The Turkish economy's recovery of the past two years and the optimism in financial markets have helped Turkish banks regain their financial strength after the biggest ever financial crisis in Turkey's history in 2001. The recent acquisition by BNP Paribas of a 50% stake in Türkiye Ekonomi Bankas›, the Koç Holding-Uni Credito partnership's acquisition of the majority stake in Yapi Kredi Bankasi (one of the largest private banks in Turkey), and the sale of 89.34% of Disbank shares to Fortis Bank NV-SA have injected the necessary fuel for the financial sector to take off. It now appears that the financial sector's recovery will encourage Turkish banks to regain their role in the international securitization market.

The first securitization deal in Turkey was reported in 1993 and was backed by credit card receivables. Since then, other successful securitizations have taken place, mostly involving trade finance cash flows and remittances of Turkish workers living outside Turkey. The $43 million international securitization of receivables from equipment leasing in 2002 is also considered a landmark deal in emerging markets. In a first for Turkey, the Turkish receivables of onshore assets were securitized by Garanti Leasing, an affiliate of Garanti Bank, one of the country's largest financial institutions.

In November 2004 Isbank, another large financial institution, completed a $600 million securitization transaction based on diversified payment rights. Standard Chartered Bank managed the transaction. A special purpose vehicle in three tranches issued the notes with maturity dates ranging from seven to 10 years. This deal provided the longest maturity date offered by a Turkish bank to date.

Akbank successfully completed another securitization deal in December 2004. This deal comprised nine different tranches of notes issued by a Channel Islands special purpose vehicle over about five years. The last tranche was worth $150 million. It involved the securitization of cross-border remittances, and was backed by a guaranty issued by Akbank.

Due to the lack of specific legislation regulating securitization transactions, the general provisions of the Turkish Code of Obligations and the Execution and Bankruptcy Law determine the validity and enforceability of the securitization transactions under Turkish law. However, the provisions of these laws are in many instances not enough to exhaustively address the legal issues arising from the complicated structure of securitization transactions. Moreover, there are no Turkish court precedents on securitization transactions to provide assistance in application of these laws by way of analogy. So despite the increasing number and volume of securitization transactions in Turkey, there are still some grey areas under Turkish law regarding the assignment of assets (for example, lease receivables, remittances, other payment rights) that will be securitized by the special purpose vehicle. The true-sale nature of the transfer of assets from the originator to the issuer will depend on the responses given to four questions: (i) whether or not there is a valid assignment; (ii) when the title to the future receivables transferred is deemed to have passed to the issuer; (iii) the law governing the assignment agreement; and (iv) which transactions might be voidable upon the bankruptcy of the originator.

Valid assignment

Under Turkish law, the nature of the transfer of assets (receivables and other rights) to be securitized from the originator to the issuer is characterized as an assignment of receivables, which is defined as the transfer of a receivable arising from a debtor-creditor relationship through a written agreement without a requirement of the debtor's consent.

Unless otherwise agreed between the parties, an assignment of receivables also transfers all ancillary rights relating to the receivables such as collateral (that is, sureties, pledges) as well as all constructive rights, such as the right to send payment default notices, filing lawsuits for collection of overdue payments, and claiming default interest for late payments. Assignment of receivables is a disposing act (that is, one that passes title rather than creating only an obligation) and, as a precondition to a valid assignment, the assignor must first have the right to dispose of the receivable to be assigned. The agreement providing for assignment of receivables should be in writing and should clearly specify the receivables to be assigned. Although, under Turkish law, the debtor's consent is not required for the validity of assignment of receivables, a notification should be made to avoid the debtor's release from its obligations upon an erroneous payment to the assignor made in good faith.

To minimize the risk of non-payment by the originator in securitization transactions, the assignment agreement should be carefully drafted and include representations and warranties by the originator that guarantee the existence and the issuer's collection of the receivables.

Transferring title in future receivables

When evaluating a receivable's assignability, Turkish law will analyze the nature of the receivable. In principle, any kind of receivable can be assigned, provided that it does not arise from an illegal or immoral action. The receivable concerned could be an ordinary receivable, a future receivable, or a conditional receivable.

In securitization transactions involving future receivables, the distinction made by the Turkish law between actual receivables and future receivables plays a big role in determining a valid assignment. If a future receivable relates to an existing contract (for example, assigning specific rental payments to be collected under an existing lease contract), Turkish law recognizes its assignability. But if a future receivable is totally speculative and does not have any legal or contractual basis as of the date of the assignment, its assignability would be questionable.

However, even an assignment agreement for speculative future receivables might be upheld by a Turkish judge through the conversion principle, and might not be set aside. Turkish law will regard such an agreement as a promissory agreement for assigning the receivables if and when the receivable becomes due. A promissory agreement would not be considered a disposing transaction passing title, and could be affected by bankruptcy.

The bankruptcy remoteness of the structure to be established in the securitization of future receivables is a key issue, but it remains as one of the grey areas of Turkish law.

Governing law of the assignment agreement

Under the Turkish International Private and Procedural Law, parties to a private law contract that has a foreign element are free to choose any law as the governing law of their contract. So the governing law of the assignment agreement within the context of a securitization transaction could be Turkish law or any foreign law chosen by the parties. Unless explicitly stated in the contract, the substantial laws of the chosen forum are deemed to have been agreed between the parties. Nevertheless, application of the chosen law can sometimes be avoided under Turkish law in exceptional circumstances and for public policy reasons. According to Turkish court precedents, only the provisions that fundamentally affect public policy are considered mandatory provisions directly applicable to the contract regardless of the chosen law.

In this respect, the assignment agreement and all the ancillary agreements involved in a securitization transaction could be governed by the foreign substantive laws, as is preferred in most transactions. So the validity and enforceability of these agreements would need to be determined by the foreign governing laws and validity, and the assignment itself would be determined accordingly.

However, Turkish law would be taken into account in relation to the bankruptcy of an originator as a Turkish legal entity, while the assignment agreement would continue to be governed by the chosen foreign law. Although the transaction agreements and the rights and obligations of the parties to the agreements would continue to be governed by foreign laws, Turkish law, as the lex fori of the bankruptcy status, would govern whether or not the bankruptcy administration would be entitled to continue with the transaction agreements (that is, the assignment agreements) and whether or not the other contracting parties' rights and receivables can be included as bankruptcy receivables in the bankruptcy estate. Assignability of the receivables might also be evaluated by the bankruptcy administration under Turkish law.

Under Turkish law, assignability of receivables and the bankruptcy remoteness of an assignment are considered two distinct legal matters, and when evaluating the assignability of a receivable, Turkish law will analyze the nature of the receivable.

Voidable transactions upon bankruptcy

In general terms, Turkish law categorizes agreements into three groups in relation to the effects of bankruptcy: (i) agreements that automatically terminate upon bankruptcy of one of the parties (for example, agency contracts, revenue lease contracts, ordinary partnerships and current account contracts); (ii) agreements that become subject to special arrangements and regulations under the bankruptcy scheme (for example, ordinary lease contracts, employment contracts, publishing contracts, insurance contracts and guarantee contracts); and (iii) agreements that continue to be valid.

No specific regime is set out under Turkish law for the assignment of receivables contracts. Therefore, upon bankruptcy of the Turkish originator, the assignment agreement will fall under the third category and will continue to be valid and enforceable until the bankruptcy administration decides upon the fate of the assignment agreement.

In principle, any and all disposing transactions (such as an assignment of receivable or acquiring an asset) entered into by a legal or real person before its bankruptcy are duly recognized and given effect under Turkish law. Nevertheless, there are certain exceptions to this general principle if the disposing act is entered into during the person's insolvency or if the act is gratuitous or fraudulent or entered into in bad faith with the intention of causing damage to the creditors. Under the Turkish Execution and Bankruptcy Code (TEBC), such transactions entered into by a person or a corporate body that later become bankrupt may be cancelled by the creditors of the bankrupt party by filing a lawsuit. In addition, courts may, at their own discretion, decide to cancel a transaction by taking into account its particularities, within the general description of transactions subject to cancellation provided under the TEBC. Transactions that may be cancelled are grouped into three categories: gratuitous transactions, transactions performed during insolvency, and certain other transactions.

All gratuitous transactions and donations (including onerous transactions which are among next-of-kin and certain relatives, or where the bankrupt party has received a disproportionate amount in return for his consideration, and contracts where the bankrupt party constructed a life annuity, usufruct, or lifetime maintenance) will be cancelled if they were performed during the two years immediately preceding a declaration of bankruptcy by a competent court.

Furthermore, any pledges granted by the debtor to secure an existing debt (unless the debtor had previously undertaken to grant security interest), any payments made for an executory debt that has not yet matured, any payments in any form other than cash or customary payment methods, and any registrations with the Land Registry Offices to reinforce personal/contractual rights might also be subject to cancellation if they were performed within one year immediately preceding the date of attachment, insolvency or bankruptcy. In all of the these cases, the debtor must have been insolvent and the transaction must have taken place within that one year immediately preceding the date of attachment, insolvency or bankruptcy.

Transactions entered into by a debtor whose assets do not cover its liabilities will be deemed fraudulent and would also be subject to cancellation if the transactions were conducted to harm the creditors and if the other party to the transaction knew (or should have known) the debtor's financial status and its intent to harm its creditors.

The risk of cancellation of an assignment as a voidable transaction under Turkish law would be mitigated by a full financial and legal due diligence of the originator to determine that it is in a financially sound condition.

Overcoming legal uncertainty

The economic reforms and financial stability in Turkey have encouraged investors and expanded the Turkish securitization market. Certain grey areas still exist in the Turkish legal system due to the absence of a specific legislation regulating securitization transactions and court precedents, especially with respect to the assignment of future receivables that do not have any legal or contractual basis as of the date of the assignment, but it has a strong foundation to support novel securitization structures by accepting foreign laws as the governing law of the transaction agreements. In addition, government authorities have so far continued to fulfill the obligations under the securitization transactions of certain banks, which they had taken over and put into liquidation within the framework of the Banks Act. Although the Turkish legal system fails to address all the issues within the framework of a securitization transaction, in practice this does not affect the validity or the enforceability of securitization transactions. Moreover, particularly younger scholars seem to support the bankruptcy remoteness of the assignment of future receivables and new studies will help the Turkish courts to evaluate the securitization structures under Turkish law.