Lease certificates are securities issued by an asset lease company ("ALC") for the purpose of financing all kinds of assets and rights, and which enables its holders to get a proportionate share from the revenues derived out of such assets and rights.
Lease certificates may be issued by sales through or without public offering. Sales without public offering may be in the form of private placement or sales to qualified investors.
In Turkey, Lease Certificates (Sukuk) are regulated under the Communiqué of the Capital Markets Board ("Board") dated June 7th, 2013 and numbered 28670 ("Communiqué").
The purpose of the Communiqué is to determine the qualities of lease certificates, and to set down principles to be followed in issuance thereof, and to regulate the principles of foundation and articles of association of asset lease companies, and kinds and characteristics of assets and rights of which they may acquire, and activities, management, documentation and recording systems, and liquidation thereof.
Lease certificates issued pursuant to article 7/A of the Law on Regulation of Public Finance and Debt Management no. 4749 dated 28/03/2002, and asset lease companies founded thereunder, are not subject to the provisions of the Communiqué.
Lease certificates may be issued based on
- management agreement;
- EPC (engineering, procurement and construction) contract. Or
- through combined use of those listed above by ALCs.
Applications for approval of prospectus or issue document relating to capital market instruments, which are not cited in the Communiqué but are not included in the scope of other regulations of the Board either, and are by nature accepted by the Board as a lease certificate, will also be handled and responded by application of the provisions of the Communiqué by analogy.
Until redemption of lease certificates, the assets and rights included in the portfolio of an ALC cannot be disposed of for any purpose other than collateralization, even in the case of transfer of management or supervision of ALC to public authorities, and cannot be pledged, or shown as a collateral, or attached for any purpose including the collection of public receivables, or included in bankrupt's estate, or be subject to an interlocutory injunction.
Holders of lease certificates are proportionately entitled to have the revenues obtained from base assets and rights for the issuance of the certificates. If required so in the issuance process, at the end of maturity the assets and rights are sold by ALC to originator or to third parties and the proceeds of sale are distributed to lease certificate holders in proportion to their shares therein.
Lease certificates are redeemed within the frame of the principles set forth in the prospectus or in the case of sales without public offering, in the agreement relating thereto. The measures and actions including the sale of base assets or rights to indemnify probable losses of lease certificates holders to be taken by the board of directors of ALC in order to protect interests of investors in the case of failure of fund users or third parties in performance of their payment obligations towards ALC, are required to have been set down in agreements at the stage of issuance application made to the Board.
Ownership-Based Lease Certificates
Ownership-based lease certificates are lease certificates issued to finance the assets and rights to be acquired by ALC from originator in order to be leased to originator or third parties or to be managed in the name of ALC.
In the issues covered by these certificates; i) an agreement is required to be executed for transfer of the ownership of the base assets or rights to ALC; and ii) if transfer of base assets and rights is subject to registration or other special formal requirements pursuant to applicable laws and regulations, all transactions required for transfer are required to be completed; and iii) ALC is required to have a direct power of disposal on assets or rights in the case of default.
Communiqué regulates that the amount of issue of ownership-based lease certificates cannot exceed 90% of fair value determined in the appraisal report prepared pursuant to the Communiqué.
If the asset on the basis of which lease certificates are issued is a real property, and if requested so by the originator, the right of repurchase is required to be annotated and registered in the land registry.
The assets and rights on the basis of which lease certificates are issued must not have been restricted by any real or personal rights in favor of third parties to the detriment of interests of lease certificate holders, and accordingly, the assets and rights must not have been restricted by an attachment or injunction.
Management Agreement-Based Lease Certificates
These are lease certificates issued for the purpose of transfer, of revenues obtained as a result of management of assets or rights owned by the originator in favor of ALC, also including the lease of them until the end of maturity, to ALC within the frame of provisions of the management agreement.
In the issue of these lease certificates, an agreement shall be entered into by and between originator and ALC, for management of assets or rights owned by the originator in favor of ALC, without transfer of ownership thereof. Principles relating to revenues of ALC or calculation of such revenues are required to be dealt with in the agreement.
Trading-Based Lease Certificates
Trading-based lease certificates are lease certificates issued to finance the purchase of certain assets or rights by ALC in order to be sold on deferred payment basis to other companies eligible such as banks, mortgage finance institutions; real estate investment companies; some public corporations; intermediary institutions which operate in any one of portfolio brokerage, general custody services or underwriting activities; companies which are granted a long-term investment grade rating upon demand inthe currency which the issue is denominated and companies of which 51% or more of the capital shares are directly held by the Undersecretariat of Treasury.
In the issue of trading-based lease certificates, ALC is under obligation to purchase the base assets or rights from the spot market and to resell them on deferred payment basis at a price above their cost, by no later than the business day immediately following the date of transfer of the funds collected from issuance to its account. If this transaction is not executed within the said period of time, the funds collected upon issue of lease certificates shall be refunded to investors by no later than the second business day following the date of transfer to the account of ALC. The assets or rights on the basis of these lease certificates are required to be traded in Borsa Istanbul Anonim Şirketi (Istanbul Exchange) or in other liquid markets.
Partnership-Based Lease Certificates
Partnership-based lease certificates are lease certificates issued by ALC for the purpose of partnership in a joint venture.
In the issues of partnership-based lease certificates where the joint ventures into which capital is put exclusively and solely by ALC, are financed:
- The joint venture is managed by venturer or by a third party appointed by venturer.
- The allocation ratios in the profit of joint venture among venturer and ALC, or the fixed fee to be paid to venturer under the proxy agreement shall be specified in the partnership agreement. In the issues where the joint venture is organized as a capital company, the allocation ratios in profit or the management by proxy fee shall be separately dealt with in company agreement or articles of association. However, except for probable damages and losses that may be caused by bad faith or unlawful acts of venturer, if the joint venture suffers losses, ALC shall bear losses to the extent of its capital put into the joint venture.
- Whether a collateral shall be requested or not from venture, for the purpose of indemnification of probable damages and losses that may be caused by bad faith or unlawful acts of venturer or of third parties appointed by venturer, and if a collateral is requested, the amount and description of the collateral shall be regulated in partnership agreement, company agreement or articles of association.
EPC (Engineering, Procurement and Construction) Contract – Based Lease Certificates
EPC contract-based lease certificates are lease certificates issued for the purpose of creation of works pursuant to an EPC contract to which ALC is a party as work owner.
In the issues related to this kind of certificates, ALC enters as the owner into the EPC contract in its own name and in the account of lease certificate holders. As part of EPC contract-based lease certificates issues, in addition to EPC contract, other agreements fit for the intended purposes, such as service contract, contracts of construction in return for flats or lands, or partnership agreement may also be signed.
ALC may make the resulting works the subject matter of a sale contract either by leasing first or directly without leasing. As of the end of maturity of lease certificates, the sale price should be fully collected by ALC, and the proceeds of sale should be paid to lease certificate holders.
The amount of issue of EPC contract-based lease certificates cannot exceed 90% of fair value determined in the appraisal report prepared pursuant to the Communiqué.
Where the price of work is paid in advance by ALC, the contractor is required to establish a pledge on movables or real properties or give similar other guarantees in favor of ALC in order to ensure precise and timely completion of the work.
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.