Distressed Assets & Project Finance: Poland

1. Distressed Assets & Project Finance: Poland 25June 2010 Christopher Garner Counsel CIS Local Counsel Forum 2010

2. Eсonomic Overview THE GOOD • GDP grew by 3.0% yoy in the 1Q10, compared with 3.3% in the 4Q09 and 1.8% in 2009 • Polish banking sector weathered the global financial storm: • 2009 recapitalization increased CAR to 14.1% by 1Q10 (from 11.1% in1Q09) THE BAD • Economy slowed 1Q10 • Significant drop in fixed business investment : minus 12.4% yoy • 1Q10 Credit to households rose at a decreasing yoy rate: 5.8% yoy versus 12.1% in the 4Q09 • Businesses decrease credit appetite  Debt reduction strategies (except construction and public sectors) AND … THE UGLY • Ratio of NPLs (to non-financial sector) increased to 7.9% in 1Q2010 from 4.5% in 1Q08

3. Distressed Assets / Restructuring (1) The Landscape: • Few transactions seen on Polish market • Polish banks prefer to restructure existing portfolios: extend repayment terms, adjust /reset financial covenants • Bankruptcy proceedings can be lengthy and expensive • Big news-makers are fighting insolvency battles elsewhere in Europe („Centre of Main Interest” battles  e.g., Orco) The Legal Framework: • Financial Restructuring of Enterprises and Banks Act 1993 • Commercial Companies Code • Banking Law Act • Investment Funds Act • Law on Bankruptcy and Reorganisation (amended 2009)

4. Distressed Assets / Restructuring (2) Two types of transactions are being seen on the Polish market: • Bankruptcy and Restructuring • Sale of assets/going concern (e.g., Drumet transaction) • Restructring of debt (e.g., Duda transaction) • Financial Institutions selling non-performing loan portfolios (NPLs) • Sale by public tender • Investment Fund • SPV

5. Distressed Assets / Restructuring (3) DRUMET • Producer of steel wires, ropes and staple bands, and employs 850 people • Suspends production activities in February 2009: unable to meet liabilities to suppliers (technical insolvency) • January 2009, files bankruptcy application and Receiver appointed • Quick process (banks on board): approx. 5 months including public tender • Sale of Company as a going concern • Numerous bidders, including PE and Strategics • Penta Investments purchases for PLN 120 million

6. Distressed Assets / Restructuring (4) PKM DUDA The Facts: • Poland’s largest stock exchange listed meat processing company • Unable to meet obligations to creditors Main problem = currency swaps • March 2009 filed for bankruptcy and voluntary reorganisation • Court gave the company a maximum of 4 months to come to an arrangement with its creditors (7 major Polish banks (approx Euro 72m debt)) Mechanism: • Moratorium of 4 months • Debt-for-equity swap • Call option • Buy-back option • Consolidated facility agreement (plus new security granted) • Other measures  shareholder guarantees, bank power of attorney Results: • No bank write-offs • Duda continues operations • Share capital increase and planned release of Eur 25m on Warsaw Stock Exchange

7. NPL SALES: Polish Practice What are the choices? • Sale of corporate debt • Public announcement • Only corporate debts • Notifying the debtor 14 days prior to public announcement • SPV or Investment fund • Current standard in Polish market • Losses on NPLs posted to operating costs and tax deductable • Bank PKO BP sold PLN 3.5bn in 2008/9

8. SPV Advantages: small share capital (EUR 1,250 or EUR 25,000) Not regulated No debtor consent Issues bonds May be traded on Catalyst Only true sale Disadvantages: no tax advantages Investment fund Investment fund can be created only by an investment fund management company (IFMC) Disadvantages: IFMC initial share capital of at least EUR 125,000 regulated IFMC creates securitisation fund contract with Bank Depository consent of FSA for securitisation fund creation Time consumming Issues certificates May be traded on Warsaw Stock Exchange True sale and sub-participation Advantages: Tax advantages (no CTT, VAT exempt) No debtor consent after 2009 SPV or Investment Fund

9. Project Finance / PPP General situation: • Required infrastructure upgrade: especially roads and rail • Euro 2012 incentive and target date: Falling behind • Renewable energy targets: largely wind farms, however this has stalled as grid capacity is saturated, financing is tighter • Traditional energy sector: problem of short-term decision-making Financing projects: • Financing constraints since 2008 • EBRD/EIB back on the scene • Private Equity support? New PPP and Concession Act: • Workable ?  transparency, tax incentives, lower initial entry costs

10. Project Finance / PPP (2) The Future: • Liquidity back to the market • LNG terminal (political motivation) • Nuclear commitment (political backing from all parties) • Waste-to-energy and other renewables (EU targets) • PPP law  Jury is still out ... (stadiums and sports centres, hospitals, transport, bus shelters)

11. Distressed Assets & Project Finance: Poland Thank you for your attention Christopher Garner Aleje Ujazdowskie 10,  00-478 Warsaw, Poland tel. + 4822 437 82 00, + 4822 537 82 00,  fax + 4822 437 82 01, + 4822 537 82 01e-mail: christopher.garner@wardynski.com.pl