Turkey: Project Finance Transactions Under Turkish Law

The explosion seen in the use of project finance techniques all around the world in the late 1980s and 1990s, has meant people are tempted to regard the financing of projects on a limited or non-recourse basis, as a relatively novel concept. This is far from true. Indeed, there is evidence of project finance techniques being actively used by the Romans and even earlier. Project finance techniques continue to be seen in the fields of power, infrastructure, transportation and, in the last few years, telecommunications - a sector which now leads the field in growth and development. The legislative activities of many countries show clear signs that the project finance boom will continue well into this century.

A relatively short article like this one will not be sufficient to cover all aspects of project finance transactions under Turkish Law. The subject involves complex issues, includes a broad range of parties and a great deal of documentation. This article will restrict itself to providing readers with a very general idea of what "project finance transactions" are, and considering those transactions from a Turkish Law perspective.

We should start by saying that there is no universally accepted definition of "project finance". However, a typical interpretation might be:

To achieve this goal, a facility to finance the project is made available to a single purpose company (most commonly known as a "Special Purpose Vehicle" or "SPV"). The principal assets and business of the SPV are determined by the project, and the funds lent are not directly or indirectly the subject of a guarantee, indemnity or any other form of assurance, undertaking or support by any company which may own the SPV. In other words, the person or persons lending the sums generally have no recourse to any company for the repayment of sums relating to the borrowing other than:

1. recourse to the borrower for amounts limited to the aggregate cash flow or net cash flow from such project; and/or
2. recourse to the borrower for the purpose only of enabling amounts to be claimed in respect of that borrowing, following an enforcement of any security interest given by the borrower over the assets of the project (or given by any shareholder in the borrower over its shares) to secure that borrowing; and/or
3. recourse to such borrower generally, directly or indirectly through a parent company, under any form of completion guarantee, assurance or undertaking, which recourse is limited to a claim for damages.

Under a project finance transaction, in the event that the borrower defaults on the loans, the lender(s) have only limited rights of redress. One of the key differences between project financing and corporate financing is the level of recourse the lender has to the assets of the borrower. As the earlier definitions demonstrate, in a typical project finance arrangement recourse is limited to an identifiable pool of assets, whereas in corporate financing the lender will have recourse to all the assets of the borrower (to the extent that these assets have not been pledged or mortgaged to other lenders).

As in the rest of the world, project finance is a developing market in Turkey. Transactions have recently favoured public-private partnerships (PPP's) and have been used in projects in varying fields including infrastructure and transportation, airport construction and electricity projects. In addition, there are a number of private sector projects relating to real property financing (eg. hotels, shopping malls). It is worth noting that lenders, particularly in the private sector, often seek conventional security such as mortgages or commercial enterprise pledges in addition to the standard security interests over the income generated by the project.

Security plays a crucial role in project finance transactions. If the project company is an SPV, it is likely that lenders will have taken security over all of its property and assets, and will have control of those assets to the exclusion of other creditors. Listed below are a number of typical project finance security interests under Turkish law and some key points concerning them.

• Assignment of Receivables: The project company usually has a considerable number of agreements with strategic business partners such as suppliers, constructors, transporters, lessees and customers. The lenders normally take security over all receivables arising from these agreements. To do this, instead of signing separate agreements, it is common practice for project companies to enter into a single: "assignment of receivables agreement". A list of the relevant agreements may then be referenced in an appendix. The consent of the counterparty/debtor is not required for the assignment of such receivables by the assignor/borrower to be effective under Turkish law. It is of course prudent to notify such debtors of the assignment and to obtain their written acknowledgement of such notice. If an event of default occurs, these debtors will be obliged to make payments to the lenders as opposed to the assignor/borrower but in the absence of notice a debtor can still discharge its obligation by making payment to the assignor/borrower. An acknowledgment of notice of assignment is useful evidentially. Future claims are also assignable under Turkish Law provided that the assigned future receivables are identified, or identifiable. A valid assignment of receivables effects the automatic transfer of all rights ancillary thereto. Accordingly, security interests attached to the assigned receivables, such as mortgages and pledged interests, are also automatically assigned. To avoid complications on enforcement, it is advisable to amend the relevant registers and records to reflect any transfer.

• Receivables Pledge: These pledges are governed by the relevant provisions of the Turkish Civil Code (Law No. 4722). Subject to the agreement of the parties, receivables may be pledged in favour of the lenders rather than assigned. To effect this, parties must enter into a "receivables pledge agreement" (which must be in writing) and the negotiable instruments representing the receivables must then be delivered to the pledgee (the lenders or a security agent acting on their behalf). It is again always advisable to notify the obligors in respect of such receivables of the existence of the pledge because an obligor who has notice cannot discharge its debt without the consent of the pledgee. The difference between a pledge and an assignment of receivables, is that under an assignment, ownership passes to the assignee. This allows the lenders to proceed directly in the collection of the assigned receivables upon the occurrence of an event of default. It should be noted that when the borrower's debt under the relevant facility agreement is entirely discharged, the lenders are supposed to re-assign the receivables, as the security is no longer necessary. In contrast, in the case of a receivables pledge, the receivables remain the borrower's property. If an event of default occurs, the lenders must make an application before the relevant execution office to realise the pledge.

• Account Pledge: An "account pledge" is a form of receivables pledge, and follows the same principles as set out above. If considering an account pledge it is again advisable to notify the relevant account bank and to obtain an acknowledgement letter from such account bank. In practice Turkish banks are generally reluctant to issue acknowledgement letters in the form required by the pledgee and can be particularly sensitive to waiving their set-off rights.

• Commercial Enterprise Pledge: These pledges are governed by the relevant provisions of the Commercial Enterprise Pledge Law (Law No. 1447). The pledgor establishes a pledge in favour of the pledgee upon its business, movable business fixtures and all accessories and other items existing in the business. It should be noted that such pledges must be prepared "ex officio" by a notary public and signed by the parties. In addition, notice of such pledges must be given to the relevant Trade Registry within 10 days of the agreement's execution.

• Mortgages: These are governed by the relevant provisions of the Turkish Civil Code (Law No. 4722). Mortgages of real property are arguably the most frequently used and effective form of security under Turkish law. To establish a mortgage of real property, an official deed must be prepared "ex officio" by the local Titles Registry Office. The mortgage must be registered along with the property's title deed records. Under Turkish law, parties to a mortgage agreement must specify the level of debt to be secured. If the amount can be determined when the mortgage agreement is signed, this does not cause any problem; the parties simply specify that amount and the mortgage is known as a "capital amount mortgage". However, in some cases, the amount of debt cannot be easily determined at the outset. The parties will be aware that the borrower will owe a certain amount of money to the lenders in the future but may not know what the potential figure may be and the parties will enter into an "upper limit mortgage". To do this the parties will fix a figure and agree that all future debt is to be covered by the mortgage to the extent that it does not exceed this upper limit.

• Share Pledge Agreement: Generally joint stock companies are involved as an SPV in which case the borrower issues share certificates (or temporary share certificates) and delivers them to its shareholders (the pledgors). The parties then sign a "share pledge agreement", following which the share certificates (or temporary share certificates) are physically transferred to the lenders or a security agent acting on their behalf (the pledgee) together with a pledge or blank endorsement. In the case of registered shares, it is advisable to register the pledge in the borrower's company share register.

Guner Law Office was established in 1996 and has since grown into one of the major corporate, M&A, banking, litigation, energy and TMT practices in Turkey. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.