Running into debt
Paksoy delves into the increasingly busy Turkish debt markets to pick apart the operating environment for debt capital market issuances and securitisations
Turkish debt offerings
A substantial number of debt offerings in the form of eurobonds and Turkish lira (TRY) local bonds were made by Turkish banks and corporates in the last three years, respectively targeting international and Turkish investors.
This trend can be attributed to the rise of capital markets financing in general, mostly due to the involvement of international financial institutions (IFIs) as anchor investors, a broader lender base, longer maturities, less restrictive covenants and certain encouraging regulatory actions taken by the Turkish authorities to facilitate debt offerings. Since the beginning of May 2018, and subject to several exceptions, Turkish borrowers are also not allowed to use foreign currency bank loans. This restriction is not applicable to debt instruments and thus debt offerings will increasingly be considered as a financing tool.
Currently and historically, Turkish banks and corporates are not allowed to issue foreign currency-denominated debt instruments to local investors in Turkey. This is mostly to prevent dollarisation in the country. There was even a restriction on Turkish banks issuing foreign currency debt instruments to international investors outside Turkey until the Turkish Banking Authority issued a decision in May 2010 allowing banks to issue these instruments provided they sell them to individual and institutional investors residing outside Turkey.
Capital Markets Law 2012
At the end of 2012, the former Capital Markets Law was replaced by Capital Markets Law No. 6362 (CML), which harmonised Turkish capital markets legislation with European Union norms and with the provisions of new Turkish Commercial Code No. 6102.
To this end, the Capital Markets Board of Turkey (CMB) published its Communiqué on Debt Instruments No. VII-128.8 (the Communiqué) on June 7 2013. The CMB also adopted various amendments (published in the Official Gazette on February 18 2017 and March 8 2017) to establish a robust and well-functioning debt capital market that actively responds to the needs of market participants.
How to prepare a debt issuance
Debt offerings may be carried out abroad or in Turkey with or without a public offering with approval from the CMB. Sales without a public offering in Turkey may only be in the form of a private placement or through sales to qualified investors.
The issuance limit for listed companies is the value of shareholders' equity multiplied by five; the limit for non-listed companies is the shareholders' equity multiplied by three. The Communiqué introduced a detailed table of the financials that will be reviewed by the CMB on the application date.
Turkish banks are also subject to a specific issuance limit on TRY-denominated debt instruments set by the decision of the Turkish Banking Authority, dated September 30 2010. This limit is separate and different from the general issuance limits determined under the Communiqué.
A general assembly resolution is required to issue debt instruments. Alternatively, the board of directors may be authorised by a general assembly resolution or through a blanket provision in the articles of association of the issuer. The efficient way to issue debt and realise the latter is to amend the articles of association of the issuer and authorise its board of directors to issue the debt instruments prior to the CMB application. This is operationally a must for issuers considering multiple issuances.
CMB and CRA applications
The documents required for the CMB application are listed in the Communiqué on a non-exhaustive basis. The CMB is authorised to ask for further documents on a case-by-case basis. Documents to be filed include: an accountant's report proving that the share capital of the issuer is fully paid; an authorised body decision; the articles of association; and the signature circular of the issuer. Terms and conditions of the bonds in eurobond offerings are not required to be submitted by the issuer. Most importantly, if the issuer is operating in a specific sector, permission, approval or clearance from the relevant regulator is required under the Communiqué. This would, for example, be the banking authority in the case of an issuer operating in the banking sector.
Since February 18 2017, issuers of debt instruments to be issued outside Turkey are now required to apply to the CMB using an electronic application platform before each issuance and sale in order to obtain CMB approval in respect of each tranche of issuance within its issuance limits. However, until this electronic application platform has been established by the CMB, issuers will need to obtain written approval in respect of each tranche.
In addition, debt instruments issued outside Turkey are no longer required to be registered with the Central Registry Agency (CRA). However, the relevant information as to the amount, issue date, international securities identification numbering (ISIN), interest commencement date, maturity date, interest rate, name of the custodian, currency of the bonds and the country of issuance must be submitted to the CRA within three business days following the issuance. Any changes to this information should be reported to the CRA within three business days following the date of change.
Prior to each tranche issuance in Turkey without a public offering, issuers should only apply to the CRA after obtaining CMB approval on the issuance certificate, and thus the CMB application is not required for each tranche issuances.
Early redemption and repurchase
In line with relevant recent changes, all issuers can repurchase their bonds, where this was previously limited to banks only. After the repurchase, the issuer has three alternatives to follow: it can retain, resell or cancel the bonds – all before the maturity. Each of these are options and they do not single out as an obligation for the issuer, including cancelling the bonds. Note that retaining the bonds on the balance sheet would raise some Turkish law questions as to the termination/cancellation of the debt due to the same issuer becoming the debtor and creditor for the same debt, therefore issuers preferably opt to resell or cancel.
The Communiqué envisages early redemption upon request of the issuer or the investor. For bond issuances in Turkey, the rules and principles governing early redemption must be provided in the prospectus or in the other relevant issuance documents. The referred rules and principles may be freely determined between the issuer and the investors for the issuances abroad, notwithstanding the legislation of the country where the issuance takes place.
Key considerations in the market
In recent years, as the Turkish debt market faced several default scenarios, regulatory developments became necessary to mitigate potential defaults during the life of a bond. In this respect, market participants expect the CMB to continue with its amendments to current legislation to protect bondholders against default scenarios. These amendments should include quarterly financial disclosures by private issuers.
It is also important to note that the bondholders meeting concept, which was envisaged under the previous Turkish Commercial Code, may be re-introduced through an amendment to current CMB legislation to enable bondholders to act in concert in cases where the issuer is in financial difficulty. This could entitle bondholders to obtain protection in the early stages and prevent default risk in the future. It is also possible to consider introducing such concept in bond terms and conditions or in bond framework agreements to underline the importance of this tool.
Market participants are also in need of certainty on the legal status of CRA extracts that contain ownership details for debt instruments in the case of insolvency or bankruptcy. Since the debt instruments are in dematerialised form and registered with the CRA, the receivable related to them can easily be documented through CRA extracts and thus the legal status of the extracts must be clearly identified through the CMB legislation in a way that they may be deemed as a court-approved document that will prevent the issuer from denying the existence and validity of such debt.
Structured finance is a generic term referring to financings that are more complicated than traditional bank lending, capital markets financing and common equity. It is designed to meet unique capital needs of borrowers not typically covered by the traditional financing tools.
Securitisation is a generic term for a subset of structured finance and is the process in which certain types of assets, such as loans and other revenue sources, are pooled so that they can be repackaged into interest-bearing and tradable securities. The interest and principal payments from the assets are passed through to the purchasers or investors of the securities.
Cross-border securitisation is the most used structured finance product in Turkey, which we will touch upon in this article.
Concept of true sale
The concept of true sale is becoming increasingly important as Turkish entities look to their financial assets as a means of financing through securitisation. This trend marks the term of true sale as the holy grail of the securitisation market. It is a general term used to describe the transfer of a receivable by the owner (ie transferor or seller) to another person (ie transferee or buyer), such that the receivable is protected from claims against the seller's assets in the event of the seller's insolvency.
The mere term 'true' in relation to the transfer is only used under Turkish factoring context where it refers to a 'true factoring' (gerçek faktoring) that is mostly agreed under Turkish legal doctrine as a transfer contract where the factor assumes, in addition to providing financing and servicing, the risk of non-payment of the receivables by the original debtors.
Transfer of receivables
Transferability of contracts/agreements (ie receivables and debt together) is possible under Turkish law. For the purposes of a securitisation transaction, it is only the receivables (eg rights under the loan agreement) that can be transferred. Debt under the agreement remains with the originator.
Identifiable receivables are freely transferable to a third party as a matter of Turkish law unless such transfer is illegal or unlawful such as healthcare or social security benefits, or against public policy or restricted under the underlying contract.
Unless a transaction is a factoring arrangement, executed under the specific applicable rules in Turkish legislation, a transfer of receivables (alacağın devri) under Turkish law as per relevant provisions of the Code of Obligations gives the effect of a true sale, as defined above, if it is affected by means of a written form where there is a clear intention by the parties to the purported transfer and where it is respected as a transfer on an arm's length basis. It is important to note that a transfer of receivables under Turkish law is regulated specifically under the Turkish Code of Obligations and is different from a sale contract or agreement; therefore, although a transfer of receivables is similar to a sale contract, it has specific provisions to be applied under Turkish Code of Obligations. We will however use these words interchangeably throughout this article: sale and transfer; seller and transferor; and buyer and transferee.
Perfection of transfer
No other action, acknowledgment or supplementary document is required under Turkish law other than a written transfer of receivables agreement to effectuate a transfer of receivables. The transfer of receivables agreement by itself constitutes a valid transfer of ownership and as a result a transfer – subject to circumstances and rules described below – the receivables are legally isolated from the assets of the transferor and the legal title/ownership over the receivables pass to the transferee. Therefore, the transferor, any of its creditor or any other person, will not be able to set aside the transfer/sale.
Rights to and interests in the receivables, such as the benefit of any related security, pass automatically with the transfer under Turkish law without the requirement to complete additional formalities, with the exception of certain security, for example security over real property, where the transferee's name may need to be annotated at the land registry office.
Notification to debtors
Notification is not a condition for a valid transfer. However, the underlying debtors are entitled to discharge their obligations by making a payment to the transferor and exercise their right of set-off, if they are not informed about the transfer. In practice, being silent to the underlying debtors does not pose a threat to receiving the cash-flows, as long as the seller is solvent. Such risks have to be eliminated however, before the seller becomes insolvent by providing for notification mechanisms ideally based on triggers linked to the financial performance of the seller.
Basis of recourse/deemed representation
The transferor of receivables is deemed to make two representations under Turkish law in the transfer of receivables agreement: the existence of the receivables; and the financial ability of the underlying debtors to pay their debts.
The first representation is self-explanatory and is in conformity with a representation similarly given in a transfer contact. However, representation on the ability of the underlying debtor(s) to pay their debts has attracted criticism in Turkish legal doctrine and market practice, and therefore requires clarification, as it did not exist in the old Turkish Code of Obligations until it was introduced under article 191 of the new Turkish Code of Obligations which came into force in July 2012.
Before explaining the meaning of this deemed representation or guarantee/recourse that exists under Turkish Code of Obligations, we would like to state that this specific guarantee is not mandatory under the relevant provision of the Turkish Code of Obligations. In other words, it can be overridden by the transfer of receivables agreement between the parties. Some Turkish scholars are of the view that this deemed representation is mandatory and cannot be superseded by contractual arrangement between the parties.
Debtor's ability to pay
Regardless of the guarantee undertaking agreed between parties in a transfer agreement, it is worth considering whether there is even merit under Turkish law for such an undertaking to be made by the seller in a transfer of receivables agreement. If there is, would it give the buyer recourse to the seller after the sale? Would this, most importantly, re-characterise the transfer as a loan since Turkish courts are not bound by the parties labelling a contact as sale or otherwise? The question is, under which circumstances would Turkish courts re-characterise a transfer/sale as a loan if there were a true sale with recourse?
First of all, Turkish lawmakers have shifted the underlying debtor's credit risk onto the seller with a view to protect the buyer, who remains in the dark about the financial condition of the underlying debtors due to the existing information asymmetry between the buyer and seller. Also there is very limited court precedent in Turkey and it is unhelpful in spotting the circumstances which provide guidance on re-characterisation risk.
We believe there are very good arguments to claim that any recourse will not run the risk of a sale agreement being converted into loan agreement. In all securitisation transactions, the originator (the seller transferring financial assets to the buyer (ie special purpose vehicle)) retains, and on an arm's-length basis must retain, first-loss risk on those assets in order to compensate for the information asymmetry between the seller and buyer in relation to the debtors' financial assets. Therefore, the purchase of the receivables at a discount, the application of an advance rate, the payment of a portion of the purchase price by way of a deferred purchase price and the maintenance of any reserves funded via the receivables would not (in and of themselves) preclude the transaction qualifying as a legal true sale, provided that there is adequate consideration for the sale, the parties act in good faith in relation to the sale and the overall arrangement is demonstrably on commercial terms.
A true sale under which the receivables are legally isolated from the assets of a Turkish originator may only be set aside following an insolvency of the originator in certain limited cases. These cases include: a transfer at under the value; security granted for an existing debt; or an intention to damage the rights of creditors. A challenge against such transactions can be brought within certain periods from one to five years, depending on the transaction type. In Turkish practice, true sale for the objective of a securitisation transaction is highly unlikely to be subject to a claw-back risk, because such a transaction would not carry the conditions mentioned above.
In the financing of a consumer product, the loan and relevant sale agreement constitute a bundle transaction if the loan is provided only for financing a specific product and both agreements are linked to each other and form an economic unity. If a loan agreement specifically refers to the goods/products financed, it is given that an economic unity exists between the sale and loan agreements. In such cases where a bundle transaction and a defected vehicle exist and a consumer exercises its right to request an appropriate reduction in the sale price, the loan amount is reduced and payment schedule amended accordingly. If a consumer exercises its right to rescind the sale agreement (sözleşmeden dönme), the financier/lender is jointly liable for the reimbursement of the payments made until the rescind date together with the product's seller/manufacturer. However, the liability of the financer/lender is limited to the loan amount and ends one year from the delivery date of the defective product.
Data protection laws were recently introduced in Turkey in line with EU standards. The transfer of personal data depends on the prior approval of the data subject the owner of the personal data which, in case of the loans, would be the underlying debtors. Such prior approval generally exists in Turkish loan contracts. Regardless of the existence of prior approvals and compliance with the law, Data Protection Law No. 6698 provides a safe harbour where there is no need to obtain prior approval of the debtors in relation to the transfer of the loans, as long as the data is needed by the transferee or the buyer to enforce debt collection from the debtors.
About the author
T: +90 212 366 4732
Ömer Çollak heads the capital markets practice at Paksoy. He has specific expertise in equity, debt and equity-linked transactions, representing underwriters and issuers in initial public offerings, debt offerings, Islamic finance transactions and private placements. Ömer also acts in regulatory capital issuances under Basel III, and represents clients in structured finance transactions, including but not limited to securitisations. He further has significant experience in listed company M&As in addition to various high-ticket and cross-border M&As in various sectors, including financial institutions and retail, acting for private equity firms and strategic investors.
Prior to joining to Paksoy, Ömer worked as a foreign associate at a US firm in California, where he acted for biotech and high-tech multinational clients.
Ömer is a graduate of Marmara University School of Law and holds an LLM degree from Golden Gate University School of Law, San Francisco. He is admitted to the Istanbul Bar and is a member of the American Bar Association and International Bar Association.
About the author
T: +90 212 366 4742
Pınar Tüzün specialises in banking and finance, capital markets, M&As and corporate law.
Her banking and finance experience has a specific focus on capital markets transactions, acting for issuers and international underwriters in equity and debt instruments.
Pınar is also involved in major acquisitions in Turkey acting for foreign buyers on various sectors from retail and manufacturing to medical/health services.
Pınar is a graduate of Koç University School of Law and holds an MA degree from Boğaziçi University in economics and finance.
About the author
Nazlı Tönük Çapan
T: +90 212 366 4754
Nazlı Tönük Çapan specialises in capital markets, banking and finance, M&As and corporate law.
Her capital markets experience has a specific focus on issuance of capital market instruments, investment funds, registration and de-registration of foreign investment funds, custody and clearing arrangements, structuring of foreign financial institutions in Turkey and various capital markets transactions.
Nazlı is also experienced in financial sector private M&A particularly in IT and energy sectors, takeovers, loan and credit facilities and other general corporate work.
Nazlı is a graduate of Marmara University School of Law and holds an LLM degree from University of Montréal in International Business Law.