# _No Financing Capacity_

One argument in favor of an advice-giving agency<sup>alsosupplyingfinanceis that theagency</sup> should be willing to "put its money where its mouth<sup>is."But this argument assumesthat it is</sup> acceptable for the agency to take over "ownership"<sup>of the client-sincethat is thelikely</sup> outcome. Finance is not an issue in liquidation<sup>bankruptcy.In restructuring bankruptcy,it is</sup> important to keep "ownership" and responsibility in the<sup>hands of thecompany managementwho</sup> must turn around the company, not in the hands of<sup>theagency.Otherwise,thecompany will</sup> slide into the passive role of urging the agency to<sup>supply"justone more round"of financingso</sup> that the company will not be an embarrassing "failure"<sup>of the restructuringagency.To avoid this</sup> trap, the agency should not supply finance-full stop.

While ARIA technically could have tapped into a line of<sup>credit,it never did and thusfor practical</sup> purposes, it did not have a financing capability.<sup>ARIAconsultantsand managersweretold to</sup> focus exclusively on internally generated funds obtained<sup>through saleand leasing of</sup> underutilized equipment and space. Furthermore<sup>theywere told that if they turned toexternal</sup> sources of finance such as EBRD or WB credit<sup>lines with interestrates of 22-25%per annum in</sup> dollars the project would be regarded as a failure.<sup>Thus thelack of readily available financing</sup> was turned from the agency's disadvantage to its<sup>advantagein setting the precedent of selling</sup> assets (under socialism, enterprises tended to hoard<sup>assetseventhoughthe assetswere unused).</sup> There is another reason why it is a bad idea for a restructuring<sup>agencyto havea financing</sup> capability. When the same agency is supplying both<sup>adviceand finance,thenthe two will</sup> inevitably become linked by conditionalities. That<sup>will then falsify the motive for the client to</sup> "take the advice." When restructuring plans are<sup>"undertaken"only asa conditionto obtain</sup> finance, then the company and its management will<sup>havelittle genuine"ownership"of theplans,</sup> and the agency will end up financing the costs of not restructuring.<sup>4</sup>

# _Cram-Down Authority_

In the early and mid-90s, the EBRD launched an ambitious<sup>SpecialRestructuringProgram(SRP)</sup> in a number of East European countries. The first and<sup>perhapsonly country wheretheSRP was</sup> fully implemented was Slovenia. Following an international<sup>tender,a foreignturnaround</sup> specialist was hired to come live in Slovenia and run the<sup>program.TheSRP wastied to potential</sup> finance through the EBRD. In spite of considerable<sup>expertise on the partof therestructuring</sup> team, only one company was restructured and privatized<sup>after severalyearsandthe programwas</sup> quietly discontinued.

What went wrong? One of the key flaws in the program<sup>was thelack of any cram-down</sup> authority on the part of the SRP. The bankrupt companies<sup>had balance sheetsfullof softloans</sup> from Slovene public sector banks. When the Slovene<sup>creditorssaw the -SRP, which they</sup> perceived as being backed by a deep-pocketed EBRD,<sup>enter the picture,their soft loans suddenly</sup> became "hard legal obligations" of the company. If<sup>thecompany was not refinanced to pay off</sup> its "legal obligations" then the creditors could throw<sup>the companyinto liquidationbankruptcy</sup>

> 4" There is a fundamental principle that should run through<sup>everythingwe do:</sup><sup>_the IFIs should helpfinance the costs_</sup> _of change-and. should not cover the costs of not changing."_<sup>[Stem2001,168]</sup>

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