I. General Overview and Scope of the Financial Restructuring Process
The Banking Regulatory and Supervisory Agency ("BRSA") published the Regulation on the Restructuring of Debts Owed to the Financial Sector ("Regulation") amid ongoing currency and inflation pressures. The Regulation was published in the Official Gazette No. 30510 on August 15, 2018, and entered into force on the same date. The Regulation primarily covers debts owed to banks, financial leasing companies, factoring companies and financing companies in Turkey ("Creditors"). However, the Regulation also leaves the door open for other creditors to participate in the financial restructuring process.
The primary purpose of the Regulation is to offer a chance to debtors to fulfil their repayment obligations. In order to achieve this goal, the Regulation provides a general overview of the contractual restructuring of financial debts.
The Regulation Amending the Regulation on the Restructuring of Debts Owed to the Financial Sector ("Amending Regulation") entered into force upon its publication in the Official Gazette No. 30602 on November 21, 2018. The Amending Regulation introduces certain changes to the Regulation, and clarifies some issues and answers certain questions as to the content and scope of the Regulation.
Firstly, the Amending Regulation introduces a new term for eligible debtors ("Debtors"). Accordingly, the following entities are not authorized or permitted to apply for financial restructuring under the Regulation:
- Entities subject to the Banking Law No. 5411 (i.e., (i) deposit banks, participation banks, development and investment banks established in Turkey, (ii) Turkish branches of such institutions established abroad, and (iii) financial holding companies);
- Capital markets institutions listed in Article 35 of the Capital Markets Law No. 6362 which are: (i) investment institutions, (ii) collective investment institutions, (iii) independent audit firms, valuation firms and rating firms that carry out activities in capital markets, (iv) portfolio management companies, (v) mortgage finance institutions, (vi) housing finance and asset finance funds, (vii) asset leasing companies, (viii) central settlement institutions, (ix) central depository institutions, (x) data storage institutions, (xi) other capital markets institutions whose establishment and activities are to be determined and regulated by the Capital Markets Board;
- Entities subject to the Insurance Law No. 5684 (i.e., insurance companies and reinsurance companies which carry out their business activities in Turkey, intermediaries, actuaries and insurance experts);
- Entities subject to the Law No. 6361 on Financial Leasing, Factoring and Finance Companies which are (i) financial leasing, factoring and financing companies established in Turkey, (ii) banks, with regard to their factoring transactions, participation banks and investment banks, with regard to their financial leasing transactions, (iii) companies, institutions and financial leasing companies that are authorized to lease air transportation vehicles, their engines and accessories and parts to airlines in accordance with their own legislation, with a financial leasing agreement for a minimum of two years, and
- Entities subject to the Law No. 6493 on Payment and Securities Settlement Systems, Payment Services and Electronic Fund Institutions (i.e., payment institutions and electronic payment institutions).
Secondly, the Regulation requires Creditors to assess the financial status and condition of the Debtors. Accordingly, the Amending Regulation clarifies that, in order for the Debtors to benefit from financial restructuring, they are required to repay their debts within a reasonable period of time. Furthermore, it is stipulated that framework agreements will determine and designate the institutions that will assess the financial status and condition of the Debtors, as discussed below.
II. Framework Agreements
The debts may be restructured within the scope of the framework agreements drafted by the Banks Association of Turkey and approved by the BRSA ("Framework Agreements"). Accordingly, the template of the framework agreement prepared by the Banks Association of Turkey and signed by the Creditors was entered into force with the BRSA's approval on September 19, 2018. It is important to note that there are no restrictions on the number of Framework Agreements that a Debtor may enter into, and there may be multiple Framework Agreements in addition to the one that was approved by the BRSA on September 19, 2018.
The Regulation stipulates the content of the Framework Agreements. Accordingly, the following matters must be included and addressed in the Framework Agreements:
- fundamental terms and conditions as to the financial restructuring;
- minimum qualifications of the Debtors;
- main obligations of the parties to the framework agreement;
- events of default under the framework agreement; and
- fundamental elements to be included in, and parties' obligations to be governed by, the restructuring agreement to be executed between the Creditors and the Debtors.
The Regulation further specifies that the Framework Agreements determine the scope of the receivables to be restructured, establish the Debtors' qualifications, and regulate the minimum content of the restructuring agreements to be executed between the Debtors and the Creditors.
As stated above, the Regulation primarily regulates the restructuring of the debts to the Creditors. However, the Regulation also leaves room for the possibility of other creditors to participate in the financial restructuring process. In this regard, foreign credit institutions and international organizations may also participate in financial restructuring without requiring the Creditors' consent. The Framework Agreements, on the other hand, set out the procedures and principles relating to the participation of foreign credit institutions and international organizations in the financial restructuring process.
Any disputes arising from the Framework Agreements will be resolved by arbitration committees, which will be composed of three members appointed by the Banks Association of Turkey. Arbitrators must be objective and they must possess the necessary knowledge and experience required for their duties. The working principles of the arbitration committees and the consequences of their decisions are determined by the Framework Agreements.
The Regulation further stipulates that the following restructuring schemes may be implemented under the Framework Agreements:
- extending the relevant loan's maturity;
- renewing the' Debtors' loans;
- providing additional loans to the Debtors;
- agreeing to a reduction of or waiving receivables relating to principal, interest, default interest, dividend payments or any other receivables arising from the loans;
- converting loan receivables (i.e., receivables relating to principal, interest or dividends) into equity, assigning or transferring loan receivables in exchange for payment in cash, in kind or consideration depending on collection, liquidating, selling, or writing off loan receivables in exchange for the assets of the Debtors and third parties;
- executing protocols with other banks and with the Creditors.
III. Restructuring Agreements
Framework Agreements will be implemented through the restructuring agreements to be executed by and between each Debtor and the Creditor(s). The Regulation sets out that the restructuring agreements must be executed within two (2) years as of the approval date of the relevant framework agreement by the BRSA.
One of the controversial provisions of the Regulation obliges the Creditors which are parties to a framework agreement to restructure the corresponding debts of the Debtor, if a restructuring agreement is signed by the Creditors comprising two-thirds of the outstanding debts of the Debtor. Although the Amending Regulation clarifies that this obligation is not applicable to a Creditor who is not a party to the relevant framework agreement, this provision is still open to criticism.
Considering the recent economic developments in Turkey, the Regulation is a positive step toward facilitating/easing debts owed to the financial sector. The contractual restructuring of debts offered by the Regulation allows the Debtors to benefit from the aid in order to fulfil their repayment obligations, while also helping financial institutions to carry out successful restructurings.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in March 2019. A link to the full Legal Insight Quarterly may be found here"
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.