This year, the Turkish prime minister's favorite saying has surely been that the global economic crisis would touch Turkey "only tangentially." Arguably, he is right. The root cause of the financial meltdown was the collapse of the sub-prime mortgage bond market, and this was not the preferred type of security for many Turkish investors. Now, after waiting for the securities markets to settle, the Capital Markets Board (CMB) of Turkey has introduced the Communiqué on the Principles of Asset-Covered Securities (Serial: III, No: 38), enabling issuers of securities to diversify financing opportunities.
The regulation, issued on 12 September 2009, allows issuers to liquidate their balance sheet assets in these credit-scarce times. Unlike asset-backed securities, which allow the originator to transfer assets off the balance sheet by assigning them to a special purpose vehicle (SPV), the asset pool covering the securities remain on the balance sheet of the issuer. Although this may result in a lower capital adequacy for the issuer, the trade-off for this is that the asset-covered securities (ACS) may allow funds to be raised in a more cost efficient manner, since, in the event of default, ACS entitle the investors to have full recourse against the issuer. By contrast, ABS give the investors recourse only against the special purpose vehicle, with no capital of its own. Such feature will also serve as an enhancement for reputable issuers, allowing the asset-covered security to achieve a better rating.
The Communiqué provides a comprehensive timeline for registration, issuance and sale, identifies market players and enumerates types of assets serving as collateral for the ACS. There is also some room for innovation in this market, as the CMB may introduce new issuers, qualified investors and asset types other than those the Communiqué prescribes.
The Communiqué provides that the issuer may be a bank, finance corporation, financial leasing company, real estate investment trust, or state institution authorized to issue securities. The issuer may securitize its own assets and receivables, or acquire them for securitization purposes. If acquired, then such asset pool should be held by either the transferor or an escrow bank. Below are some examples of assets and receivables which the CMB has designated as eligible for the asset pool:
- consumer and commercial loans;
- receivables arising from financial and operational leasing agreements;
- export receivables arising from loans extended by the banks and export receivables acquired by joint stock companies engaged in factoring transactions;
- future receivables of joint stock companies and state enterprises arising from sales contracts represented by negotiable instruments;
- receivables arising from special loans extended to small-scale enterprises, tradesmen and craftsmen; and
- receivables arising from sale and promise-to-sell contracts for real estate from the portfolio of real estate investment trusts.
Upon review, if the CMB finds the asset pool unsatisfactory, it may request a bank guarantee as security.
The issuer may offer ACS either to the public or to qualified investors by way of allocated sale. By either method, the securities should be registered with the CMB. For the purposes of public offering of ACS, the issuer may either submit a registration application for separate issuances or may make one application for prospective issuances to take place within 5 years. If a public offering method is pursued, then an intermediary institution should be employed.
ACS are very well protected, as the assets in the asset pool cannot be used for any purpose other than covering the securities. Furthermore, they cannot be pledged or used as collateral. These assets cannot be seized, even for the collection of public receivables, cannot be subject to injunctions, and cannot be included in a bankrupt's estate. The Communiqué also provides rules for maintaining the quality of the assets. Foremost among these, an independent audit firm must be designated to verify and regularly audit the assets' compliance with the offering circular and the Communiqué. If any non-compliance is detected, such irregularity should immediately be reported to the CMB. No assets can be removed from the asset pool without the audit firm's approval. Thus, the role of the audit firm is quite important. In the event that the audit firm fails to perform its duties, the CMB may ask the issuer to replace the auditor, or replace it unilaterally.
The major legal consequence of non-compliance is that the security holders collect the receivables accruing up until the time of non-compliance. If the issuer defaults in its payment obligations arising from the ACS, it should immediately transfer the gains accrued over the assets and receivables to the security holders. If such payment does not satisfy the investors, then they have the opportunity of recourse against the issuer's other assets.
It appears that the CMB has learned its lesson from the collapse of the securities markets, and crafted safeguards for maintaining a high level of scrutiny of the ACS market. After the meltdown of the global securitization markets, the Communiqué – which harmonizes the investors' opportunity for recourse against the issuer with a high level of compliance verification – is a smart approach to restoring confidence. From the perspective of issuers, the Communiqué provides a belated but new alternative financing tool.
Finally, the Communiqué's discretionary provisions to the effect that the CMB is open to evaluating new issuers and asset types other than those prescribed in the Communiqué are very promising. We believe that reputable public companies wishing to issue ACS will soon be applying to the CMB for inclusion within the Communiqué's scope. Good days are ahead for an active securitization market in Turkey.
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