Turkey has gone through serious domestic and external shocks which have contributed to reduced business confidence, lower private investment demand and tourism revenues, and a tightening of credit standards. Challenges facing the Turkish economy consist of reducing dependence on external and foreign currency (FX) financing and increasing the maturity and diversity of funding instruments so crucial for banks and other market players.
In the summer of 2020, Turkey faced yet another currency crisis; a sharp drop in the value of Turkish lira further tested Turkish businesses and residents. In a bid to subdue the volatility of the local currency, Turkish financial authorities introduced a number of additional rules and restrictions concerning FX-denominated transactions as well as the outflow of Turkish Lira from local banks.
This accumulation of vulnerabilities and external impacts emphasises the significance of a solid financial system supervision and regulatory framework. In present circumstances, additional policies to lower risks and raise the resilience of the banking system and non-financial firms is recommended, particularly regarding FX.
As a result of fluctuations in the financial markets due to the COVID-19 outbreak, Turkish authorities have taken several measures to contain its adverse effects and support Turkish businesses. In the banking sector, some notable developments included:
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 as a result of the careful supervision conducted by the banking regulator. The BRSA implemented strict capital requirements and controls on the exposure of Turkish banks to foreign exchange in a bid to establish a certain level of control over potential risks. The management bodies of Turkish companies have also contributed by providing their experience on navigating the volatile Turkish economy. However, Turkish companies tend to be conservative; 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.
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.
Statistics from June 2020 show that 97.1% of the total credits extended to Turkish borrowers were made available by banks. The total credits extended by financial leasing companies, factoring companies, and financing companies decreased to 1.5%, 0.7% and 0.6%, respectively.
Banks remain dominant in the banking sector, even though factoring, financial leasing, financing companies and funds are strengthening their position and alternatives to banks are emerging. Further, the Turkish financial market is experiencing enhanced interest from foreign funds.
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 June 2020, the Turkish banking sector had TRY3.25 trillion of outstanding loans and the NPL ratio is 4.43%.
As a result of COVID-19 related incentives and measures, Turkish banks are keen to offer new loan products with interest rate advantages to borrowers. Further, in a bid to support SMEs and other Turkish businesses, the CGF guarantee scheme was expanded with further support from the Ministry of Treasury and Finance. Accordingly, the amount available under the CGF programme has been increased from TRY25 billion to TRY50 billion and the total value of guarantees that may be given by the CGF was increased from TRY250 billion to TRY500 billion. In addition, for balance sheet purposes, BRSA allows Turkish banks to treat their CGF covered exposures the same with their exposures to the Turkish State (ie, with 0% risk weight).
The economic impacts of COVID-19 made 2020 a very unpredictable in every aspect. However, the Turkish government has dynamically introduced various measures to boost credit growth and to support SMEs and businesses against the outcomes of COVID-19 and volatility of the local currency.
In parallel, in order to support the country's ambitious targets involving projects with high capital costs, project financing funds (PF Fund) were introduced in Turkish capital markets to provide long-term financing to projects in sectors such as infrastructure, public services, energy, industrials or technology. Regulators have been publishing drafts of the secondary legislation, to be finalised by the end of 2020.
With PF Funds, Turkish sponsors could explore alternative financing techniques with more suitable terms. PF Funds are also expected be used for refinancing, securitisation or the repackaging of existing conventional bank loans in the Turkish project finance market.
A company organised in Turkey may obtain loans from:
Lending and credit products business within Turkey can only be provided by banks licensed by the BRSA. However, Turkish foreign exchange regulations, in particular the Decree No 32 Regarding the Protection of the Value of Turkish Currency (published in the Official Gazette dated 11 August 1989 and numbered 20249, "Decree No 32") and the Capital Movements Circular issued by the Central Bank on 2 May 2018 (the "Capital Movements Circular") provided that a Turkish resident may obtain loans (other than FX-indexed loans; revolving loans; consumer loans or mortgage loans) from banks and financial institutions incorporated outside Turkey, provided that the cross-border loans borrowed by Turkish residents are disbursed through local intermediary banks. Similarly, repayment and payment of interest must be made through local intermediary banks.
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, it is advisable for foreign banks and financial institutions to conduct their activities on an "unsolicited" and "reverse inquiry" basis.
Pursuant to the Turkish conflict of laws rules, security documents creating a security interest over the assets that are located in Turkey should be governed by Turkish law. Therefore, security agreements concerning a mortgage over a real estate property or a pledge over a movable asset located in Turkey, or Turkish securities custodied and/or listed in Turkey, shall be governed by Turkish law and cannot be governed by the laws of another jurisdiction. Also, security documents that are subject to formal certification or registration requirements and/or executed between Turkish parties have to be executed in Turkish.
As per the Decree No 32, Turkish residents (excluding banks incorporated in Turkey) are required to notify the Ministry of Treasury and Finance regarding the guarantees and sureties issued in favour of non-residents within 30 days of the date of issuance.
However, there are no generally applicable restrictions on the granting of security or guarantees to foreign lenders.
Decree No 32 and the Capital Movements Circular provide that Turkish corporates that do not generate FX revenues cannot utilise FX loans unless such Turkish residents benefit from the exemptions exhaustively listed therein. 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 fields, such as:
In addition, Turkish intermediary banks have responsibilities in monitoring the use and repayment of offshore FX loans by Turkish residents. In respect of FX loans extended by offshore entities that, Turkish intermediary banks through which the proceeds of the loans flow are responsible for monitoring compliance with the restrictions under the Turkish foreign exchange regulations (eg, monitoring of credit balance).
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 either.
In general, although such concepts have not been sufficiently tested before Turkish courts, it is possible to have a security agent or a security trustee holding the security package on behalf of a pool of lenders and syndicated lending transactions usually involve a security agent. However, the security agent acting may encounter some practical problems when enforcing certain security interests given that Turkish courts and enforcement offices may not be sufficiently familiar with these concepts.
The concept of trust is not regulated under Turkish law, however, pursuant to International Private and Procedure Law (Law No 5718) (the "Private International Law"), the capacity of legal persons to perform legal acts or to have legal rights is subject to the law of the place of their headquarters. Therefore, a company (or a non-Turkish entity) authorised to act as trustee under the laws of the place of its headquarters may be recognised under Turkish law to have the legal capacity to act as a trustee.
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. This 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 typically require the consent of the underlying debtor, but the underlying loan agreement may contain contractual provisions that could trigger notification or consent requirements. 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. 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 5 Guarantees and Security).
Funded 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 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 may also benefit from the related security pro rata to its participation under the loan. In the case of guarantees, the loan agreement usually provides for them to be granted in favour of "finance parties", which usually includes any transferees/assignees who become a lender under the finance documents.
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 extinguishment of original debt, and will need 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-à-vis the grantor pro rata to 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.
In principal, 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.
Exceptions are the rate of tax applicable to payments which have been reduced to zero interest with respect to Article 30 of the Corporation Tax Law, in line with Decree No 2009/14593 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 located in Turkey or 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 loan 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 offshore Turkish lira loans with an average maturity of at least one year, the RUSF amount will be 0%. Cross-border FX loans with an average maturity of less than three years may be subject to RUSF between the rates of 0.5%-3% over the principal amount.
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, any provision entitling a security holder to become the owner of a secured asset upon the occurrence of default is null and void under Turkish law (the lex commissaria prohibition). However, the security holder can sell the security (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, 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 (CRA), Article 47 of the Capital Market Law (CML) (Law No 6362) allows the pledgee to automatically acquire the ownership of such listed shares on an enforcement event.
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 may secure:
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 secures an FX loan to be obtained from a credit institution.
Mortgages are registered in first and continuing degrees and 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 an express provision to this effect.
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. See 5.2 Floating Charges or Other Universal or Similar Security Interests.
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.
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 (amongst others) current or potential assets of a pledgor (or revenues thereof), receivables, IP rights, livestock, inventories, machineries or equipment under the Movable Pledge Law. In cases of a commercial enterprise and/or craftsmen enterprise, any and all kind of assets that are allocated to the activities of such enterprise will be deemed to be pledged as of the date of the establishment of the pledge.
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, court charges, security deposits, lawyers' fees and other charges or expenses may be relevant depending on the transaction.
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.
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.
A target cannot provide financing or security for the acquisition of its shares by a third party. Any such transaction will be null and void. 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. See 5.3 Downstream, Upstream and Cross-Stream Guarantees.
Pledge over Shares
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 pledgee 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 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; see 7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency 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:
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:
Pursuant to Article 24 of the Private International Law, the law governing contractual rights and obligations may be freely chosen by its parties, provided that there is a foreign element to the subject transactions and relationships and such choice of law is valid under such foreign law; unless to recognise and give effect to such law would be clearly against the public policy rules of Turkey. However, according to Article 21 of Private International Law in rem rights (such as ownership or security interests created under a pledge) on assets are subject to the laws where such assets are located (lex loci situs).
A Turkish court would not uphold the choice of law provision if to recognise and give effect to such law would be clearly against the public policy rules of Turkey. In addition, a Turkish court may stay proceedings if concurrent proceedings are being brought in other jurisdictions.
Further, despite the relevant provisions of an agreement which state that the choice of a certain court is made only for the benefit of a single party, a Turkish court may decide that other parties to the relevant agreement may also benefit from such provisions. Accordingly, it would generally be advisable to avoid using one-sided jurisdiction clauses, mainly for enforcement purposes.
Under Turkish law, a company would not enjoy any immunity from any suits or attachment in Turkey provided that its assets that are:
Accordingly, a customary waiver of immunity clause in the facility agreement could effective and enforceable under Turkish law subject to the any public immunities or statutory limitations mentioned above.
Under Private International Law, 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.
There may be limitations arising from bankruptcy, insolvency, liquidation, and similar laws generally affecting the rights of creditors. For instance, if a Turkish court grants a temporary or definite period of standstill or moratorium under concordat in respect of a party in Turkey, the non-defaulting party may not be able to take enforcement action during such period of standstill or moratorium under concordat. Further, contractual provisions entitling any party, amongst others, to call an event of default or terminating an agreement or exercising similar remedies due to concordat may not be enforceable on or after the Turkish debtor files for concordat if it is deemed by the Turkish courts that the relevant agreements are material for the continuity of the operations of the relevant Turkish debtor.
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 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 concordat (konkordato) process in favour of borrowers and imposed certain limitations and restrictions on the actions that the creditors. The Turkish concordat 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 concordat legislation for the creditors is the temporary and definite standstill periods granted to the borrower upon filing for concordat, which can be for a maximum period of 23 months, during which no enforcement proceedings can be initiated against the borrowers (save for secured creditors) and all existing enforcement proceedings are suspended (save for the enforcement proceedings in respect of security).
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. However, 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).
See 7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency.
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 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.
Most recently in February 2020, certain amendments were made to the CML which allow investment institutions to establish special purpose project financing funds ("PF Funds") to provide long-term financing to projects that entail high capital costs in sectors such as infrastructure, public services, energy, industrials or high tech. Introduction of the PF Funds mainly intend to enable Turkish sponsors to explore alternative financing techniques with more suitable terms. These novel structures are also expected be used for refinancing, securitisation or repackaging of the existing conventional bank loans in the Turkish project finance market.
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 main 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.
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 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, some intergovernmental energy projects contained specific rights to have permissions granted within certain timelines and the relevant state authority (eg, State Pipeline Corporation for a pipeline project) was given responsibility for co-ordinating and arranging 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 forestry permits; 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 Urbanisation).
With respect to project sectors defined above, the main regulatory bodies are as follows:
From a legal perspective, lenders would usually assess (amongst other matters) whether the project company:
Significant incentives in Turkey generally concern research and development activities, strategic national projects, technology and development zones, foreign investment and free trade zones (which may include exemption from most taxes subject to certain conditions, including VAT, customs duty, special consumption tax, income tax and corporate tax). In the context of lending transactions, eligible foreign financial institutions benefit from a number of tax exemptions (such as exemptions from WHT or VAT). There may also be international treaties between the country of residence of the offshore party and Turkey, which may provide for additional incentives of benefits for certain types of transactions. In the context of lending transactions, there is no express difference of treatment amongst foreign lenders which have been incorporated within or outside of the EU.
The Turkish project finance sector mostly revolves around special purpose vehicles (SPVs) established as the vehicles for undertaking the project and procuring 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.
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 sovereign support (eg, debt assumption). While traditional corporate financing is heavily dependent on the financial strength of the borrower, project companies in PPPs are backed by a sovereign state. Also, it may be advisable to seek coverage under a 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 is 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 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.
Impacts of COVID-19 and the Balance of Payments Crisis
Turkey's economy has become increasingly susceptible to risks associated with its external vulnerabilities arising from a significant downfall in its hard currency reserves and, Turkish lira has depreciated rapidly and recently hit the multi-decade low despite of the efforts of the Central Bank of Turkey to preserve the value of Turkish lira in 2020. Although Turkey has been implementing various measures to increase its gross reserves, this is considered to be a relatively low buffer taking into account the upcoming external debt payments. Moody's estimates that the country's external vulnerability indicator, which sets out whether the FX reserves are sufficient to cover for the external debts and non-resident deposits, will increase up to 409% in 2021, which essentially reflects the country's high level of FX exposure.
Further, Turkey has experienced serious economic shocks as a result of COVID-19, which contributed the weakening of the local currency. Historically, the Turkish tourism industry has been one of the most responsive sectors to competitive exchange rates given the periods of low exchange rates are usually the same periods with the highest level of international tourist arrivals. This was also the case back in 2019 where a strong tourism industry significantly contributed to tackling the account-deficit problems of Turkey. However, due to COVID-19's negative impacts on international travel, tourism is not expected to have the positive impact on the recovery enjoyed in 2019.
Despite a plethora of risks, the first half of 2020 saw a number of interesting trends develop in the Turkish banking and finance markets, including the increased appetite of Turkish corporates for exploring alternative funding methods such as structured bond issuances. Further, in line with the global trends that emerged as a result of COVID-19, there is also a significant increase in restructuring and refinancing deals concerning Turkish corporates' existing exposure under conventional loan facilities.
Exploring liability management techniques
Due to the additional pressure placed on the already-strained financial markets by the COVID-19 pandemic, Turkish corporates are now even more aggressively seeking ways to reduce their capital-raising costs.
As Turkey’s bond market is dominated by local issuers, unlike some of its emerging market peers, offshore investors have grown increasingly concerned about the hard currency debt of Turkish issuers. Despite recent emergency interest rate hikes to stem the freefall of the Turkish lira, local bond markets still offer a relatively low premium against the backdrop of rising inflation. The prices to hedge with credit default swaps (CDS – an instrument to hedge the risk of default) against a default by a Turkish issuer, continue to see record highs according to recent market data, which invites most market players to explore liability management methods to various extents.
Since early 2017, the Capital Markets Board of Turkey (CMB) offers an investor-friendly environment by allowing a wide range of liability management techniques, as well as other cost-efficient tools for corporates to mitigate their balance sheet risks and tap more liquidity into their investments. Effective implementation of these liability management techniques may help Turkish corporates to get the edge on achieving deleveraging efficiency, avoiding stressed covenant testing and deferring their near-term maturities.
Ambitious projects in the pipeline
The Turkish government is pursuing an ambitious PPP programme to undertake a series of mega-scale infrastructure projects across a variety of sectors, including transportation, healthcare and energy, in a bid to cater the needs of its burgeoning economy. Located at the crossroads of East and West, Turkey offers lucrative investment opportunities in its infrastructure sector.
Despite ongoing global economic uncertainties, Turkey aims to offer sovereign support for a number of mega infrastructure projects (such as the Canal Istanbul Project which aims to create an artificial canal for international maritime traffic in the European side of Istanbul) within the framework of its goals for 2023, marking the centennial of the Republic of Turkey. In tandem with this vision, Turkey's infrastructure sector could benefit from a boost from the introduction of new PPP models with more bankable terms which could potentially help to overcome certain structural issues in the Turkish infrastructure sector.
Diversification of project finance solutions
Certain amendments were introduced to the Capital Market Law of Turkey (Law No 6362) (the "Capital Market Law") on 20 February 2020, which, amongst other things, allow licensed investment institutions to establish special purpose project financing funds (“PF Funds”) in order to provide long-term financing to projects that entail high capital costs in sectors such as infrastructure, public services, energy, industrials or high tech. Other important novelties brought by the amendment include significant improvements to the legal framework applicable to project bond issuances in Turkish capital markets and Turkish securitisation and debt funds, such as the introduction of a statutory regime concerning security agents acting in these sorts of transactions, which are expected to enable a wider investor base to provide financing directly to Turkish projects.
With its impressive track record and strong sovereign support, Turkish infrastructure and PPP projects continue to be an attractive opportunity for all types of investors across the globe. Currently, a substantial portion of infrastructure financing in Turkey is procured from domestic and international banks, including multilateral development banks. Against the backdrop of the credit crunch, local banks are less willing to provide financing for public concessions and PPP projects at low costs, increasing the country’s dependency on offshore liquidity and financing sources. These novelties introduced with the February 2020 amendment could be used in order to lessen Turkey’s dependence on external financing and enable project developers to reach a wider investor base. In addition, PF Funds are also expected be used for refinancing, securitisation or repackaging of the existing conventional bank loans in the Turkish PPP market.
Market players may need to adapt to a different set of rules and standards in parallel with the implementation of the February 2020 amendments. While the issuers would have a wider range of options to fund their projects through multi-sourced financing structures, they would also require familiarisation with increased financial reporting, rating and the mandatory public disclosure requirements to be introduced under secondary legislation by the CMB in the historically bank loan dominated Turkish project financing market that is used to operating on a confidential basis. Furthermore, the level of sovereign support for these new financing structures would also play a vital role in the early stage development of the local markets. In particular, it would be interesting to see whether the Turkish government will extend the scope of sovereign support that is currently mostly available to external financing resources (such as debt assumption by the Turkish Treasury) or establish a centralised fund in a bid to achieve off-balance sheet financing of capital project costs (such as guaranteed revenues) in relation to the upcoming projects.
Urgent need for debt restructuring
The sharp weakening of the Turkish currency caused a build-up of the debt and borrowing costs of a notable number of Turkish corporates. Ultimately, Turkish corporates that are highly leveraged or having high levels of foreign currency denominated debts started to focus on the restructuring and refinancing of their existing debt.
From 2018, in a bid to support Turkish companies facing financial difficulties failing to service their debts to the banks and financial institutions, the BRSA has published the Restructuring Regulation, initially published 15 August 2018 and amended from time to time. The Restructuring Regulation mainly introduces the scope and general terms and conditions of the new restructuring scheme under Turkish law.
Under the Restructuring Regulation, debts of eligible borrowers may be restructured pursuant to a framework agreement prepared by the BAT, which forms an intercreditor platform that sets out the general scope, terms and conditions of the restructuring process (including the eligibility criteria for the borrowers, the rights and obligations of the parties participating in the restructuring, etc). In addition, a borrower-specific restructuring agreement to set out the terms applicable to each restructuring is contemplated to be executed between the lenders and the relevant borrower whose application for restructuring is accepted by the lenders in line with the terms of the framework agreement. This legislative framework also encourages Turkish banks to use this platform by way of granting certain tax and accounting benefits in respect of their loans restructured based on this model.
Overall, the first half of 2020 the Turkish loan market saw a trend of diversification of funding methods, increased appetite for liability management techniques and new debt restructuring tools – all aimed to bring a certain level of relief to Turkish corporates impacted by the uncertainty in the local and global markets. Notwithstanding this however, the increased convergence of loan and bond products has increased the overall complexity of regulations and documents. Timescales for deals have also been increasingly compressed, with debt deals being brought to market and sold in shorter timeframes. In reality, this means that investors have tended to focus on a handful of key points, with borrowers being prepared to accommodate a majority (but not all) of the key concerns of funders in the interests of time. With the expected deepening of the local debt investor base, however, the convergence of terms looks likely to continue, and with it the complexity of documentation.