The concept of financial restructuring was introduced in Turkey following the currency crisis of August 2018. Financial restructuring became the major item on the agenda of Turkish financial institutions, and regulators intervened immediately, working to create a useful legal framework for the process. The joint efforts of the Banking Regulatory and Supervisory Authority (the BRSA) and the Banks Association of Turkey (the BAT) resulted in the Framework Agreement. Nevertheless, restructurings commenced pursuant to the Framework Agreement are progressing very slowly, and in most cases have reached an impasse.
Comparing the concepts behind the Framework Agreement to those in international restructuring regimes such as Chapter 11 in the United States and Administration and Scheme of Arrangement in the United Kingdom reveals some of the obstacles to effective financial restructuring in Turkey.
Following the entry into force of the Financial Restructuring Regulation (the “Regulation”), Turkey enacted the Framework Agreement, but both required amending shortly after their creation following criticism from international and Turkish financial institutions. These criticisms first led to the preparation of a draft law proposing amendments to the Banking Law (the “Draft Law”), then to the preparation of a separate law focused on financial restructuring. The Draft Law was enacted in July 2019. Shortly thereafter, the BAT circulated two new versions of the Framework Agreement – one for large corporates and one for SMEs.
As the currency crisis is under control and financial restructurings will take place over the longer term, there might be an opportunity to holistically contemplate the proposed legislation, taking all stakeholders’ opinions into account.
Banks must maintain their capital adequacy while restructuring their receivables, and one solution is for banks to sell NPLs in their balance sheets. There are various licensed asset management companies operating in Turkey, but it would be unfair to expect the companies whose job is to buy and collect NPLs to undertake the major NPL burden alone. At this point, an option may be to attract investment in NPLs from international funds focused on NPL work-out. Various tax exemptions granted to asset management companies are not available to international funds’ purchases, which increases the costs of funds and renders the option of shifting the NPL burden to these international funds unfeasible. Turkish tax and NPL laws must be amended in order to convert the international interest in Turkish NPLs into actual investments.
One of the critical objectives of restructuring regimes is to facilitate the provision of additional funds to the debtor in default, which is likely experiencing a shortage of working capital. Naturally, it would be unfair to expect Turkish banks that cannot collect their receivables to undertake the additional financing burden alone. The funding gap could be closed with the help of international funds that provide specialized funding (mezzanine, distressed, DIP finance, etc.). Since international funds are not considered financial institutions under Turkish tax laws, the loans they provide are subject to additional taxes. To overcome these obstacles, tax exemptions must be granted to the loans provided by these funds.
Benchmark restructuring regimes allow for write-down or other restructuring of debt, and debt for equity swaps, without minority creditor or shareholder consent. The Framework Agreement does not go so far because a write-down specifically requires the unanimous consent of creditors. Additionally, it does not contemplate debt-for-equity swaps without shareholder consent. Where a debtor balance sheet requires right-sizing, the absence of those tools could lead to a material issue because they curtail possible solutions. The Framework Agreement must be updated to provide these tools.
Contractual Rather Than Universal Effect
The Framework Agreement is just an agreement; it is not a proper collective insolvency procedure. Proper collective procedures operate vis-à-vis the world at large, including all creditors. The only parties who are bound by the Framework Agreement are those who signed it. As such, many parties who commonly operate in the credit markets in Turkey will work outside the Framework Agreement, and compromises struck by the parties to the Framework Agreement will not bind non-signatories.
The ability of creditors to enforce rights, including security rights, are imperative for tidying up financial markets. Where it is desirable that outside parties relieve incumbent holders of distressed debt, potential purchasers will wish to know that the path to enforcement is as smooth and efficient as possible, and that proper recourse can be had against debtors and their assets. The more straight-forward the enforcement processes, the more attractive local loans are to international investors, and the quicker they enter the market to acquire them and thereby resolve local banks’ balance sheet issues.
Muhsin Keskin, Partner, Esin Attorney Partnership
This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.