Turkey has gone through a number of shocks over the years, 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 its 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.
However, being one of the few economies in the world to avoid the effect of the pandemic on economic growth, the Turkish economy grew significantly by an impressive 11.4% in 2021 due to measures adopted to support businesses throughout the pandemic. The growth trend from 2021 remains strong in 2022 as quarterly GDP growth has been recorded as 7.4% and 7.3% in Q1 and Q2, respectively, mainly driven by the sharp increase in export revenues.
As a result of fluctuations in the financial markets due to the COVID-19 outbreak, Turkish authorities have taken several measures to contain the adverse effects and support Turkish businesses. In the banking sector, 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 Banking Regulation and Supervision Agency (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, avoiding anything 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 a 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, enabling investors to benefit from the current potential of higher spreads without necessarily having to bear higher credit risk.
Statistics from June 2022 show that 97% of the total amount of credit extended to Turkish borrowers was made available by banks. Whilst 3% of the total credit extended to Turkish borrowers was made available by financial leasing companies, factoring companies and financing companies in the market with 1% each.
Banks remain dominant in the credit 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.
In line with the measures adopted by the BRSA for smoothening the loan classification rules and the increase in the amount of outstanding loans, the Turkish banking sector saw a decrease in the non-performing loan NPL ratio, which should reduce the tendency in the Turkish banking sector for debt restructurings and sale of NPLs to asset management companies. As of July 2022, the Turkish banking sector had TRY6.511 trillion of outstanding loans and the NPL ratio was 2.42%.
The Impact of COVID-19 Measures
As a result of COVID-19 incentives and measures, 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. In 2022, the amount available was increased to TRY100 billion and the total value of guarantees that might be given was increased to TRY1 trillion.
In addition, for balance sheet purposes, the BRSA allows Turkish banks to treat their CGF covered exposures the same as their exposures to the Turkish State (ie, with 0% risk weight).
Statistics from September 2022 show that the CGF covers TRY690.7 million of the credit extended by Turkish banks and financial institutions. In order to build a more prudent and sustainable lending framework, the BRSA introduced a requirement for Turkish companies with a total exposure equal to or exceeding TRY500 million to obtain a credit rating for the purpose of borrowing further loans, effective as of 31 December 2021.
On 24 June 2022, the BRSA announced that it has detected that some companies have been withdrawing Turkish lira commercial cash loans and buying FX with the loan proceeds instead of using the Turkish lira loans for their intended purposes. As a result, the BRSA has decided to adopt certain measures to prevent this trend by introducing requirements to be fulfilled by companies to utilise new Turkish lira cash commercial loans. Mainly, the measures apply to companies (other than a banks or financial institutions) which satisfy each of the following conditions:
Foreign subsidiaries and affiliates of the relevant company will not be included in the calculation of threshold amount. These restrictions will also apply to credit extended by factoring and leasing companies. The relevant company may be exempted from this requirement if it is not allowed to borrow foreign currency loans and has a foreign currency net position deficit within three consecutive months following the date of the credit application, as certified by its financial statement prepared by an independent audit firm or a certified public accountant.
On 20 August 2022, the Central Bank of the Republic of Turkey announced that
Although the adverse effects of COVID-19 and the accompanying global macroeconomic uncertainties linger, Turkey has seen some exciting developments in the last year, including the following.
Environmental, social, corporate and governance (ESG) issues are on the agenda of every sustainability-seeking and socially concerned government.
Over the years, Turkey has undertaken a remarkable sustainability strategy, focusing particularly on renewables in accordance with the ever-increasing energy demand of the country. Since early 2000s, Turkey has invested approximately USD66 billion in renewable energy projects and the renewable energy capacity in the country has enjoyed a tremendous increase, reaching 54,000 MW. Further, Turkey is expected to increase its installed renewable energy capacity by approximately 50% by 2026.
In order to introduce ESG in the agendas of listed companies in Turkey, the CMB published the Sustainability Principles Compliance Framework which contains the ESG principles that would apply to listed companies in Turkey as of October 2020. Although implementation of these principles remains voluntary, companies will be required to dedicate a section on the CMB’s Sustainability Framework in their annual reports, and report on their compliance status on a “comply or explain” basis.
In February 2022, the CMB has introduced Guidelines on Green Debt Instruments and Green Sukuks, setting out the principles and procedures governing the new sustainable debt instrument and green sukuk issuance by the Turkish issuers in the offshore markets.
In May 2022, the Presidency of the Republic of Turkey, Finance Office published a working paper in relation to green sukuk issuances (see 1.6 Legal, Tax, Regulatory or Other Developments), setting out the legislative framework with respect to the issuance of green sukuk instruments and the actions required to align the green sukuk issuances with the Participation Finance Strategy Paper which is expected to be published during the course of 2022.
In June 2021, Turkey revealed its Foreign Direct Investment Strategy for the years 2021–23, setting out the intention to align Turkey’s business environment and regulatory framework with the European Green Deal and the UN’s Sustainable Development Goals. In July 2021, the Green Deal Action Plan was published by the Ministry of Trade. The main goals and principles of the Green Deal Action Plan are:
The Medium-Term Programme for the years 2023–25 was published by the Presidency of the Republic of Turkey on 4 September 2022, which has further emphasised Turkey’s sustainability efforts, particularly on:
In terms of sustainable finance, the most common forms of sustainable funding in Turkey have been green credit lines and loans made available by international financial institutions (IFIs) and foreign lenders. In parallel with global trends, Turkey has further increased its focus on sustainable finance by setting the standards with the Guidelines on Green Debt Instruments, published on 24 February 2022.
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”) provide 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.
A foreign financial institution may act as a lender for credit services without triggering licensing requirements. Although Turkish authorities have historically taken 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 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 for monitoring the use and repayment of offshore FX loans by Turkish residents. In respect of FX loans extended by offshore entities, the 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 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 the 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 prior rights and obligations of the prior 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 this communiqué, the relevant participation shall not be considered as a risk-mitigating factor to be 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, 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) 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 a 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 loans obtained from European Bank of Restructuring and Development (EBRD) and International Finance Corporation (IFC) by Turkish residents other than banks and financing companies and 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.
Pursuant to the Turkish Commercial Code (Law No 6102) (the TCC), contractual interest and default interest may be freely determined in commercial affairs.
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 commissoria prohibition). However, the security holder can sell the security (if such sale is permitted) 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, 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-à-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, under the general provisions of the Civil Code, a 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, especially in commercial transactions, the Movable Pledge Law – which does not require the transfer of physical possession – 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:
The pledge will be established with the registration of the same to the Pledged Movables Registry.
A pledge can be established on (amongst other things) current or potential assets of a pledgor (or revenues thereof), receivables, IP rights, livestock, inventories, machineries or equipment under the Movable Pledge Law. In the case of a commercial enterprise and/or a 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 Turkish lira 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 or appointment of a majority of the members of the board of directors) 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 included 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 in which the loss is suffered, 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, other than rules relating to corporate benefit under the TCC. 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, etc) 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 under Turkish law, 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. 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:
Further, in November 2021, a new method for sale of pledged assets was introduced, which will allow the debtor to request the sale of the pledged assets within seven days following the receipt of the valuation report. Accordingly, if the debtor chooses to exercise this new method, the foreclosure may be made by way of private sale within debtor 15 days following the receipt of the consent of the debtor.
Pursuant to Article 24 of the Private International Law, the law governing contractual rights and obligations may be freely chosen by the contracting 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 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 is advisable to avoid using one-sided jurisdiction clauses, mainly for enforcement purposes.
Under Turkish law, a company would not generally enjoy any immunity from any suits or attachment in Turkey. That being said, a company’s assets may be immune from attachment in Turkey, if its assets are:
Accordingly, a customary waiver of immunity clause in the facility agreement could be effective and enforceable under Turkish law subject to the any public immunities or statutory limitations mentioned above.
Under the 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.
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 a 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 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 court declares a debtor bankrupt, all assets owned by the debtor, and all assets acquired or received subsequently, will form the bankruptcy estate (iflas masası). Similarly, any assets over which a security interest (eg, pledge) was created will 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, 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 certain creditors, ie, those 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. 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 claw-back 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.
In February 2020, certain amendments were made to the CML, entering into force in in July 2021, allowing 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 to be used for refinancing, securitisation or repackaging of the existing conventional bank loans in the Turkish project finance market.
Another important development was an amendment introduced to the Law on the Realisation of Certain Investments and Services within the Framework of Build-Operate-Transfer Model (Law No 3996) on 11 March 2021. As per the amendment, the Ministry of Transportation is now able to become an additional party to debt assumption agreements to be signed by public institutions affiliated with the Ministry of Transportation that have a special budget, such as the General Directorate of Highways, in order to ensure that the relevant public institution is able to satisfy its obligations vis-à-vis project finance lenders under the debt assumption agreement. The new system seeks to provide an investor-friendly environment for cross-border financings in respect of BOT projects.
In June 2022, an amendment introduced to the Law on the Realisation of Certain Investments and Services within the Framework of Build-Operate-Transfer Model (Law No 3996). As per the amendment, a new PPP scheme for waste management projects has been introduced, enabling the implementation of the BOT model by the local administrations (ie, municipalities and special provincial administrations) and the Turkish Environmental Agency on waste management projects, including recycling, purification, waste collection and transportation, waste processing, recycling and disposal facilities. Accordingly, the amendment provides that:
Turkey has been pursuing an ambitious PPP and privatisation programme, and has successfully carried out impressive project-financing deals with increasing investment volumes since the early 2000s. The country continues to be a leader in the region in landmark transportation and infrastructure projects, with particularly large deals in the motorways and airports sectors.
Infrastructure projects are the most pre-eminent endeavours, but Turkey has a vast PPP portfolio. The PPP model is heavily encouraged and 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, for the Akkuyu PPP Project, the project company was required to be the successful participant in a tender process 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, the 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:
There is no specific government authority established only in respect of project finance transactions. That said, certain government authorities become relevant as the regulator of the respective sector in which 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 withholding tax 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 government 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 risk 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.
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COVID-19 Recovery: Consistent GDP Growth
In recent years, the achievement of high growth rather than the correction of macroeconomic imbalances has remained at the top of Turkey’s economic agenda. As a result, Turkey was amongst the few economies across the globe to avoid the adverse effects of COVID-19 on growth, and so outperformed its peers with a rapid recovery and grew its economy by 11.4% in 2021, 7.5% in Q1 of 2022 and 7.6% in Q2 of 2022, with the upward momentum supported by the reopening of international borders, recovering tourism revenues, effective measures adopted to support businesses through the pandemic. As of August 2022, Turkey’s export revenues reached an all-time high of USD21.3 billion, as a result of the consistent increase in its export performance following the pandemic.
Turkey’s powerful performance in economic growth has placed the country on the radar of various types of international debt and equity investors. According to the Investment Office of the Presidency of the Republic of Turkey, despite the severe effects of the pandemic on the development of cross-border trade, Turkey grew its market share in Europe from 3% in 2019 to 3.1% in 2020, maintaining its ranking as the ninth most popular FDI destination of Europe in 2020, with overall projects numbering 160. Further, in 2021, Turkey was ranked as the fifth most popular FDI destination in Europe with a significantly increased total number of 264 projects.
The Turkish government responded swiftly to address the COVID-19 pandemic in 2020, with economic support measures having a remarkable effect on the country’s budget. In the first half of 2021, Turkey’s central government budget has demonstrated a stronger performance in line with the cyclical recovery and a high rate of nominal GDP growth, and the Turkish government met its reduced 2021 central fiscal deficit target of 3.5% or less of GDP with an impressive 2.8%. In parallel, navigating through a variety of macroeconomic, global, local and regulatory challenges, the Turkish banking industry has proven to be resilient in the face of the financial stress brought by the pandemic and global macroeconomic uncertainties, holding a sufficient level of available hard currency liquidity to meet its short-term foreign currency debt while at the same time fuelling the country’s economic growth.
Building the Sustainable Finance Framework
Amid the growing awareness amongst governments and corporates across the globe of environmental, social and governance (ESG) initiatives, sustainable finance has gradually gained ground and is now at the forefront of Turkish financial markets. Accordingly, Turkey has been an early adopter of global sustainability efforts and has undertaken a notable sustainability strategy, focusing particularly on renewables in a bid to cater to the needs of its burgeoning economy.
Significant milestones have been passed during recent years in Turkey’s ESG and sustainable finance market, both on sustainable funding and policy fronts, which, in turn, have paved the way for the widespread use of sustainable funding and sustainability-linked offerings by Turkish issuers both within and outside Turkey. On the legislative front, in 2020, the “Sustainability Principles Compliance Framework” was published by the Capital Markets Board of Turkey (CMB) which contains “voluntary” ESG principles that would apply to listed companies. Although the implementation of the principles set out in the Sustainability Framework remains voluntary, listed companies are required to dedicate in their annual reports a section on the CMB’s Sustainability Framework, and report to investors on their level of compliance.
In July 2021, the “Green Deal Action Plan” was published by the Ministry of Trade for the purposes of setting out the action items needed to align Turkey’s business environment and regulatory framework with the European Green Deal and the UN’s Sustainable Development Goals, in accordance with Turkey’s Foreign Direct Investment Strategy for the years 2021–23, followed by Turkey’s ratification of the Paris Agreement in November 2021.
In parallel with this momentum, 2021 saw a steady increase in popularity of sustainable finance in Turkey, including many successful “first of their kind” transactions out of Turkey, such as the world’s first sustainable tier 2 sukuk issuance, the first sustainability-linked repo transaction in the Central and Eastern Europe, Middle East and Africa (CEEMEA) region, and Turkey’s first ever corporate green bond issuance in the international markets.
In February 2022, the CMB introduced its Guidelines on Green Debt Instruments and Green Sukuks, setting out the principles and procedures governing the new sustainable debt instrument and green sukuk issuance by Turkish issuers in offshore markets.
Amendments to the BOT Law: A New PPP Scheme
In June 2022, an amendment was introduced to the Law on the Realisation of Certain Investments and Services within the Framework of the Build-Operate-Transfer Model (Law No 3996). As per the amendment, a new PPP scheme for waste management projects has been introduced, enabling the implementation of the build-operate-transfer (BOT) model by local administrations (ie, municipalities and special provincial administrations) and the Turkish Environmental Agency on waste management projects, including recycling, purification, waste collection and transportation, waste processing, recycling and disposal facilities. Accordingly, the amendment provides, among other things, that:
Ambitious Projects in the Pipeline
Turkey has been pursuing an ambitious public-private partnership (PPP) and privatisation programme, and since the early 2000s has successfully carried out impressive project-financing deals with increasing investment volumes. The country continues to be a leader in the region with landmark transportation and infrastructure projects, with particularly large deal volumes in the motorways and airports sectors.
Despite ongoing global economic uncertainties brought about by the impacts of the war in Ukraine and the volatility of global financial markets, the Turkish PPP market remained very active in terms of announcement of greenfield projects as well as share transfer and financing/refinancing transactions relating to existing projects.
The Medium-Term Programme for the years 2023–25 was published by the Presidency of the Republic of Turkey on 4 September 2022, which provides that the irrigation, waste management, motorway and railway sectors will be prioritised within the framework of Turkey’s development goals. Turkey aims to continue to offer sovereign support for a number of mega infrastructure projects within the framework of its goals for 2023, marking the centenary of the Republic of Turkey. In tandem with this vision, the introduction of amendments to the Law on the Realisation of Certain Investments and Services within the Framework of the Build-Operate-Transfer Model (Law No 3996) is expected to scale up the sovereign support available for Turkish BOT projects, by allowing the Ministry of Transport and Infrastructure to become an additional support provider in respect of certain eligible projects.
In addition, the introduction of amendments to the Law on the Realisation of Certain Investments and Services within the Framework of the Build-Operate-Transfer Model (Law No 3996) will also scale up the sovereign support available for BOT projects implemented by local administrations in respect of the waste management PPP projects carried out through the BOT model.
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. Amongst other things, this allows 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 and hi-tech. Other important innovations introduced 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 types 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 cost, increasing the country’s dependency on offshore liquidity and financing sources. Accordingly, the long-awaited secondary legislation recently entered into force on 17 July 2021, providing the much-needed legal framework in a bid to lessen Turkey’s dependence on external financing and enable project developers to reach a wider local investor base. In addition, PF Funds could also be used for refinancing, securitisation or repackaging of existing conventional bank loans in the Turkish PPP market.
Islamic Finance in the Spotlight
In the past few years, leveraging its cultural and historical background and geopolitical position, Turkey has scaled up its efforts to strengthen its Islamic finance capabilities with a view to becoming a regional and global hub for Islamic finance and bolstering economic ties with Middle Eastern financial centres.
The Turkish government is pursuing an ambitious policy to promote the use of Islamic finance instruments and increase the share of Islamic banking to 15% by 2023, aiming to tap into the opportunities offered by these new relatively less tested means of finance so as to provide alternative financing solutions for Turkish corporates and also to bridge the project-financing gap in Turkey.
With the introduction of a broader range of legislatively endorsed Islamic finance instruments, investors and issuers in Turkey are displaying an ever-increasing appetite for Islamic finance instruments such as sukuk as an alternative to conventional bonds. According to the IFSB Stability Report 2021, Turkey has been ranked amongst the top five jurisdictions in the global sukuk market, holding an 8.7% market share of global sukuk issuances, which is a fine achievement considering Turkey’s 3.0% share of global Islamic banking assets.
Further, in February 2022, Turkey realised its largest sukuk issuance to date with a size of USD3 billion, attracting substantial demand from both regional and international investors.
According to the New Economic Programme for the years 2021–23, the Presidency of the Republic of Turkey announced that a new strategic roadmap for Islamic finance is being prepared, which will introduce new concepts to the Turkish Islamic banking scene, such as maqasid Shariah, value proposals, risk-sharing and human-centric finance. In addition, the promotion and integration of sustainable finance principles within the Islamic finance framework has gained an ever-greater role in Turkey’s political agenda.
In May 2022, the Presidency of the Republic of Turkey, Finance Office published a working paper in relation to the green sukuk issuances, setting out the legislative framework with respect to the issuance of green sukuk instruments and the actions required to align the green sukuk issuances with the Participation Finance Strategy Paper which is expected to be published during the course 2022.
Overall, in the first half of 2022, Turkish financial markets saw a trend of diversification of funding methods, tightening of credit standards, increased appetite for liability management techniques and an ever-increasing momentum in sustainable finance efforts – all of which brought a certain level of relief to Turkish banks and corporates affected by the turmoil in the local and global markets brought about by the pandemic and global macroeconomic uncertainties.
Although economic vulnerabilities such as dependence on external financing, elevated inflation, the weakened Turkish lira, and high unemployment rates remain a point of concern, an average GDP growth of 5.3% is expected over the next three years supported by a significant growth in export and tourism revenues. In this regard, Fitch reported, on September 2022, that it expects Turkey’s GDP to grow by 5.2% in 2022, 2.8% higher than anticipated global economic growth. With a growing economy, resilient banking sector, diversified financial markets and an ambitious project development scene, Turkey is expected to remain on the radar of various equity and debt investors across the globe.
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