As the Turkish economy continues to develop steadily,
various financing methods are emerging and changing the scenery
of Turkish legal practice. This article discusses some of the
recent developments in the Turkish market and legal
Distressed debt financing
It may be an underestimation to call distressed debt
financing deals in Turkey a rising star, as many would consider
it to be a star already up in the sky. Since the government-led
sale of non-performing loan portfolios formerly held by
bankrupt banks, various market players have emerged ranging
from institutional investors to distressed debt funds.
While the early comers of the market (institutional
investors) tend to continue their collection and secondary
market creation efforts through their domestic asset management
companies, a hub of activity exists in the form of individual
distressed debt financing deals cherry-picked among survivors.
Various funds structure innovative deals involving an equity
portion as well as the debt financing portion. We observe a
strong tendency to pick distressed borrowers among public
companies that facilitate the exercise of the lender's
The recent change in the Corporate Tax Law, allowing for an
explicit 3:1 debt-to-equity ratio in corporations (as opposed
to the former vague criterion of matching the debt-to-equity
ratio of "comparable companies"), has been well
received by lenders seeking an equity stake in the distressed
debtor together with a lender role, as it brings clarity to the
Another risk factor for lenders with such a dual position
(both a lender and an equity holder) remains: insider trading
issues. The inexplicable choice of lawmakers to avoid creating
a comprehensive regulation on this issue – and opt
instead for a general reference in the Capital Markets Law
pointing to the use of non-public information by potential
insiders – continues to be a significant pressure
point on investors.
Mortgage financing will be the highlight of the Turkish
market this year and in ensuing years. The basket law changing
the relevant provisions of various laws, thus allowing the
creation of mortgage-backed securities among many other
relevant changes, is expected to have a significant effect on
Turkish structured finance transactions.
Already, institutional investors are keenly looking into
possible securitization programmes based on repayments of
mortgage loans. Investors and ratings agencies have a positive
view with respect to the statutory recognition of bankruptcy
remote funds holding the underlying asset pool that will back
up the securities.
The regulations which will entail all legal aspects of the
mortgage-backed securities are expected to become effective in
the coming months. Once the regulations come into effect and
the legal framework is finalized, the task will be to compile
an existing asset pool comprising mortgage loans. We believe
that investors will not have to wait for long as the new law
provides for an automatic conversion of prior secured
residential bank loans into mortgage loans unless otherwise
explicitly required by the individual borrowers.
In addition, the state-owned Housing Development
Administration has been very active in recent years through
projects in many different locations in Turkey. This
government-sponsored public entity has finished constructing
241,507 residential units at 655 different construction sites.
Furthermore, it has announced the construction of 236,278 more
units. This substantial portfolio may be an attraction for
As the Turkish market reaches a comparably steady inflation
and interest rate, we observe a comeback with respect to the
issuance of corporate bonds by Turkish companies. The
investors' favourites are real estate development or
construction companies with an existing portfolio. The recent
surge in the local real estate market is one of the reasons for
this preference. Local companies tend to prefer corporate bond
issuances as opposed to a term facility for many reasons, such
as less complex legal documentation concerning their
representations, warranties and covenants; less stringent
events of default; and a quicker consummation of the deal.
Obviously, the route is open to those local companies that are
able to obtain an acceptable rating from a reputable ratings
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.
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A trustee in bankruptcy's rights to obtain a possession order and order for sale against a bankrupt's property will not be suspended indefinitely even where there are exceptional circumstances.
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