2020 was a busy year for the legislator in relation to the Turkish Capital Markets. An amendment made in the Turkish Capital Markets Law (CML) at the beginning of 2020 introduced several elements, including a Security Agent, into Turkish law. And then the pandemic hit, making the trust factor in regard to assets even more crucial than it was before. In times of uncertainty, the Security Agent may be invited to play a greater role.
Under the amended CML, companies are provided the opportunity to issue secured bonds. By this tool, companies are able to provide the comfort that investors may seek in these challenging times. Accordingly, issuers can use a certain category of their assets for leveraging, and may reach financing at lower costs than unsecured debt instruments.
Following the amendment of the CML, secondary legislation was expected. In October 2020, the Capital Markets Board issued a draft communique on the terms and conditions applicable to the issuance of secured debt instruments, as well as the rules applicable to the Security Agent.
As per the draft communique, assets which may constitute “security” for debt instruments are rather broadly defined, and may include: Turkish Treasury bonds and notes, immovable assets, precious metals, participations in investment funds, shares traded on the Star market of the Istanbul Stock Exchange, and machinery and equipment. Such assets must be located in Turkey. Periodical revenues from these assets (such as rent, interest, dividend, and so on) are normally added to the corresponding security. However, it is possible to decide otherwise, so that the issuer may still collect the periodical revenues, while using the asset itself to generate financing.
The secured debt instruments can be issued at once, or in several tranches within a certain ceiling corresponding to the secured amount. Prior to the initiation of the offering of the secured debt instruments, a security management agreement is required to be executed between the issuer and the Security Agent. The assets constituting securities of the debt instruments to be issued are to be transferred to the Security Agent at least one day prior to the start of the subscription into the secured bonds, either by way of transfer of ownership or as an in rem right.
The assets transferred to the Security Agent shall be kept separately from the assets of the Security Agent and cannot be subject to any foreclosure for any debts of the Security Agent, including public debts. Furthermore, the draft communique also addresses potential conflict of interests between the issuer and the Security Agent and restricts/forbids certain areas of inter-action which could otherwise potentially create conflicts.
One of the most attractive feature of such secured debt instruments from the perspective of the investors involves the relatively quicker remedies available in cases of default: the Security Agent is authorized to convert any security asset under its management into cash by any means, including direct sale to a third party or through auction. By doing so, the Security Agent is not required to notify the defaulting party of such default, provide a cure period, or obtain any permission or approval from court or from any administrative authority. In addition, the draft communique sets out clear deadlines in terms of the period of time within which such liquidation activities shall be initiated following default.
In order to ensure the protection of investor trust, breaches by the Security Agent of its legal obligations trigger relatively heavy consequences: if assets constituting security are used in ways violating the security management agreement, the Security Agent may be sentenced to 5 to 7 years of prison.
The secured debt instruments are expected to make a very positive contribution to the domestic debt market as they are very likely to facilitate financing by providing sufficient comfort to investors and by reducing costs for issuers, since such instruments will reduce potential default risk exposures.
By Levent Celepci, Managing Partner, Celepci Law in cooperation with Schoenherr