As part of a pilot program to resolve Konsolidacni Banka''s (KoB) US$10 billion portfolio of non-performing loans (NPLs), the Czech Government is auctioning US$500 million of KoB''s NPLs (the pilot portfolio), which primarily comprise loans collateralized by real estate and inventory. The government has qualified three bidders --Goldman Sachs, Lone Star and GE Capital-- to submit bids for the pilot portfolio on or before January 10, 2001. The winning bidder will, pursuant to an asset management and disposition plan, proceed to liquidate the pilot portfolio on a loan-by-loan basis.

It is proposed that IFC participate in the Czech government''s sale of the pilot portfolio by providing up to US$20 million of finance to Goldman Sachs. To participate in the significant upside potential of the structure, IFC would explore allocating a portion of its total exposure to the "equity" tranche alongside Goldman Sachs (i.e., up to US$5 million).

Goldman Sachs has extensive experience in making principal investments in NPL portfolios in Brazil, France, Italy, Japan, Mexico, South Korea, Thailand and the US. It was the first firm to structure an NPL securitization, Bank of America''s Kearney Street deal, which closed in 1992. Moreover, its principal investments group is dedicated to purchasing NPL portfolios in Central and Eastern Europe and is currently focusing on portfolios in Czech Republic, Hungary, Poland and Slovakia. Goldman has expressed an interest in working with IFC throughout the region. Archon, Goldman''s asset management subsidiary, has experience in managing over US$11 billion of NPLs world-wide. In addition, Goldman has an extensive debt distribution network, which IFC would access to syndicate this or future NPL financings.

KoB is the Czech government''s institution for management, recovery and implementation of problematic assets. In 1991, the Czech government established KoB for the purpose of taking over those loans made on non-commercial terms that large banks inherited from the former economic system. Since then, KoB has directly undertaken other restructuring operations including the purchase of bad loans from state banks prior to their privatizations. Moreover, KoB has expanded its operations to include development finance activities and, as a commercial bank, accepting deposits and making loans to commercial customers. KoB has relationships with more than 4,000 Czech enterprises. KoB relies on future privatization proceeds for its funding and its annual operating losses are funded by an ex-post contribution from the State budget.

Total project cost: US$50.0 million to US$100.0 million

Proposed IFC financing:
Quasi Equity.................................... US$15.0 million
Equity.............................................. US$ 5.0 million

Total................................................ US$20.0 million

22.50 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan
Equity	22.50

* These investment figures are indicative

The pilot portfolio comprises loans to borrowers throughout the Czech Republic.

The project has been classified as Category FI Type 1 according to IFC''s environmental and social review procedure. However, as the first of its kind to be undertaken by IFC, the project presents a different set of issues to IFC''s typical investments in the financial markets sector. By its very nature, the pilot portfolio of NPLs may include some companies that do not fully comply with Czech environmental standards or which have other pre-existing environmental problems (such as contaminated real estate) that could translate into financial risks to the project. The circumstances of the project also mean that it will not be possible or appropriate for the Manager to cause such environmental issues to be completely corrected or remediated in the timescale required for liquidation of the portfolio''s assets. Goldman Sachs will therefore undertake appropriate due diligence to ensure that such environmental risks are adequately identified, evaluated and managed during the project, including the commissioning of environmental audits on individual NPLs as required on a case-by-case basis. Goldman Sachs will also provide IFC with regular reports on any environmental issues arising during implementation of the project. IFC''s appraisal will include a review of the likely environmental significance of the pilot NPL portfolio and liaison with Goldman Sachs on the optimum approach to environmental due diligence.
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