the model is to provide a financial restructuring tool to insolvent enterprises and bankruptcy practitioners. With the help of the model a good practitioner can identify the best possible way for restoring the solvency of an enterprise and developing a realistic schedule of debt payments to the creditors. The model also offers a visual means of demonstrating to the creditors the advantages of reorganization over liquidation.

In the next issue we shall continue our traditional dialogue between practitioners and arbitration managers, for which we have already received materials from our readers. We hope that you will continue assisting us in preparing our next issues.

Cordially, 

Olga Makara

News & Media Coordinator

OUR SEMINARS

FRP trains practitioners and enterprise managers from Kiev and Kiev Oblast

From May 14 to May 18, 2001 the National Training and Advisory Center, created through FRP, conducted two seminars in Kiev that were dedicated to the problems of restructuring and solvency restoration of Ukrainian enterprises. Seminars and trainings are one of the most important areas of FRP’s activity.

A four-day training seminar for arbitration managers and employees of consulting firms was held in Kiev. FRP has conducted similar seminars in Ivano-Frankivsk, Kharkiv and Dnipropetrovsk. The seminar was free of charge. Participants had to go through a serious selection process in order to qualify. As a result, an audience of professionals was formed. The training course was structured in such a way that the invited practitioners did not simply listen to the cycle of lectures, but were actively involved in practical assignments. For this purpose, they were provided with a complete profile of a fictitious enterprise, GlavMetalMash, that was in dire need of restructuring. For training purposes, the trainees were split into five groups, so that each group had at least one professional lawyer, one economist, and one certified arbitration manager. During these four days, each group drafted its production rehabilitation plan based on the financial restructuring scheme offered by FRP staff. Each group had its own PC to work with electronic worksheets, and the opportunity to learn Corporate Restructuring Model (CRM) using practical examples. According to Mr.Valery Khandus, the developer of the CRM, this is the best way to master the model to use in future work.

The seminar’s program included familiarization of the seminar participants with the main legal and financial issues that arise during bankruptcy proceedings. Thus, the presentation of Mr. Gleb Glinka, Head of FRP Legal Department, was received with great interest and provoked discussion. This presentation was a comparative review of Ukrainian bankruptcy legislation as compared with U.S. and Russian legislation. Experienced lawyers discussed in detail all stages of bankruptcy proceedings, as well as sanation and liquidation, and paid special attention to amicable settlement agreements with the creditors.

The presentation of Mr. Rick Wolfe, Deloitte and Touche expert, “Developing Restructuring Strategy” was also highly assessed. The participants learned about modern managerial methods, such as the Boston matrix, which considers relation between the market share and expected growth of sales, comparative attractiveness of goods, etc.

After final presentations of all groups and analysis of all restructuring strategies, FRP representatives presented certificates to 25 seminar participants. These certificates testify that participants successfully completed the course in financial restructuring and enterprise solvency restoration using provisions of the Law of Ukraine “On Restoration of Solvency of the Debtor or Declaring It Bankrupt.”

The second seminar was designed for enterprise managers from Kiev and Kiev Oblast who are interested in problems of solvency restoration. We should like to thank Kiev Oblast State Administration for their considerable support provided to the National Center and assistance in organization of the seminar. Valentina Romantsova, the Head of the Oblast Administration’s Main Department of Economy, opened the seminar. In her opening remarks she characterized the solvency of many enterprises in the region as critical and pointed to the importance of the National Training and Advisory Bankruptcy Center that was created by FRP.

Over 80 people participated in the seminar, representing over 50 enterprises from the region. Notably, apart from the managers of the enterprises experiencing hardships, the seminar was also attended by representatives of some creditor enterprises. Managers of these enterprises were interested in how it is possible to collect the money owed them by debtor enterprises undergoing bankruptcy proceedings.

Apart from its main participants, enterprise managers, the seminar was also attended by employees of the Bankruptcy Agency, arbitration managers, managers of consulting companies, and representatives of local district state administrations.

FRP staff shared with the participants the experience they acquired in using the Law of Ukraine “On Restoration of Solvency of the Debtor or Declaring It Bankrupt”. An invited lecturer, Dr. V. Savchuk, Professor of the National Metallurgic Academy, covered the possibilities for applying the Law to efficient enterprise restructuring. Mr.Andriy Volkov, FRP Legal Counsel, discussed the main differences in approaches to repayment of budget debt under the Laws of Ukraine “On Restoration of Solvency of the Debtor or Declaring It Bankrupt” and “On Procedure for Paying-Off Taxpayers’ Obligations to the Budget and the State Proprietary Funds,” after some provisions of the latter become effective on October 1, 2001.

During the seminar, the participants discussed the major economic problems that halted efficient operations. Sometimes this involves the absence of an real owner; more often, there are objective economic causes. These seminars provide an important opportunity for open discussion with colleagues and consultation with experts.

Unanimous support and understanding by all participants of the need for active application of solvency restoration procedures could be described as one of the results of the seminar. Previous initiation of bankruptcy proceedings in the majority of cases resulted in liquidation of the debtor. After the new Law came into effect, there arose abundant opportunities to resolve financial problems not only for the debtor, but also for the creditors, who can receive more than in liquidation.

At the end of the seminar a group of enterprises wished to stay on and talk with FRP representatives about further assistance, as well as consultative support in the process of solvency restoration.

FRP Ivano-Frankivsk Training Center continues its very important informational work. Three seminars for enterprises and organizations and one training seminar for financial restructuring practitioners, were held with the Center's assistance in the west of Ukraine, during April.

It should be mentioned that the seminars “The Law of Ukraine “On Restoration of Solvency of the Debtor or Declaring It Bankrupt” as an opportunity for saving Ukrainian businesses” are quite popular. Over 30 people, including not only debtors and creditors, but also representatives of the oblast state administration, the State Tax Administration (STA), and the Pension Fund, attended the seminar in Rivne on April 5. On April 12, a similar seminar in Chernivtsi was attended by 11 heads of district administrations and 20 enterprise managers. The next seminar was held on April 20 in Ivano-Frankivsk. About 20 enterprises from Ivan-Frankivsk oblast listened to the presentations of FRP experts and the STA representatives. A lively discussion was provoked by the issue of application of the Law of Ukraine “On Procedure for Paying-Off Taxpayers’ Obligations to the Budget and the State Proprietary Funds” in the context of enterprise solvency restoration. And on May 16 and 24, there were seminars organized in Khmelnitsky and Kolomiya, totaling over 100 participants. Usually such seminars receive support of the oblast state administrations, city executive councils, and the Regional Bankruptcy Agency in Rivne, Khmelnitsky, and Volyn oblasts. Local branches of Ukrainian Bankruptcy and Crisis Management Practitioners Association are extremely interested in such events, for which they provide real support.

Undoubtedly, such active involvement of the organizers and participants of information seminars assists in restructuring, overcoming of crises, and improving the overall Ukrainian bankruptcy system. Dissemination of information on restructuring possibilities and practical experience in applying the Law “On Restoration of Solvency of the Debtor or Declaring It Bankrupt” is an important element of economic reform.

OUR ACHIEVEMENTS

Corporate Restructuring Model

Corporate Restructuring Model (CRM) was developed by the Unites States Agency for International Development (USAID) Financial Restructuring Project (FRP). The model is designed to be used as the main tool by the enterprises that are experiencing problems and trying to restructure themselves using the Law of Ukraine "On Restoration of Solvency of the Debtor or Declaring It Bankrupt" (hereinafter, the Law).

The emphasis is made on debtor-led restructuring under Article 53 of the Law. This means that the debtor itself proposes the restructuring plan that is to be approved by majority of its creditors. Once the reorganization plan (in the language of the Law - sanation plan) is approved, the debtor's management, under control and with approval of the creditors and arbitration court, the process of restoring financial viability of the enterprise starts.

CRM is one of the main tools in developing enterprise restructuring plan and determining its viability. The purpose of the model is to demonstrate to the management of the enterprise that is experiencing problems but is potentially profitable, how and when the enterprise can be profitable again. We expect and hope that results of the model will be used to substantiate sanation plans. These will be submitted for consideration of the creditors and the court. One can get an idea of what can be achieved using CRM. From the list below are enterprise management actions that can be identified and substantiated with the help of the model:

• reduction of fixed costs
• reduction of variable costs
• more efficient use of production facilities
• purchase of new equipment
• improvement of quality
• focus on profitable market segments

CRM makes development of restructuring plans for a potentially viable enterprise, easier. The plan is to point out and persuade the creditors, that keeping the enterprise running, is more attractive from financial viewpoint, than its liquidation.

The main users of CRM are solvency restoration practitioners. For simplicity of use, CRM is implemented as an Excel spreadsheet. Microsoft Excel was selected because it is widely used, and is included in Microsoft Office, that is installed on 9 out every 10 computers. In addition, most of future users have some skills of working with Microsoft Excel, so that they will not have to learn new software products.

The initial purpose of developing CRM was to make so-called "what if analysis" simpler. The user determines some assumptions (input cells), and then utilizes prescribed formulas for interim calculations of input data. Finally, Microsoft Excel generates final data (results) that can be produced in easy-to-use format, and printed in form of reports. When Excel is used, there is no need for a calculator, Excel performs the necessary calculations.

So, what is “What if analysis”? For example, when your develop a business plan, it is sufficient to change only input assumptions. Excel will automatically recalculate all appropriate cells, and the results can be seen immediately. If you do not like them, change the input assumptions again and see what happens. After several attempts, you can select the best options without even touching the calculator!

Logical structure and the set of processes in CRM are traditional for corporate analysis and restructuring models. The model’s structure is based on determining and forecasting three main types of enterprise activity : operations, investments, and financing.

The model is able to analyze advantages of the new law by considering six sources of internal financing.

As the model was designed to be used predominantly in Ukraine, the developers tried to make it acceptable and convenient for Ukrainian practitioners:

• Ukrainian format of balance sheet that is used as the basis and then converted into the format similar to International Accounting Standards (IAS);
• A separate section dedicated to financial ratios according to the methods of Ukrainian Bankruptcy Agency in addition to the section where financial ratios are considered based on international methodology;
• List of most common Ukrainian taxes, with the possibility to change their rates, and some space for the new taxes that may be introduced later;
• One-touch switch between Ukrainian and English, which saves a lot of time when results have to be shown to foreign investors or creditors.

Elements that ensure flexibility and elasticity of the model:

• Distribution of sales and purchases between different market segments – overseas and domestic, barter and cash;
• Product prices or output resources can be expressed in hryvnas or US dollars, in any case they will be automatically adjusted according to forecast exchange rate;
• Each assumption may have three options: basic, optimistic, and pessimistic, so that the user can not only have a numeric result, but also determine the most likely range of possible values and impact of each assumption on cash flows.

Elements that ensure convenience of the model:

• Work sheets are structured according to the order in which they are used – from the left to the right, and from the top to the bottom;
• The model is automated to the maximum – the number of data that have to be input with the help of the keyboard is kept to the minimum. For instance, names of all product types, enterprise units, production shops, and expenditure items, must be typed in only once. They will automatically come up where necessary;
• For convenience of the users, the places of data input are marked in color.

The model consists of over 20 separate worksheets. Some of them have up to 1000 data rows, while others not more than 50. There are also several diagrams that make interpretation of results easier. The main criterion, in distribution of the model components, is that the data that have similar structure or require consecutive calculations, are located in one worksheet.

The model can also be used for improving financial planning, for finding out the impact of purchase of new equipment, entry to the new markets, as well as help in optimizing the product range, cost management, and generate professional reports for potential investors.

If you are interested in the CRM possibilities, and you feel it would be useful to apply it at your enterprise, please contact for additional information Mr. Valery Khandus, Head of Financial Restructuring Department. We will try to make your life less complicated. We suggest, that if you try the CRM, you will like it.

Deloitte and Touche Financial Restructuring Project

5, Tereshchinkivska St apt. 2, Kiev, 01004, Ukraine

tel/fax: +38(044) 246-37-63