Turkey has gone through serious domestic and external shocks which, together with increasing private indebtedness, have contributed to weaker business confidence, lower private investment demand and tourism revenues, and a tightening of credit standards. The fundamental stability challenges of the Turkish economy consist of reducing dependence on external and foreign currency (FX) financing and increasing the maturity and diversity of funding instruments that are crucial for banks and other firms.
In the summer of 2018 Turkey was challenged with a currency crisis that resulted in the lira (TRY) being 30% less valued against the US dollar (USD) by the end of the year. In consequence of the challenges regarding foreign currency, and in efforts to manage the FX exposure of Turkish SMEs, restrictions were introduced on FX-denominated borrowings by Turkish residents. The volatility in the lira has been followed with the need of Turkish corporates to restructure their financial debts, to which legislators have responded with certain regulatory changes, introducing an out-of-court restructuring scheme based on fundamental terms and conditions agreed by a majority of Turkish banks.
This accumulation of vulnerabilities and externalities emphasises the significance of a solid financial system supervision and regulatory framework. In present circumstances, additional policies to lower risks and to raise the resilience of the banking system and of non-financial firms is recommended, particularly aimed at decreasing the vulnerabilities from banks’ wholesale FX financing and from high corporate leverage in FX. Increasing the official net FX reserve ratios would also provide countrywide support.
The Turkish corporate bond market features a wide range of opportunities for investors with energy and infrastructure companies, food and beverage manufacturers, industrials and large conglomerates as issuers. Further, the Turkish banking sector comprises both state-owned and private banks, while the shareholding structures of a considerable amount of private banks include prominent multinational financial groups.
The financials of Turkish corporate and banking bonds seem strong in terms of credit fundamentals, mostly as a result of the careful supervision conducted by the banking regulator. The Banking Regulation and Supervision Agency (the BRSA) has put in place strict capital requirements and controls on exposure of Turkish banks to foreign exchange in a bid to establish a certain level of control over the risks entailed by financial institutions. Management of Turkish companies have also significantly contributed to keep the credit fundamentals solid by providing their experience on navigating through the volatile Turkish economy. However, the approaches of Turkish companies generally tend to be conservative whereby most companies do not pursue big investments or acquisitions that could jeopardise the health of their balance sheets, which can be seen in the relatively low rates of average leverage.
However, this low leverage ratio may translate into potential for investment choices with appealing risk/return characteristics. In fact, Turkish corporates offer one of the most attractive spreads per unit of leverage in emerging markets. This enables investors to benefit from the current potential of higher spreads without necessarily having to bear higher credit risk.
December 2018 statistics show that 96.1% of the total credits extended to Turkish borrowers were made available by banks, whereas this percentage decreases to 2.3%, 0.9% and 0.7% of the total credits extended by financial leasing companies, factoring companies, and financing companies respectively.
Banks still heavily dominate the banking sector, even though factoring, financial leasing, financing companies and funds are beginning to strengthen their position and alternatives to banks are emerging in the market and legislation. The Turkish financial market is experiencing enhanced interest and involvement of foreign funds in Turkish borrowers with combined financing methods including equity.
Induced by the increasing non-performing loan (NPL) ratios in the balance sheets of private and state-owned banks, there is a high tendency in the Turkish banking sector for debt restructurings and sale of NPLs to asset management companies. As of March 2019, the Turkish banking sector had TRY2.5 trillion of outstanding loans, TRY100 billion of which is currently being re-structured; the NPL ratio is 4.04%.
Due to high interest rates and inflation, Turkish banks are keen to offer new loan products with interest rate advantages to borrowers. In efforts to minimise the challenges encountered by SMEs due to increasing rates of inflation, as of June 2019, a new loan product called an "economy value loan" (Ekonomi Değer Kredisi) has been launched with the co-operation of 12 banks and the Credit Guarantee Fund (Kredi Garanti Fonu) (the CGF) which provide for variable interest rates indexed to inflation and which will be secured by the CGF guarantee.
Recently, the Turkish government has implemented some measures to increase saving levels in Turkey, particularly the individual pension system and automatic participation system, aimed at stimulating growth of Turkey’s institutional investor base and domestic asset management industry. This will create stronger domestic demand for asset diversification, which will eventually stimulate the corporate bond market. Further, the Istanbul Finance Centre project is expected to have a positive impact on Turkish capital markets in the following years. Additionally, setting banking and insurance transaction tax to zero is one of the key steps to attract derivative transaction clients based abroad to the Turkish markets.
In addition, as a result of the challenges encountered by the Turkish financial sector and highly indebted Turkish borrowers, in the past two years legislators have been very active, introducing new laws and regulations to address the financial difficulties encountered by Turkish corporates. In this respect, legislators and the BRSA have introduced a new out-of-court restructuring scheme for financial debts with the involvement of both local and foreign creditor banks or financial institutions.
A company organised in Turkey may obtain loans from (i) banks established in Turkey, (ii) foreign banks' branches established in Turkey, (iii) foreign banks established abroad (provided that it is made on a reverse inquiry basis), or (iv) its shareholders.
The following products and services trigger licensing requirement in Turkey under the Banking Law (Law No 5411) and the Capital Market Law (Law No 6362) (the CML):
Lending and credit products business within Turkey can only be provided by banks licensed by the BRSA. However, pursuant to Decree No 32 on the Protection of the Value of the Turkish Currency, a Turkish resident may – freely and without the permission, approval, licence from or registration or filing with any Turkish regulatory authority, including the BRSA, the Undersecretariat of Treasury (UT), the Central Bank of Turkey (the CBT) – obtain loans (other than consumer or mortgage loans) from banks and financial institutions abroad, provided that the proceeds of such commercial loans are paid to an account of a Turkish resident held with a bank operating in Turkey.
In light of the above, a foreign financial institution may act as a lender for credit services without triggering licensing requirements. Although Turkish authorities historically have a more lenient approach towards corporate lending (and it is currently the market practice to lend on a solicited basis as well) it is advisable for foreign banks and financial institutions to conducts their activities on an "unsolicited" and "reverse inquiry" basis.
With the amendments introduced to Decree No 32 and the Capital Movements Circular effective as of 2 May 2018, Turkish corporates that do not generate FX revenues cannot utilise FX loans unless such Turkish residents benefit from the exemptions listed exhaustively under Decree No 32 and the Capital Movements Circular.
The general exemption is for Turkish corporates who have an aggregate outstanding FX-denominated credit balance of at least USD15 million (or equivalent in any other currency). Other exemptions are also available for Turkish borrowers that are operating in certain sectors, such as (i) the defence industry or (ii) in undertaking certain projects such public-private partnership (PPP) projects or energy projects. Further, as per the 2018 amendments, Turkish residents are prohibited from utilising FX-indexed loans.
Pursuant to the Turkish conflict of laws rules, security documents creating a security interest over the assets that are located in Turkey should be subject to Turkish law. Therefore, security agreements concerning (i) a mortgage over a property or a fixed asset located in Turkey, or (ii) Turkish securities custodied and/or listed in Turkey shall be governed by Turkish law and cannot be subjected to any other law than Turkish law; there are otherwise no restrictions on the ability of foreign banks or financial institution to take such security. Also, security documents that are subject to formal execution proceedings or registration requirements and/or security documents between Turkish parties have to be executed in Turkish.
Otherwise, granting security over assets for the benefit of offshore lenders is not restricted.
Please refer to 3.1 Restrictions on Foreign Lenders Granting Loans, above.
Currently, there is no statutory limitation on a borrower's use of loan proceeds. As per Decree No 32, a Turkish resident should have the loan proceeds disbursed into a bank account held with a bank licensed in Turkey and cannot have the proceeds disbursed into a foreign account. Further, there is no statutory limitation on the use of proceeds from debt securities as well.
In general, apart from the fact that the lenders can hold the security package in their own capacity, it is possible to have a security agent or a security trustee holding the security package on behalf of a pool of lenders. However, if a security trustee is used, such role cannot be undertaken by a Turkish entity as this concept is not recognised under Turkish law. As per the Act on International Private and Procedural Law (Law No 5718) (the PIL), the capacity of legal persons to perform legal actions or to exercise legal rights is subject to the law of the place of their headquarters. Therefore, a non-Turkish entity can be appointed as a security trustee if it has the capacity to act as a trustee under the laws of the place of its headquarters and its capacity, which is recognised under its own jurisdiction, would also be recognised under Turkish law.
Transfer (Assignment) of Agreement
This causes a direct change in the parties to the agreement and is achieved through a transfer agreement whereby all of the existing lender's commitment, rights and obligations under the loan agreement are transferred to the new lender.
This also causes a direct change in the parties to the agreement (where instead of replacing a new party an additional party is included) and is achieved through a participation agreement whereby part of the existing lender's commitment, rights and obligations under the loan agreement are transferred to the new lender.
Transfer (Assignment) of Receivables
A common way to effect a transfer of loan receivables along with relevant interest and fees is transfer (assignment) of receivables. A transfer of receivables does not cover transfer of obligations under the loan agreement. Accordingly, rights of an existing lender in respect of the transferred receivables under a loan agreement, such as the right to receive interest and fees, would be transferred to a new lender. The transfer of receivables is perfected by entering into a written agreement between the existing lender and the new lender. It does not require the consent of the underlying debtor. However, typically the borrower is notified of the transfer and its acknowledgment is obtained.
This method is also available under Turkish law, which extinguishes the existing rights and obligations of the existing lender and replaces the same with those of the new lender's. However, due to its negative effect on the established securities, this is mostly used for non-Turkish law governed loan agreements provided that the loan agreement contains a parallel debt provision (see Section 5 Guarantees and Security, below, for more detail).
Funded and Risk Participations
Funded participations and risk participations are available through participation agreements to be entered into between the existing lender (ie, grantor) and other banks and financial institutions (ie, the participant). Under funded and risk participations, the lender of record remains the same and the borrower is not directly affected by the participation. The mechanism used for these arrangements is similar to that used in the UK. In addition, Turkish banks are required to observe the principles imposed by the BRSA under the Communiqué on Credit Risk Reduction Techniques. In the event any participation arrangement is not in compliance with the principles set out under such communiqué, then the relevant participation shall not be considered as a risk-mitigating factor which is taken into account for calculation of the capital adequacy ratio and lending limits of the grantor bank.
Guarantees and Security
Turkish law securities (other than guarantees) are generally considered to be of an accessory nature and linked to the original debt. Therefore, when the loan is transferred through a transfer of receivables or transfer of agreement, security connected to the loan is automatically transferred to the transferee/assignee who directly gets the benefit of any related security (ie, the pledge follows the asset). When the loan is transferred by way of participation to an agreement, the new lender also benefits from the related security in proportion to its participation to the loan. In the case of guarantees, the loan agreement usually provides for them to be granted in favour of "finance parties", which includes any transferees/assignees who become lenders of record.
In the case of novation, as it has the effect of extinguishing the original debt, any Turkish law security which is accessory to that original debt will fall away, together with the extinguishing original debt, and will have to be re-established. Therefore, parallel debt structure (ie, an abstract acknowledgment of debt in favour of the security holder which is recognised under Turkish law) is used in order to avoid this consequence and to mitigate the concerns that may arise from holding security for a pool of lenders.
In the case of a funded or risk participation, since the grantor of the participation remains as the lender of record, the participant has no direct entitlement to the security and guarantees but can have a claim vis-a-vis the grantor to the extent of its participation.
There are no buy-back restrictions for the borrowers or sponsors. Under the Debt Instruments Communiqué (No VII-128.8), all issuers can buy back their bonds. This Communiqué stipulates application of equal treatment principles, under which the issuer must treat bondholders equally.
Principally, Turkish law does not require "certain funds". Nevertheless, exceptions exist (eg, if a bidder makes a voluntary or mandatory takeover offer for a listed company, the offer document shall contain the information on the fund and the amount).
The Corporate Tax Law (Law No 5520), requires the borrower to deduct withholding tax from all payments of interest and fees under the finance documents to the lender whose principal office or facility office is outside Turkey, except for the rate of such Turkish tax applicable to such payments which has been reduced to zero interest with respect to Article 30 of the Corporation Tax Law, in line with Decree No 2009/14593 (published in the Official Gazette dated 3 February 2009 and numbered 27130); and fees under or pursuant to loan, to be adjusted to payments of interest in accordance with the Articles and Decree referred to above, with the result that the rate of such applicable Turkish tax is reduced to zero.
Loans that are granted to Turkish residents by Turkish banks, foreign credit institutions and international entities, as well as any security in connection therewith, are exempt from stamp tax.
Income or Franchise Taxes
These taxes may be imposed on a lender if that lender makes a loan available from, or carries its portion of the loan on the books of, or receives any amount payable thereunder at, any facility office which is either (i) located in Turkey or (ii) incorporated or organised or has its principal office in Turkey (a "resident finance party"). Interest, commission and fees to be paid by a borrower to a resident finance party and any income realised by such party is subject to Banking and Insurance Transaction Tax.
Resource Utilisation and Support Fund (RUSF)
Loans extended by Turkish banks and financial institutions are exempt from RUSF. In respect of cross-border loans, if a cross-border TRY loan to be extended to Turkish residents (other than banks and financing companies) – save for fiduciary transactions – has an average maturity of less than one year, it will be subject to RUSF at a rate of 1% calculated over the interest amount. For the offshore TRY loans having an average maturity of at least one year, the RUSF amount will be 0%. The RUSF amount to apply to cross-border FX loans are:
Contractual interest: pursuant to the Turkish Commercial Code (Law No 6102) (the TCC), contractual interest and default interest may be freely determined in commercial affairs.
Compound interest: in principle, interest on the accrued interest (ie, compound interest) is prohibited under Turkish law. However, the following exceptions exist in relation to the compound interest.
As a general principle that applies to all forms of security, any provision entitling the security holder to become the owner of the secured asset upon the occurrence of an event of default is null and void under Turkish law (the lex commissaria prohibition). This means that the security holder cannot automatically become the owner of the secured assets upon the occurrence of an event of default but it can sell (depending on whether private sale is permitted for that particular form of security) or have them sold in order to receive sale proceeds for the satisfaction of its receivables and/or it may join such sale and bid against its claims (ie, the security holder does not have to make an actual payment for the amount of its claims).
As an exception to such rule, for the collateral arrangements where the subject matter of the form of security is dematerialised capital market instruments registered in the electronic records of the Turkish Central Registry Agency (the CRA), Article 47 of the CML allows the pledgee to automatically acquire the ownership of such listed shares on an enforcement event (ie, a recent exception to the lex commissaria prohibition).
Pledge over Shares
Without prejudice to any further requirements in the articles of association of the relevant company, a pledge over the shares of a Turkish joint stock company (anonim şirket) can be established by:
Perfection of a pledge over the shares of a Turkish limited company (limited şirket) requires a written pledge agreement to be executed before a notary public and registration of the pledge with the share ledger of the company upon a resolution of the general assembly of such company to that effect.
The shares of publicly traded companies are in dematerialised form and are recorded with the CRA. Accordingly, the shares of these companies that are subjected to a pledge should be transferred to the sub-account of the pledgee held with the CRA with a record of the pledge.
In the absence of any agreement to the contrary, the voting rights of the pledged shares will be exercised and the dividends will be received by the pledgor(s).
A mortgage constitutes an encumbrance over the immovable property subject to such mortgage and all buildings thereon including the integral and accessory parts. A mortgage over immovable property secures
Pursuant to the Turkish Civil Code (Law No 4721), a mortgage can be created as security over immovable property for any kind of debt; present, future or contingent. The perfection of a mortgage requires a mortgage agreement to be entered into by and between the mortgagor and the mortgagee at the relevant Title Deed Registry in ex officio form and thereafter registration of the mortgage with the same.
In principle, the amount of the mortgage is required to be registered in Turkish lira (TRY). However, according to Article 851/II of the Civil Code, a FX mortgage can be created if it is security for a FX loan to be obtained from a credit institution.
Mortgages are registered in first and continuing degrees (ie, rankings). The degree of the mortgage holds particular importance in an enforcement scenario. Initially, the first-degree mortgagee receives its receivables (up to the mortgage amount) from the proceeds of the sale of the mortgaged property. If there remain any proceeds, the second-degree mortgagee receives its receivables and the process continues in such a manner.
It is possible to create a joint mortgage on a certain degree (ie, a mortgage in favour of more than one mortgagee) and unless a different arrangement is included in the mortgage agreement, the rights of each mortgagee under the joint mortgage shall rank pari passu with the rights of the other joint mortgagees.
Mortgages can move up to a higher degree upon its becoming available if the relevant mortgage agreement includes such an express provision.
Pledge over Movables
Under Turkish law, perfection of a pledge over movable property requires a written pledge agreement to be entered into by and between the pledgor and the pledgee and transfer of the physical possession of such movable property to the pledgee.
In respect of a pledge over movable property which is legally required to be registered with a special registry (such as vehicles), the pledge may be granted through a registration at the relevant special registry as a perfection condition and, in such a case, physical possession of such movable property is not required to be transferred to the pledgee.
Movables Pledge in Commercial Transactions
The Movable Pledge Law in Commercial Transactions (Law No 6750) provides for the establishment of pledge over movables without any requirement to transfer the physical possession of the pledged asset to the pledgee. Please refer to 5.2 Floating Charges or Other Universal or Similar Security Interests, below.
Assignment (Transfer)/Pledge of Receivables
An assignment (transfer) of receivables or pledge over receivables is perfected by entering into a written assignment/pledge agreement. Present or future receivables (including insurance proceeds) can be assigned or pledged but they should be ascertainable. An assignment (transfer) of receivables is the preferred form of security because it transfers the title of such receivables to the assignee, unlike a pledge; the creation of a pledge would not be possible without the delivery of the actual receivables to the pledgee or its custodian.
Bank Account Pledge
The perfection of a bank account pledge (which is a type of receivables pledge over the receivables of the deposit holder vis-a-vis the account bank) requires execution of a written pledge agreement between the pledgor and the pledgee and a notification to the account bank (unless the pledgee is also the account bank). It is also advisable to obtain an acknowledgement from the account bank to ensure that the pledge is duly registered with its records, it waives any set-off rights it may have in respect of the pledged accounts and it does not have any counterclaims as at the date of the acknowledgement.
Other Forms of Security
In addition to the above-mentioned forms of security which are most commonly used in the Turkish market, there are also more specific forms of security available such as aircraft or vessel mortgages or pledges over mines, etc.
As mentioned above, under the general provisions of the Civil Code, pledge over movable assets is perfected by transfer to the pledgee or its custodian of the physical possession (ie, the delivery) of the movable property is required to create a pledge over the same. As this is highly impractical for both parties, especially in commercial transactions, the Movable Pledge Law – which does not require the transfer of physical possession – was enacted and came into force on 1 January 2017.
According to the Movable Pledge Law, a movable pledge can be created in commercial transactions as security for any kind of present or future debt. Accordingly, the pledge agreement can be made, electronically with secure e-signatures or in written form, between either (i) credit institutions and merchants, craftsmen, farmers, producer organisations and self-employed natural or legal persons, or (ii) merchants and/or craftsmen. Written pledge agreements are required to be signed before an official of the Pledged Movables Registry or the signatures of the parties thereof are required to be approved by a notary public. The pledge will be established with the registration of the same to the Pledged Movables Registry.
A pledge can be established on the current or potential assets of a pledgor (or revenues thereof). Receivables, IP rights, materials and inventories, machineries and equipment, amongst others, can be subject to a pledge agreement under the Movable Pledge Law.
In cases of a commercial enterprise and/or craftsmen enterprise, any and all kind of assets that are allotted to the activities of such enterprise will be deemed to be pledged as of the date of the establishment of the pledge.
The TCC provides that a parent company cannot use its dominant position (ie, through voting rights, appointment majority of board of directors members) to force its subsidiary to enter into transactions which may result in losses to the subsidiary. These include giving sureties or guarantees, making payments or decreasing its assets for the debt of the parent company.
An exemption to this rule was also provided and so upstream guarantees or security can be provided if any such transaction is made for consideration. For the purposes of such consideration, the TCC allows compensation by the parent of any loss suffered by the subsidiary within the operating year that the loss is suffered in, or granting of an express right to the subsidiary against the parent (or a counter-guarantee) to claim any losses it may suffer as a result of providing such guarantee or security (so-called "equal right of demand").
Failure to provide the consideration explained above allows the shareholders of the subsidiary to claim compensation against the parent and its board of directors. Any creditors of the subsidiary may also request payment to the subsidiary of any losses so suffered.
A target cannot provide financing or security for the acquisition of its shares by a third party. Any such transaction will be null and avoid. It is sufficient that the intention of the restricted transactions is to acquire the shares and no written agreements are necessary for this restriction to apply. The timing of the acquisition (whether completed before or after such restricted transactions) is also irrelevant as long as the intention of transactions is to acquire the shares.
Under the TCC, provision of upstream/cross guarantees or security may give rise to liability of the parent company and board of directors of the parent company unless corporate benefit in respect of the subsidiary company exists. Please see 5.3 Downstream, Upstream and Cross-stream Guarantees, above.
There is no specific requirement under Turkish law in relation to related party transactions to be entered into by privately held companies. However, related party transactions of publicly listed companies are regulated in detail by the CML. Accordingly, prior to entering into a related party transaction, publicly listed companies must adopt a board resolution, which requires the approval of the majority of the independent board members. Unless approved by the majority of independent members, a public disclosure must be made on the Public Disclosure Platform (Kamuyu Aydınlatma Platformu) and the transaction must be submitted to the general assembly (shareholders) for its approval. There may be other requirements (ie, obtaining an evaluation report, disclosure requirements) according to the size of the related party transaction.
In respect of the costs, in general, for any security that requires registration or notarisation, registration and notarisation fees would arise.
It should also be mentioned that any document indicating a monetary value is, in principle, subject to stamp tax imposed by the Stamp Tax Law of Turkey (Law No 488) in the amount of the TRY equivalent of 0.948% of the highest monetary figure indicated in the relevant document. However, as per the Stamp Tax Law, loan agreements in respect of the loans that are granted to Turkish residents – as well as any security documents in connection therewith – are exempt from stamp tax.
In addition to the above, the following charges and fees may be applicable:
Pledge over Shares
Joint stock companies (anonim şirket): the endorsement on the share certificates should be cancelled, the pledged share certificates should be physically returned to the pledgor (in return for a delivery receipt notice) and the pledge should be removed from the share ledger of the company.
Limited companies (limited şirket): a written notice should be sent to the pledgor and the company.
Publicly traded companies: a notification is required to be made to the CRA for the release of the pledge over the shares held with the CRA.
After obtaining a release letter from the mortgagee (in which the mortgagee consents to the release of the mortgage), a written application should be made to the relevant title deed registry for the release of the mortgage.
Pledge over Movables
The pledged movables should be physically returned to the pledgor (in return for a delivery receipt notice).
Movables Pledge in Commercial Transactions
Within three days following the full performance of the secured obligations and full satisfaction of the mortgagee, the mortgagee should apply to the Pledged Movables Registry for the release of the pledge.
Assignment of Receivables
A release agreement is required to be executed between the assignor and the assignee in order to assign the receivables back to the assignor. It is also advisable to notify the debtors with regard to the release and obtain acknowledgement letters from them.
Bank Account Pledge
Although there is no specific requirement for the release of a bank account pledge, the most common way is to obtain a release letter from the pledgee and deliver such letter to the account bank.
Other than a commercial movable pledge and/or mortgage (see above, 5.1 Assets and Forms of Security and 5.2 Floating Charges or Other Universal or Similar Security Interests), in general the priority of security interests established on an asset would be determined in accordance with the establishment date of such pledges, meaning the pledge that has been established earlier than the other pledge would be preferred.
Although contractual subordination is permitted in general under Turkish law (ie, the parties can regulate subordination as a contractual undertaking and a party would have a contractual claim in case the other party breaches such undertaking), mandatory ranking set out under the Enforcement and Bankruptcy Law (Law No 2004) (the EBL) would apply in case of insolvency; please refer to 7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency, below, for the mandatory ranking in case of insolvency. In order to avoid this, in practice, any subordinated debt is assigned to the lender under an assignment of receivables agreement with the result that in the event of the bankruptcy of a party which owes subordinated debt, the lender can claim to be the holder of such debt so it will ensure that the subordinated parties are not in competition with the lender to recover their receivables from the bankrupt party.
In order to foreclose pledged assets, the creditor needs to file a request with the relevant enforcement office. Following that request, the enforcement office will send the debtor a payment order explaining that the pledged assets will be sold if the debtor does not object to the payment order within seven days and/or fails to make payment within 15 days (for movable assets) or 30 days (for immovable assets).
If the debtor objects to the payment order within seven days, the foreclosure proceeding will stop. In such a case, the creditor: (i) may file a lawsuit for the annulment of the objection within one year of such objection; or (ii) if the debt has either been acknowledged by the debtor in a written document or is based on a receipt or a document duly issued by official authorities, may request the rescission of the objection within six months by providing the relevant document.
If the debtor does not object to the payment order or if the debtor's objection is annulled or rescinded, the creditor will be entitled to request the sale of pledged assets within six months (for movable assets) or within a year (for immovable assets) following the delivery of the payment order.
As a general rule, the sale of pledged assets may be made by way of auction. However, the foreclosure may be made by way of private sale:
According to the PIL – which would apply to the private law transactions and relations that contain a foreign element – in general, the parties may freely choose the governing law of the contract. However, contracts concerning an immovable property and/or use of immovable property shall be subject to the law of the country where such immovable property is located.
Submission to Foreign Jurisdiction
According to the PIL, parties to a transaction that contain a foreign element may freely submit the dispute arising therefrom to a foreign jurisdiction unless any such dispute falls into the exclusive jurisdiction of Turkish courts.
Under the PIL, Turkish courts will only enforce a judgment of a foreign court if:
Although a Turkish court would only examine an application of enforcement of a foreign judgment with a view to determining whether these enforcement conditions are met and should not necessarily re-examine the merits of the case, such court may still re-examine the merits to ascertain if there is any public policy violation.
Please see 6.3 A Judgment Given by a Foreign Court, above.
With the commencement of bankruptcy proceedings, the debtor loses its capacity to dispose of its assets and the management and liquidation of the estate will be undertaken by the bankruptcy administration. However, the EBL provides certain composition (reorganisation) proceedings so as to grant a payment holiday to cure the distressed condition of the debtor.
Reorganisation proceedings before and after bankruptcy that may apply upon a court decision or creditors' approval (as the case may be) are:
The recent amendments introduced to the EBL (published in the Official Gazette dated 15 March 2018 and numbered 30361) has facilitated the application process and implementation of composition (konkordato) process in favour of borrowers and imposed certain limitations and restrictions on the actions that the creditors. The Turkish composition regime is similar to an in-court debt restructuring scheme: wit aims to improve the financial condition of a debtor and sustain its operations rather than liquidating the assets of the same for the discharge of its debts.
The main setback of the amended composition legislation for the creditors is the temporary and definite standstill periods granted to the borrower upon filing for composition, which can be for a maximum period of 23 months, during which (i) no enforcement proceedings can be initiated against the borrowers (save for secured creditors); and (ii) all existing enforcement proceedings are suspended (save for the enforcement proceedings in respect of security).
In addition, as per the EBL, the agreements that are material for the operations of a borrower who has filed for composition cannot be terminated, or the debt thereunder cannot be accelerated due to initiation of composition proceedings, and any provision to that effect would be unenforceable during the standstill periods. Accordingly, any provision contained in a loan agreement entitling the lender, among others, to call an event of default under, or terminating the respective loan agreement or exercising similar remedies (including acceleration), due to composition or restructuring may not be enforceable on or after the date the borrower files for composition or restructuring if that loan agreement is deemed material for the operations of the borrower.
Once the conditions are triggered and the court declares the debtor bankrupt, all the assets owned by the bankrupt debtor at the time of declaration of bankruptcy, and all assets acquired or received subsequently, will form together the bankruptcy estate (iflas masası). Similarly, any assets over which a security interest (eg, pledge) was created will also be registered as part of the bankruptcy estate but this will not prejudice any pre-emption rights of secured creditors.
Upon declaration of bankruptcy, the bankrupt debtor will lose its capacity to dispose of its assets. Accordingly, the management and liquidation of its bankruptcy estate will be undertaken by the bankruptcy administration (iflas idaresi) appointed by the relevant court under the monitoring of the enforcement office.
Under general rules, the creditors will have a period of one month to register their receivables over the assets and submit documents evidencing their receivables. This period may be extended for creditors that are living far away or abroad. Upon the expiry of such period, the bankruptcy estate will render its decision regarding the registered claims and receivables. The claimants of the rejected claims will be entitled to bring such claims before the relevant enforcement court within seven days. On the other hand, the creditors whose receivables have been rejected will be entitled to file a lawsuit with the relevant commercial court within 15 days following the declaration of the table of rankings (sıra cetveli).
Please also refer to 7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency, above.
Upon the liquidation of the bankruptcy estate, payments to eligible creditors shall be made in the following order.
Claims of each creditor within a particular category rank pari passu with claims of other creditors in the same category (save for secured debts which shall be paid in accordance with their respective rankings and degrees). Creditors of any category are not entitled to any payment until and unless all creditors of the superior category are satisfied in full.
Subordination is not a recognised concept under Turkish law and therefore is not enforceable against Turkish courts or enforcement offices. As such, in Turkish legal practice, any contractual subordination arrangements are usually followed by an assignment agreement to ensure that the title to the subordinated debt is transferred to the senior creditor to give effect to the contractual subordination.
Transactions carried out by the bankrupt debtor prior to bankruptcy can be subject to an annulment action (tasarrufun iptali davası) subject to the clawback periods under the EBL. Accordingly, the assets of the debtor which have been transferred to a third party prior to the declaration of bankruptcy may be included in the bankruptcy estate and will be liquidated for the satisfaction of its creditors if the relevant transactions are challenged by the bankruptcy estate or creditor and found fraudulent.
Project financing is commonly focused on energy, infrastructure, telecommunications and healthcare projects as well as the projects undertaken through the public-private partnership (PPP) model.
The project finance sector in Turkey has been attracting the interests of both local and foreign banks and financial institutions, as well as international investment banks. The European Bank for Reconstruction and Development (EBRD), the World Bank/International Bank for Reconstruction and Development and the World Bank's Multilateral Insurance Guarantee Agency (MIGA) are among those that finance projects in Turkey.
Turkey is among the top emerging markets using PPPs. Infrastructure projects are the most pre-eminent endeavours, but Turkey has a vast PPP portfolio for the near future. The PPP model is heavily encouraged and recently implemented in the transportation, healthcare and energy sectors; the projects mostly consist of build-operate-transfer, build-operate, build-lease-transfer or transfer of operational rights.
Although there is no specific legislation governing PPP projects in Turkey, the relevant laws are as follows:
Foreign investors are encouraged to enter into the market by various incentives provided mainly under the Foreign Investment Law (Law No 4875) which gives a very broad definition of foreign investment, enabling many investors to benefit from such incentives. Furthermore, foreign investors also benefit from noteworthy tax incentives, alongside the tax exemptions in place for health PPP projects. Pursuant to proposed amendments by the Ministry of Finance), special purpose vehicles (SPVs) would be exempt from stamp tax, duties charges (except for court charges) for all documents that are in connection with the issuance of securities to finance the contractors of PPP projects.
The approval process varies depending on the sector and categorisation of the project. For example, in relation to the Akkuyu PPP Project, the project company was required to be the successful participant in a tender process which was initiated by the Turkey Atomic Energy Authority (TAEA). Following its selection, the project company further negotiated and signed a series of project contracts with the TAEA. After signing off on the related project contacts, the project company obtained an electricity manufacturing licence from the Energy Market Regulatory Authority (EMRA) as well as construction licences and environmental permits from the relevant local authorities and ministries.
In the third airport project, applicable approvals were obtained in co-ordination with the General Directorate of Airports and the Ministry of Transport, the entities responsible for overseeing the project.
In general, the permits and approvals are subject to a fee. In some cases the government has granted waivers or made special provisions to speed up the approval process for significant projects. For example, the BTC pipeline project documents (see 8.2 Overview of Public-Private Partnerships, above) contained specific rights to have permissions granted within certain timelines and the State Pipeline Corporation was given responsibility for co-ordinating all permissions. This model has been followed in a number of projects with international investor participation.
Depending on the nature and location of the project, additional permits and approvals may be required, such as: permission in relation to archaeological areas and national heritage sites; approval from the General Directorate of Mining Affairs.
There is no specific government authority established only in respect of project finance transactions. That said, certain governmental authorities become relevant as the regulator of the respective sector that a project financing will be undertaken (such as the Energy Market Regulatory Authority, Ministry of Energy and Natural Resources, Ministry of Environment and Zoning).
With respect to project sectors defined above, the main regulatory bodies are as follows:
No information is available.
The Turkish project finance sector mostly revolves around special purpose vehicles (SPVs) established as the vehicles for undertaking the project and obtaining finance. Several structures exist, including offshore SPVs; some projects may require the project companies to establish a single purpose partnership or a contractual joint venture in Turkey for operational purposes. If the relevant administration does not specify the legal form for the project company, the parties may determine the structure of the SPV together with its location according to their own preferences. In some projects, where such freedom of choice is granted by the Turkish state, finance parties have structured the SPV.
A wide range of financing models have been used in Turkish project finance practice, including (in some cases, a combination of):
In PPP deals, the lenders undertake to provide large sums over a long period. Moreover, the project's income stream and assets are generally of a very high value. This provides banks and international credit agencies with a long-term return coupled with a sovereign guarantee (ie, debt assumption by the state). While traditional corporate financing is heavily dependent on the financial strength of the borrower, project companies in PPPs are backed by a sovereign state guarantee. Also, it is advisable to be covered by country risk insurance in order to avoid significant losses which may arise from country risks.
Under the Turkish Constitution, the state owns minerals and natural resources. As such, in all cases a licence to explore or produce the resource will be required from the state regulator. Although foreign entities are entitled to have rights over petroleum, establishment of a local entity is required to hold mining rights.
Ownership rights on the land with minerals is legally separate from the ownership of the resources. Accordingly, legal ownership, usufruct or easement rights may be granted over the exploration or production licence area. For instance, if the land is privately owned, the land may be expropriated if permitted by the relevant laws. The lands owned by the state could be utilised by way of purchasing, leasing or establishing usufruct rights after obtaining permits from the relevant governmental authorities.
Royalties are mostly based on revenue under Turkish law. For minerals, the licence holder is required to pay a royalty of 3% of the minerals' sales price. An extra rental payment would be required for mining activities performed on state-owned lands. The mining laws reduce the royalty by 50% given that the ore is processed in Turkey. For petroleum (crude oil or gas) the royalty is 12.5% of the sale price, which is set determined the state.
Mineral ores can be exported freely provided the export taxes are paid. However, the Law on Turkish Petroleum (Law No 6491) restricts the percentage of oil and gas exports due to scarcity of Turkish petroleum resources.
In general, the "polluter pays principle" is applicable in Turkey. The project's attributes would determine the types of environmental risks it entails. Generally, excavation soil utilisation, waste control, gas emission ratios, waste-water discharging procedures and related hazardous events are covered in detail under Turkish Law, aiming to regulate activities of energy and infrastructure companies. Furthermore, Environmental Impact Assessment Regulation requires some facilities to obtain environmental impact assessment approval.
Driven by sovereign issuances and the Government’s will, issuers and investors in Turkey are increasingly eager to benefit from sukuk, as Islamic finance continues to earn further ledges both within and outside of the Islamic world. In 2014, the UK government became the first non-Muslim sovereign to issue sukuk, followed by the governments in Hong Kong, South Africa and Luxembourg, tapping into the fast-growing global sukuk market.
Turkey is located between Asia, the Middle East and Europe, so is well-positioned to evolve into one of the significant players in international sukuk markets. Upon recent enactment of regulatory and infrastructural reforms in the banking sector, the Turkish government seeks to triple the share of participation banks that operate in accordance with Islamic law in the near future.
The Turkish government made its intentions to continue to develop the corporate and legal infrastructure for interest-free finance and to promote the diversification of interest-free financial products clear in its medium-term programme. In this respect, the Turkish government implemented an extensive tax reform in August 2018, primarily aiming to eliminate the impediments and ambiguities concerning taxes on sukuk issuances and transactions.
Sukuk looks likely to be an increasingly vital financial instrument of economic development, and Turkey is expected to be among the main participants in shaping the forthcoming sukuk market on an international level.
Turkish Islamic finance sector is widening and the enlarging market share of Islamic banking needs to be followed by implementation of efficient regulation and supervision.
Both sukuk (Islamic bonds), and takaful (Islamic insurance) are proposed by financial institutions classified as "participation banks" whose activities are in compliance with the Islamic order. Participation banks are subject to the same legal framework as other banks and their activities are supervised by the same authorities (the BRSA and the Savings Deposit Insurance Fund). See also 9.3 Main Shari'a-compliant Products, below.
In this context, the Banking Law is the main legislation establishing the Participation Banks Association of Turkey (TKBB) and enabling participation banks to benefit from the same privileges and status as other banks. Apart from that, the initial regulatory intervention was made through the Communiqué Serial III No 43 on Principals Regarding Lease Certificates and Asset Leasing Companies, which broadly aimed to introduce and familiarise the principle of sukuk to Turkey.
Recently, the Turkish Government introduced the Communiqué Serial III-61.1 No 28670 on lease certificates. This sets out the principles for determining the classification of lease certificate and grants companies authorised by the Capital Markets Board (CMB) the right to raise funds from the capital markets by issuing lease certificates.
Subsequently, other banks in the market are aiming to incorporate their Islamic finance departments by adapting a considerable number of their operational and financial procedures to be Shari'a-compliant. The TKBB gives figures which steadily indicate that participation banks have increased their asset growth, raised and allocated funds, and expanded their shareholders' equity together with their operational capabilities in general.
Following the recently introduced tax exemptions and allowances, corporate taxpayers could enjoy corporate income tax and value added tax exemptions in both sale and leaseback schemes for their movable and immovable assets. Further, it has been made clear that transfer of underlying immoveable assets under the lease certificates will not reset the holding period (eg, in the event such sale and leaseback is followed by a potentially taxable disposal in the future), and the documents executed for the transfer of any underlying asset under the lease certificates will be exempt from stamp tax, which is a unique kind of document tax in Turkey.
Turkey does not have specific laws and regulations that apply to Islamic finance in Turkey. Islamic finance is mostly governed under the laws and regulations that apply to conventional capital market instruments other than for the issuance of sukuk certificates, also called "lease certificates", which is regulated under Lease Certificates Communique No III-6.1 of the CMB.
The Islamic banking industry, which is known in Turkey as "participation banking" (katılım bankacılığı) and its diverse products are regulated under (i) the Banking Law; (ii) the Financial Lease, Factoring and Financing Companies (Law No 6361); and (iii) other secondary legislation published by the BRSA.
There is no particular administrative authority that implements and supervises Islamic finance regulations. In terms of banking legislation, the BRSA has the power to supervise and enact secondary legislation that apply to banks in Turkey, including participation banks. On the other hand, the CMB has the authority to supervise and enact secondary legislation applicable to lease certificates to be issued in accordance with Article 61 of the CML and Lease Certificates Communique No III-6.1.
There are no specific laws that apply to products of Islamic finance concerning insurance. With respect to funds, the Communiqué on Principles of Investment Funds No III-52.1 allows Islamic funds to include Islamic finance products, such as Islamic pension funds, and allows conventional funds to invest in lease certificates.
See also 9.1 The Development of Islamic Finance and 9.2 Regulatory and Tax Framework, above.
There is no specific insolvency regime pertaining to Islamic finance products under Turkish law. As per Article 61 of the CML and Article 3 of the Lease Certificates Communiqué, sukuk assets cannot be included in the bankrupt's estate and are ringfenced. Also, these cannot be disposed of or pledged, posted as collateral, attached or added to a bankrupt's estate, or made subject to any preliminary injunctions until the related payment obligations against the respective holders of the lease certificates are fulfilled. In case an issuer of lease certificates declares bankruptcy, the proceeds of the sukuk assets shall first be used to make payments to the lease certificate holders; the CMB will be authorised to take any measures to protect the rights of certificate holders (eg, recourse to the issuer's board members or shareholders holding at least 10% of the share capital).
No information is available.