Turkey: Project Finance Comparative Guide

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern project finance transactions in your jurisdiction?

Project finance transactions – comprising loan agreements, security agreements, and ancillary documents – are subject to the following laws:

• the Law of Obligations (6098);
• the Commercial Law (6102); and
• the Civil Law (4721).

The Capital Markets Law (6362) and its secondary legislation might also apply if the borrower or any security provider is a public company.

In February 2020, a new project financing scheme was introduced by the legislature. This scheme creates an alternative project financing method through the establishment of project financing funds by investment corporations or portfolio management companies. Project financing funds enable project companies to raise funds through third-party investments as remuneration for project assets and project revenues backed by securities. This new method is regulated under the Capital Markets Law and the Capital Markets Board is preparing secondary legislation on the establishment of such funds, the requirements for founders, details on the issuance of securities and so on.

1.2 Do any bilateral and/or multilateral international instruments have particular relevance for project finance transactions in your jurisdiction?

There are no bilateral or multilateral international instruments directly related to project finance transactions in Turkey. However, Turkey is a party to essential international treaties such as:

• the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965;
• the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and
• bilateral tax, trade facilitation and mutual judicial assistance treaties.

These treaties might affect the decisions of investors on making project finance investments in Turkey.

1.3 Beyond normal governmental institutions, are there regulatory bodies that play a particular role in project finance in your jurisdiction? What powers do they have?

There are no governmental institutions or regulatory bodies directly related to project finance transactions in Turkey. However, governmental permits, approvals and licences are usually required at various stages of investment projects in the energy, mining, infrastructure, real estate and healthcare sectors. The responsible bodies vary depending on the sector, as follows:

• the Energy Market Regulatory Authority for energy projects;
• the General Directorate of Mining for mining projects;
• relevant bodies of the Ministry of Transport and Infrastructure for infrastructure projects;
• relevant municipalities and/or the Ministry of Culture and Tourism for real estate projects;
• the Ministry of Health for healthcare projects; and
• the Ministry of Environment and Urbanisation for environmental permits.

The importance of these bodies concerning project finance transactions is their power to determine whether a project can commence operations. In cases where the relevant permits, approvals and licences cannot be obtained, or are revoked or suspended, a default will likely occur in relation to the project loan.

1.4 What is the government's general approach to project finance in your jurisdiction? Is PFI/PPP a preferred model in your jurisdiction?

Private sector project financings and PPP project financings are both rapidly growing financing models in Turkey, receiving strong support from the government in various sectors, from energy to healthcare. Turkey has legislation that supports different PPP models – such as build-operate-transfer, transfer of operational rights, build-operate, build-lease-transfer – in various sectors. For example:

• electricity generation projects are usually realised through the build-operate model;
• infrastructure projects are usually realised through the build-operate-transfer model; and
• healthcare projects are usually realised through the build-lease-transfer model.

These PPPs are further supported by the government through different types of government guarantees, payment mechanisms and debt assumption agreements. According to information published on the website of the Presidential Directorate of Strategy and Budget at https://koi.sbb.gov.tr/, almost 250 PPPs have been realised in Turkey over the last 30 years.

Most recently, the PPP model has been adopted for major transportation, healthcare and nuclear energy projects. They include:

• the 1915 Çanakkale Bridge – Malkara Çanakkale Motorway, which ranked first among Europe's largest PPP investments, with a value of €3.1 billion;
• the Ankara-Niğde Motorway, which ranked second, with a value of €1.2. billion;
• Istanbul Airport, which, once completed, is planned to be the world's largest airport, with a capacity of 200 million passengers and an estimated total value of €10 billion;
• the Northern Marmara Motorway (including the Third Bosporus Bridge), with a total distance of 400 kilometres;
• 18 city hospitals which are or will be in service in 2021, with a total bed capacity of 27,221; and
• the Akkuyu Nuclear Power Plant, Turkey's first nuclear power plant, with a capacity of 4800 megawatts.

2 Project finance market

2.1 How mature is the project finance market in your jurisdiction?

The Turkish project finance market began to grow after the banking crisis of 2001 and in particular, after 2012, as foreign direct investment increased and the government engaged in PPPs and promoted investments, especially in energy, infrastructure and healthcare projects. The Turkish banking sector adapted swiftly to this new trend in financing and today, all major banks and most of the small and medium-sized banks have dedicated project finance departments that employ considerable numbers of project finance experts, including lawyers with experience in the field. The market is now quite mature and numerous experts have experience in a diverse range of project financings.

2.2 On what types of project and in which industries is project finance typically utilised?

In Turkey, project finance is typically utilised in the following sectors:

• infrastructure (construction of motorways, bridges, ports, airports);
• energy (construction of power plants for the production of various energy resources, including renewable energy, oil and natural gas, privatisations, energy sector acquisitions);
• healthcare (construction of city hospitals and other healthcare centres);
• shipping (construction of ships and ship acquisitions);
• real estate (construction of hotels, malls, residential and office buildings); and
• mining (construction of mines including copper, gold and other metals).

It is also utilised as a financing model in various industries for capex requirements, as well as for mergers and acquisitions and restructured finance transactions.

2.3 What significant project financings have commenced or concluded in your jurisdiction over the last 12 months?

Many notable project investments have been concluded over the last 12 months, but few have commenced due to the COVID-19 pandemic and the resulting economic slowdown. One significant project expected to commence shortly is the Istanbul Canal Project. This is an artificial sea-level waterway that will bypass the Bosporus and connect the Black Sea and the Sea of Marmara. The anticipated cost of the project is TRY 75 billion.

Some of the significant projects concluded over the last 12 months include:

• the Galataport Project – a cruise ship port in Istanbul and a centre of culture, tourism and commerce covering 52,000 square metres;
• the Istanbul Başakşehir Çam Sakura City Hospital, with a bed capacity of 2,682 (456 in intensive care) and 90 surgery rooms, built by a consortium of Japanese and Turkish companies symbolised by the names ‘Çam' and ‘Sakura';
• the third aerodrome and second tower of Istanbul Airport, which will reach a capacity of 200 million passengers per day once completed; and
• the Kömürhan Bridge, located at the interaction of the eastern cities of Elazığ and Malatya, which connects 16 cities and used the same amount of steel as was used in the construction of the Eifel Tower.

3 Finance structures

3.1 What project financing structures are most commonly used in your jurisdiction?

The conventional loan structure model, the borrowing base model and the mega-project PPP model are the most common project financing structures in Turkey. Models such as fund raising through leasing and capital market instruments such as bonds and project finance funds are also available, but are not commonly preferred. Direct agreements, which regulate the intervention of the lenders in the project contracts, might also be relevant, depending on the project and the amount of the loan.

The most common model is the conventional loan structure model. This is used for individual projects, usually on a syndicated basis, with several banks lending money in local and/or international currency to a special purpose vehicle (SPV) to finance a project. Lenders often secure their risk through:

• personal or corporate guarantees from shareholders of the SPV;
• the establishment of mortgages and pledges on project assets and the SPV's shares; and
• the assignment of projects revenues and receivables under project insurance; and
• engineering, procurement and construction (EPC) contracts and operation and maintenance contracts.

Direct agreements which regulate the intervention of the lenders in the project contracts might also be relevant, depending on the project and the amount of the loan.

The borrowing base model is also common. This is used on a multiple project basis, whereby group companies as borrowers are provided with a loan for projects of each group company, and the aggregated value of the assets and the future cash flows of all projects are considered as the basis for the borrowing. In this model, each project's assets and future revenues are cross-collateralised, and each borrower provides cross-guarantees for the benefit of the other borrowers.

Mega infrastructure projects are usually realised through the build-operate-transfer model, whereby the relevant administrative authority grants the project company an exclusive right to construct and operate the mega-project for a concession period by entering into an implementation agreement. These mega-projects require huge amounts of investments; therefore, they are always financed by a group of lenders. This project financing structure may be distinguished from others due to the security package, as the loan payment obligations of the project company are also guaranteed by the relevant administrative authority by a way of debt assumption or debt payment. In addition, the relevant administrative authority usually grants other guarantees to the project company, such as traffic guarantees in transportation projects which are payable when actual levels of traffic fall below an estimated threshold. These guarantee payments are also assigned to the lenders as part of the security package. Direct agreements, which regulate the intervention of the lenders in the implementation contract and/or EPC contract, are also a feature of this model.

3.2 What are the advantages and disadvantages of these different types of structures?

The conventional loan structure is flexible, easy to negotiate and subject to a certain degree of standard documentation. It will depend on the cash flow of the project and the debt capacity of the project company, and therefore it rarely contains complex financing features. This is the most common project financing structure utilised in the credit market, so market players are quite familiar with it, which also speeds up the process.

The borrowing base model is likely to involve considerably less management time and lower costs and fees, since it involves financing several projects in a single project financing transaction instead of conducting several conventional loan transactions. In addition, an over-performing project's cash flow and assets can be used to balance the risk of an under-performing project. The disadvantage of this model relates to the cross-default mechanism: a default in relation to one project will give rise to a loan default, which might lead to acceleration of the loan and foreclosure of the assets of each project.

The mega-project PPP model provides lenders with high-level securities, such as various types of government guarantees, and assures lenders the return of their investments. Such models contain complex financing structures which take time to implement and require superior organisation and management skills, due to the involvement of high numbers of lenders as well as government authorities. The main disadvantage of this model concerns the cost overruns which usually occur in mega-projects due to their size. Typically, the cost overrun threshold is restricted to a certain percentage of the total investment and any cost overruns above this threshold will be outside the scope of the government guarantee.

3.3 What other factors should parties bear in mind when deciding on a project financing structure?

Parties should bear in mind that the involvement of sponsors is an essential aspect of project financing in Turkey. Lenders usually require the shareholders or sponsors of the project to share the risk, so financially credible sponsors are very useful in expediting the process and agreeing on favourable commercial terms.

Parties should also be aware that club loans are common in Turkey and many project financing transactions – especially in the infrastructure, energy and mining sectors – are realised through syndicated loans.

4 Industry players and ownership requirements

4.1 Who are the key players in project financings in your jurisdiction? Do any restrictions apply in this regard (eg, foreign ownership)?

The key players in project financings in Turkey are as follows:

• banks and financial institutions as lenders;
• borrowers (mainly special purpose vehicles established by holding companies or consortiums operating in the energy and construction sectors);
• sponsors as shareholders or directors of the borrowers;
• governmental authorities;
• insurance companies;
• engineering, procurement and construction contractors;
• operation and maintenance companies; and
• equipment suppliers.

No restrictions apply in relation to the qualities or quantities of the key players. Any entity operating in the credit market as a creditor, any local or foreign borrower or any local or foreign third party can take part in a project financing transaction if the parties agree on the terms of the financing.

4.2 What role does the state play in project financings in your jurisdiction?

The state plays a role in project financings where a PPP model is involved. In PPPs, the state might play a role only as the transferor of the operational rights; or it may be significantly involved in the project by sponsoring and assisting the project.

The state's involvement in private sector project financings is limited to being the authority that grants the official permits, approvals and licences for the financed projects.

4.3 Does your jurisdiction have nationalisation or expropriation laws in place? If so, what are the implications in the project finance context?

Nationalisation is regulated under the Law on the Nationalisation of Private Entities Engaged in Public Services in Cases of Public Interest (3082), which enables the state to nationalise companies that engage in public services in consideration of equitable compensation, provided that nationalisation is necessary and no other option is available.

Expropriation is regulated under the Law on Expropriation (2942), which enables the state to expropriate the immovable property of a real or legal person in consideration of equitable compensation, provided that there is a sufficient level of public interest.

Nationalisation of a project company and expropriation of the project assets are commonly regulated as events of default under the project finance loan agreements. On the other hand, expropriation might also be favourable at the pre-project finance stage, as in many cases project companies liaise with the government for the expropriation of immovable property on which the projects will be constructed.

5 Regulatory and documentary requirements

5.1 What regulatory approvals are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

From a lending point of view, no approvals are required for project financings in Turkey. However, to operate in certain sectors, and for the construction and operations of certain projects, approvals must be obtained and retained before the utilisation of the loan, as well as for the life of the loan.

The administrative authority responsible for the project approvals and permits will depend on the type of project that is financed. The fees payable for the permits or the guarantees that must be submitted to obtain the permit will also depend on the type and size of the project, and should be checked with the relevant administrative authority and the law during the pre-financing stage.

5.2 What licences are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

From a lending point of view, no approvals are required for project financings in Turkey. However, to operate in certain sectors, and for the construction and operations of certain projects, approvals must be obtained and retained before the utilisation of the loan, as well as for the life of the loan.

5.3 What documentation is typically involved in a project financing in your jurisdiction?

The main transaction documents are:

• loan agreements – usually a tailor-made loan agreement and in some cases a tailor-made loan agreement, accompanied by a general loan agreement;
• security agreements, including pledges, mortgages, assignments and guarantees;
• insurance policies, which usually insure the project assets and revenues;
• agreements on generation of project revenues;
• engineering, procurement and construction contracts, operation and maintenance agreements and supply agreements;
• direct agreements that regulate the interference of the lenders in the project contracts; and
• implementation contracts and debt assumption agreements with regard to PPP financings.

5.4 What registration or filing requirements apply for project financing documents to be valid and enforceable?

There are no specific registration or filing requirements for loan agreements or project financings in general. However, certain security agreements must be registered for perfection and enforceability. These include:

• mortgages;
• movable property pledges established as per general law; and
• movable property pledges established as per specific laws (see question 6.3).

If a Turkish natural or legal person provides a guarantee/surety as security for a foreign special purpose vehicle in any project financing, that person should notify the Undersecretariat of Treasury of the Republic of Turkey. This is a notification requirement solely for information purposes; there is no requirement to obtain any permits and/or approvals from the Undersecretariat of Treasury.

5.5 Is force majeure understood as a legal concept in your jurisdiction?

Force majeure is not regulated under Turkish law. However, it is a recognised and well-understood concept, determined under court of appeal decisions. As per those decisions, any event which is unexpected, unavoidable – despite any measures that could have been taken to prevent it – and beyond the control of the parties may be considered a force majeure event. Force majeure events can also be specified under contracts by the contracting parties as per the principle of freedom of contract, provided that this is not contrary to the principle of good faith.

6 Security/guarantees

6.1 What types of security interests and guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)? In particular, is the concept of a security trustee recognised (and if not, how are guarantees or security taken for multiple lenders)?

Pledges, usufruct rights, step-in mechanisms, mortgages, assignment of receivables, direct agreements and several types of guarantees (surety, guarantee and debt assumption) are available in Turkey. In addition, certain undertakings can be considered securities.

In a standard project financing transaction, the lender usually:

• establishes:
• • pledge and usufruct rights on the shares of the special purpose vehicle (SPV);
  • pledges on the accounts of the SPV;
  • mortgages on the project immovables; and
  • pledges on the trade name, project plant, machinery and equipment; and
• acquires the project revenues, insurance policy receivables and other receivables of the SPV through assignment agreements.

There is almost always a guarantee or surety agreement involved from the sponsors. In addition, lenders secure control of the project cash flow by executing agreements granting them exclusive rights on the SPV's banking activities. In PPP financings, direct agreements and debt assumption agreements are also executed.

In Turkey, the concept of security trustee is realised through a lender or a third party acting as a security agent, where only the security agent becomes party to the security documents and has the security interests. The legal foundation of security agent is established through contractual parallel debt provisions, which grant the security agent an independent right to enforce the security. An alternative way to secure the interests of multiple lenders is by establishing securities as per pro rata shares. In this way, all lenders become parties to the security agreements and have security interests as per their pro rata shares in the loan. Although both alternatives are commonly used in Turkey, the concept of security agent has not yet been tested before the Turkish courts.

6.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests?

The process requires the conclusion of written contracts and might also require notarisation and registration of these contracts, depending on the type of security and the company.

The most common types of securities that must be registered are:

• mortgages over immovables;
• ship mortgages; and
• movable pledges, which create a security over the trade name and movable assets such as machinery and equipment, IP rights, revenues, raw materials, stocks etc, as per the Law on Movable Pledges in Commercial Transactions (6450).

6.3 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Both movable and immovable property can be subjected to pledge rights in Turkey. Mortgages can be established over immovable property as per the Civil Law; and pledges can be established over movable property such as plant, equipment, machinery, IP rights, revenues, raw materials and stocks as per the Movable Pledge Law in general. However, it is not possible to establish securities over certain movable assets – such as ships, mining rights, company shares and trademarks – within the scope of the Movable Pledge Law. These are rather subject to special provisions regulated under different laws and subject to registration requirements with the appropriate registries.

Mortgages are established by execution of official mortgage deeds before the land registry at the place where the relevant immovables are located. To perfect the security, the mortgage and the mortgage deed must also be registered with the land registry. A degree system applies in Turkey, whereby the higher degree will rank before the lower degree in case of foreclosure. Another important issue to note in relation to Turkish mortgages is that the amount secured under the mortgage must be in Turkish lira if the loan is in Turkish lira; however, the mortgage can be in Turkish lira or the foreign currency of the loan if the loan is in foreign currency.

To establish pledges over movable property as per the Movable Pledge Law, a pledge agreement containing specific information detailed under the law must be concluded, notarised and registered with the Movable Pledge Registry for perfection.

6.4 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how? In particular what types of notice and control (if any) are required?

Securities can be established over the bank accounts of pledgers, and thus a security interest can be created over the cash of the pledgor. Such pledges are concluded by simple written form pledge agreements, which also usually contain provisions on the operation of the pledged accounts. If the pledged account is held in a different bank from the pledgee, a notice must be served on such bank by the pledgor, with the aim of informing it of the pledge and the blockage requirements.

Security interests can be established on receivables by executing pledge agreements and/or agreements on the assignment of receivables. In project financing transactions, such securities are commonly created through the execution of the assignment of receivable agreements. Assignment of receivables agreements is considered duly executed by law once they have been signed-in written form by all parties. However, in practice, such agreements are also notarised and third-party debtors are notified through notaries, usually as a condition precedent for loan utilisations. Obtaining the acknowledgement of third-party debtors of the notification is also a primary concern for assignees in order to secure payment of the transferred receivables to the accounts of the assignee.

6.5 Is it possible to take security over major licences (particularly in the extractive industry sector)?

It is not possible to take security over electricity generation licences; however, it is possible to establish mortgages over mining licences. Securities might also be taken over the sales of electricity generated or materials mined.

6.6 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest or the taking of a guarantee?

Notary fees will be payable if the security agreement is notarised. The notary fees vary depending on the type of the security, the secured amount or the loan amount, if the secured amount is not specified.Assignment of receivables agreements, which are usually notarised in project financings, are subject to a notary fee of 1.13 per thousand of the amount specified in the agreement.

A mortgage fee of 4.55 per thousand of the loan amount is chargeable by the land registries for any mortgages established.

Any loan-related security agreements (including any security interest and guarantees) are exempt from stamp tax as per Schedule 2 to the Law on Stamp Tax (488), provided that the loan is extended by a bank, foreign financial institution or international organisation.

6.7 What are the respective obligations and liabilities of the parties under security documents?

The obligations and liabilities vary depending on the type of security. However, some of the notable obligations of borrowers and other security providers are as follows:

• to establish further securities on additional assets acquired, shares issued and project revenues arising from agreements executed after closing of the project financing;
• not to sell, transfer or dispose of the secured assets;
• not to establish further encumbrances on any of the secured assets;
• to refrain from any actions that might result in a decrease in the value of the secured assets;
• to provide additional securities in case of a decrease in the value of the secured assets and/or if requested by the lender;
• to accept step-in rights of the lender; and
• not to object to enforcement through private channels upon the occurrence of an event of default.

6.8 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security or must enforcement action be pursued through the courts?

A security interest or guarantee may be enforced through:

• bankruptcy proceedings before the courts;
• general seizure through execution offices; or
• liquidation of the secured assets through execution offices as per the Law on Execution and Bankruptcy (2004).

If there are secured assets and their value is sufficient to satisfy the debt, then liquidation of the secured assets is the primary option for enforcement.

Self-help is another enforcement option that is commonly accepted and practised by market actors in Turkey. Self-help clauses are commonly included in share pledge agreements and account pledge agreements. The clauses in share pledge agreements entitle the pledgor to enforce the security through private sales, while the clauses in account pledge agreements entitle the pledgor to acquire control of the pledged accounts. Although such clauses have not yet been tested before the courts, in practice, they are commonly used and accepted as valid by most scholars.

In relation to movable asset pledges established under the Movable Pledge Law, and pledges of capital markets instruments and shares of publicly held companies established under the Capital Markets Law, the pledgor has the option of acquiring the secured assets by law and the need for self-help clauses is thus satisfied.

In relation to assignment of receivables agreements, the assigned receivables are directed to the assignor's account on execution of the agreement or on the occurrence of an event of default, so the security interest is protected in this way.

Mortgages must be enforced by requesting liquidation of the secured assets from execution offices and self-help is not available under law.

Sureties and guarantees are enforced through the initiation of bankruptcy proceedings before the courts or general seizure through execution offices. As the general rule stated above is applicable, if the assets of the sureties/guarantors are secured through a pledge for the relevant debt and the value of the pledged asset is sufficient to satisfy the debt, then general seizure or bankruptcy proceedings cannot be initiated against the sureties/guarantors.

6.9 What other considerations should be borne in mind when perfecting a security interest or taking the benefit of a guarantee in your jurisdiction?

‘Guarantees' as defined under Article 128 of the Law of Obligations and ‘sureties' as defined under Articles 581–603 of the Law of Obligations are two methods of sponsorship under Turkish law. While sureties are provided by securing all obligations of the borrower arising from the loan relationship, guarantees may also be provided by securing specific obligations of the borrower, such as completing the project by the project completion date, funding the cost increase or funding the debt service reserve account.

The validity of a surety is subject to strict legal requirements. The amount, date and type of the surety must be handwritten by the surety, and the consent of the spouse of the surety must be obtained if the surety is not a shareholder or a manager of the borrower. The validity of guarantees obtained from legal entities is more flexible and is subject to no legal requirements. However, guarantees obtained from real persons are also subject to strict requirements of sureties.

6.10 What other protections are available to a lender to safeguard its position in connection with security or guarantees?

Lenders usually safeguard their positions by requesting information from third parties if the secured asset is held by a third party (eg, in assignment of receivables agreements and account pledges). The information requested concerns whether the secured assets are free of any encumbrances and whether the third party has any rights to the assets which may rank prior to the lenders.

In addition, lenders safeguard their positions by obliging borrowers and sponsors to submit their financials to the lenders at certain intervals, which enables the lenders to control the financial status of the obligors and request additional securities, if deemed necessary.

By law, lenders must conduct a valuation of the secured assets every six months and at any time if there are indications of a significant reduction in the value of the secured asset, as per the Communique on Technics on Credit Risk Reduction published by the Banking Services Regulation Agency.

6.11 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Direct agreements are not explicitly regulated under Turkish law, but are concluded through the application of the principle of freedom of contract.

The main scenario in which such agreements are concluded is in PPP project financings. Direct agreements in PPPs grant lenders the right to intervene in the project contract executed between the project company and the relevant government entity. Such direct agreements usually entitle the lenders to trigger termination of the project contract and debt assumption in cases where an event of default occurs under the project contract. They also contain certain undertakings by the government entity to protect the lenders' position and minimise their credit risk during the term of the loan.

Direct agreements are also concluded in other project financings as well as PPP project financings, and entitle the lenders to intervene in engineering, procurement and construction (EPC) contracts and other major project agreements. EPC contract direct agreements usually grant lenders comprehensive rights to intervene, including step-in and termination rights, and provide them with a substantial degree of control over the EPC contract.

7 Bankruptcy

7.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

If a creditor initiates enforcement proceedings by requesting liquidation of the secured assets as per the Law on Execution and Bankruptcy, such proceedings will not be suspended or terminated if bankruptcy proceedings are initiated or a bankruptcy order is issued. If a bankruptcy order is issued during such execution proceedings, the secured creditor has the right to terminate the execution proceedings and register its receivables in the bankruptcy estate and recover its receivables in this way. Creditors secured with pledges and mortgages have priority over the amounts recovered by the bankruptcy estate from the sale of the pledged/mortgaged assets.

7.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

The cancellation of certain transactions is possible under the Law on Execution and Bankruptcy in relation to bankruptcy. Such antecedent transactions are listed in the law and include:

• any transaction performed in bad faith to harm the creditors and/or decrease the value of the bankruptcy estate, provided that the counterparty to the transaction has not acted in good faith and the transaction was executed in the five years prior to the commencement of insolvency proceedings; and
• any payments made for undue debts, any payments made in customary payment methods other than cash and any pledges established to secure claims other than those established due to a prior undertaking of the debtor, provided that such acts were performed in the year prior to the commencement of insolvency proceedings and the counterparty to the transaction cannot prove that it was unaware of the debtor's financial situation of the debtor.

8 Project contracts

8.1 Are project contracts in your jurisdiction typically governed by local law?

In Turkey, implementation contracts in relation to PPPs are governed by local law; whereas engineering, procurement and construction contracts and equipment supply contracts are generally governed by foreign law – usually either English law or Swiss law – as there is usually a foreign third party involved in the project. Implementation contracts, executed by and between the project company and the relevant governmental authority, must be governed by Turkish law, as per the Resolution on the Application of the Law Concerning the Realisation of Certain Investments and Services in the Build-Operate-Transfer Model (3996). Therefore, in PPP project contracts, a foreign law option is not available. Apart from PPP project contracts, the parties can choose a foreign law to govern the project contract where an element of foreignness is involved, as per the Law on International Private and Civil Procedural (5718).

8.2 What remedies are available to a project company for breach of the project contract?

The Law of Obligations sets out some remedies in favour of the project company in case of breach of the project contract by the counterparty. Examples include the following:

• The project company can terminate the contract if it is clear that the contractor will be unable to deliver the project at the agreed time.
• The project company may delegate the work to another contractor, at the cost of the existing contractor, if it is clear that the work will not be completed following the terms of the project contract due to the fault of the contractor, provided that a notice is delivered to the contractor requesting the remedy of such default within a specified period.
• Provided that the contractor is liable for the breach, the project company may:
• • terminate the project contract, if the work completed by the contractor is not compliant with the project contract to a degree that it would be equitable to expect the project company to accept the delivered work;
  • request a reduction in price; or
  • request the remedy of the work at the cost of the contractor.

In addition to such remedies, the project company may ask for compensation.

The parties may agree on a different set of remedies. Therefore, contractual remedies may also be available if agreed by the parties in the project contract, provided that such remedies are not contrary to the principle of good faith and other mandatory provisions of law. Furthermore, the remedies may be limited by the parties, provided that such limitation does not eliminate liabilities arising from gross negligence and wilful misconduct.

8.3 Are liquidated damages provisions in project contracts enforceable?

The Law of Obligations includes no provisions on pre-determined damages clauses such as liquidated damages, but decisions of the courts of appeal create a legal basis for contractual pre-determined damages clauses. As per these decisions, the project company and the contractor may agree on compensation in advance and regulate it under the project contract as per freedom of contract; such clauses are enforceable provided that they are not contrary to the principle of good faith. Another similar concept regulated under the Law of Obligations is the penalty clause: penalty clauses can also be agreed upon in advance and included in the project contract. The main difference between these two concepts is that penalties are available even if no damage has been caused to the project company, whereas liquidated damages are available only where actual damages have occurred.

8.4 Are there any public policy considerations which need to be taken into account when assessing the enforceability of project contracts?

Public policy should be considered before entering into a project contract. For example, issues relating to environmental and social matters and obtaining environmental impact assessments should be considered before the project contract is executed; and the project company should identify possible social and environmental concerns before selecting the project area. If the purchase of an immovable is concerned, and if the project company has a foreign shareholding of over 50% or a foreign shareholder has the right to control the management of the project company, then the project company should apply to the relevant governate before the purchase of the immovable, to obtain confirmation that the immovable is not in a military exclusion zone, military security zone or special security zone.

In addition, mandatory limitation of liability provisions of law should be taken into consideration when a contract is executed. Although the statutory time limitation will be subject to the governing law of the contract, some limitations on time bars may be deemed unenforceable by the courts due to unproportionable determination of the time limits.

9 Project risk

9.1 What risks typically arise in project financings in your jurisdiction and how are these best mitigated?

The types of risks that typically arise in relation to project financings in Turkey include:

• construction risk;
• operation risk;
• offtake risk;
• repayment risk;
• political risk; and
• currency risk.

Construction risk is mitigated by:

• the feasibility assessments conducted by technical experts; and
• guarantees from sponsors on delays on construction and cost overruns.

Operation risk is mitigated to a considerable extent by insurance such as property damage, third-party liability and business interruption insurance. In addition, lenders mitigate their risk by inspecting the operations and financials of the project company, as well as the project revenues. In this context, the borrower regularly provides the lenders with its financials and all project revenues are transferred to the accounts of the borrower held with the lenders.

Offtake risk is another major risk to be considered. To mitigate that risk, the lenders usually prefer to extend funds to projects where the project revenues are guaranteed under a long-term scheme, such as government purchase guarantees in renewable energy projects and traffic guarantees in PPPs. Therefore, the project financing sector has lately been dominated by PPPs and renewable energy project financings.

Repayment risk is mitigated by debt service reserve accounts funded by the project revenues prior to the repayment date. If such accounts are not funded before the repayment date, the sponsors usually guarantee to fund such accounts as of the repayment date. Another common way to mitigate the repayment risk is through periodic debt service cover ratio tests. If the project company fails to maintain the debt service cover ratio on a test date, the sponsors are usually obliged to inject equity into the project company to achieve the agreed ratios.

Currency risk is also a significant risk, since many loans are extended in hard currencies, but project revenues are usually in Turkish lira. To mitigate currency risk, currency swap agreements are usually concluded.

9.2 How significant is political risk in project financings in your jurisdiction? How is this best mitigated?

Turkey has a solid and stable political system. However, as its location is geopolitically critical, it has experienced acts of terrorism and several coups over the last 50 years, including a recent coup attempt. Political risk should thus be considered by investors as well as lenders in project financings. Although each of these issues created a political risk, they had no direct effect on project financings themselves, but rather triggered sharp fluctuations in the Turkish lira, which in turn had a direct impact on project financings. For example, in recent years the government has changed its purchase guarantee mechanism in renewable energy projects from US dollars to Turkish lira and prohibited foreign currency transactions in most types of contracts due to the fluctuations in the lira. These political decisions of the government have created a major currency risk for existing projects, as the borrowers and lenders were expecting foreign currency revenues. The importance of currency swaps has once again presented itself, especially when the position and interactions of the Turkish lira are considered.

Another way to mitigate political risk is through political risk insurance, which is available – but not common – in the Turkish project financing market.

10 Insurance

10.1 What types of insurance arrangements are typically put in place for project financings in your jurisdiction?

The typical types of insurance arrangements put in place for various types and sizes of project financings in Turkey include:

• construction all risk;
• workers' compensation;
• employers' liability;
• third-party liability; and
• property damage.

10.2 If local insurance is required, can local insurers assign offshore reinsurance contracts in your jurisdiction?

Subject to certain exceptions, the Insurance Law (5684) states that insurable interests of Turkish residents which are located in Turkey must be insured by insurance companies operating in Turkey. However, this rule does not prevent local insurers from assigning offshore insurance contracts. The Commercial Law states that insurance companies may reinsure the risk on any terms and conditions deemed necessary; and Circular 2007/5 of the Insurance and Private Pension Regulation and Supervision Agency explicitly states that it is legitimate for local insurers to assign offshore reinsurance contracts.

10.3 What other forms of insurance feature in the project finance market in your jurisdiction?

Other types of insurance that feature in the Turkish project finance market, depending on the type and size of the project, include:

• loss of profits;
• business interruption;
• environmental liability;
• performance guarantee;
• country risk;
• war risk; and
• life insurance in relation to real-person sponsors.

11 Tax

11.1 What taxes, royalties and similar charges are levied in the project finance context in your jurisdiction?

Banking and insurance transactions tax (BITT) and Resource Utilisation Support Fund tax (RUSF) are chargeable on loan extensions in Turkey. BITT is applied on the earnings of a bank, such as interest and commissions in relation to loans, at a rate of 5%. BITT is payable only when the lender is a local bank and is not applicable to loans extended by foreign lenders.

RUSF, on the other hand, is applicable to any loan extended to local borrowers by foreign financial institutions and not applicable to commercial loans extended to borrowers by Turkish banks and financial institutions. The rate of RUSF depends on the currency and maturity of the loan. Turkish lira loans extended by foreign financial institutions are subject to RUSF at a rate of 1%, calculated on the accrued interest. The rate of RUSF on foreign exchange loans extended by foreign financial institutions varies between 0% and 3%, calculated on the capital amount plus any accrued interest. If the maturity of such foreign exchange loans is more than three years, the applicable rate is 0%. Therefore, project finance loans are usually exempt from RUSF, due to their long-term maturity and currency.

11.2 Are any exemptions or incentives available to encourage project finance in your jurisdiction?

All loan agreements and related security agreements are exempt from stamp tax as per Schedule 2 to the Law on Stamp Tax (488), provided that the loan is extended by a local bank, a foreign financial institution or an international organisation, and is utilised in Turkey.

11.3 What strategies might parties consider to mitigate their tax liabilities in the project finance context?

There is no legal strategy to mitigate the tax liabilities of the parties. However, no BITT, RUSF or stamp tax is applicable to foreign exchange loans with a maturity of more than three years extended by foreign financial institutions or international organisations.

12 Governing law and jurisdiction

12.1 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Loan agreements are typically governed by Turkish law if all lenders and borrowers are Turkish entities. If one of the lenders is a foreign credit institution, loan agreements are usually governed by English law. Security agreements, on the other hand, are typically governed by the law of the place where the secured asset is located, for simplified and quicker collection purposes. For example:

• ship mortgages are subject to laws of the flag country;
• assignments of receivables are governed by foreign laws if the assigned receivables arise from a commercial relationship governed by foreign law; and
• guarantee agreements are governed by foreign laws if the assets of the guarantors are located in foreign countries.

As a mandatory legal requirement, the security agreement must be governed by Turkish law if the security is established on immovables or movables located in Turkey. Apart from that, the parties may choose a foreign law in cases where there is an element of foreignness (eg, assets are located in a foreign country or one of the parties is a foreign entity).

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

A choice of foreign law or foreign jurisdiction is valid and enforceable provided that:

• there is a foreign element (eg, assets are located in a foreign country or one of the parties is a foreign entity) in the contract in question; and
• the Turkish courts do not have exclusive authority over the dispute.

Accordingly, even if a foreign jurisdiction has been chosen, a Turkish court may assume jurisdiction if:

• the foreign court does not accept its jurisdiction; or
• proceedings are initiated in the Turkish court and the defendant does not object to its jurisdiction.

However, the authority of the Turkish courts over disputes arising from employment agreements, consumer agreements and insurance agreements cannot be eliminated by a contractual choice of jurisdiction, in order to protect the weaker party to such contracts.

In the case of PPP projects, the project contract must be governed by Turkish law and referred to the jurisdiction of the Turkish courts or local or international arbitration, as per the Resolution on the Application of the Law Concerning the Realisation of Certain Investments and Services in the Build-Operate-Transfer Model (3996). Therefore, PPP-related project contracts cannot be referred to the jurisdiction of foreign courts and/or governed by foreign law.

12.3 Are waivers of immunity enforceable in your jurisdiction?

Turkish law distinguishes between acts of state which are sovereign acts and those which are private law acts. For any sovereign acts, the state or its assets cannot be subject to any legal proceedings.

On the other hand, as per the International Private and Procedural Law (5718), a foreign sovereign state cannot claim immunity in relation to disputes arising from their private law relations. However, the International Private and Procedural Law does not specify which acts are to be considered as private law relations, so it has been left up to the courts to determine the private law nature of any act. The courts of appeal have tended to identify an act as private according to its nature and purpose. Accordingly, the following constitute private law relations:

• commercial transactions;
• contractual obligations, including employment contracts;
• IP rights;
• personal injury; and
• damage to property.

Therefore, waivers of immunity are not required in such relationships with states in Turkey.

According to the Enforcement and Bankruptcy Law (2004), property of the Turkish state cannot be subject to seizure. With regard to the property of foreign states, the Enforcement and Bankruptcy Law allows for the initiation of enforcement proceedings with judgment against the same, provided that the provisions of international treaties are observed. The courts of appeal have also ruled that assets of foreign states which are not used for diplomatic or consular purposes can be subject to seizures and attachments.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

Turkey is a party to the New York Convention on the Recognition and Enforcement of Arbitral Awards 1958. As per the New York Convention, Turkey recognises and enforces foreign arbitral awards issued in other contracting states, provided that the conditions set out in the New York Convention are met (eg, the composition of the arbitral tribunal complies with the New York Convention; the subject matter is arbitrable in Turkey; enforcement of the award is in line with Turkish public policy), without re-examining the merits of the case. Turkey also recognises and enforces foreign arbitral awards that do not fall within the scope of the New York Convention, as per the International Private and Procedural Law. The relevant provisions of the International Private and Procedural Law apply in parallel to the New York Convention and the same conditions apply for recognition and enforcement.

Turkey is also a party to the Convention on Settlement of Investment Disputes Between States and Nationals of Other States 1966. Pursuant to this convention, Turkey automatically recognises International Centre for Settlement of Investment Disputes arbitral awards without any need to apply to the Turkish courts for recognition.

13 Foreign investment

13.1 What taxes and other charges are levied on foreign investors in the project finance context in your jurisdiction?

Resource Utilisation Support Fund tax (RUSF) is chargeable on foreign financial institutions that extend loans to local borrowers, which does not apply to local banks in relation to commercial loans (see question 11.1). Otherwise, no other taxes or other charges are levied on foreign investors in the project finance context.

13.2 Are any incentives available to encourage foreign investment in the project finance context?

When the long-term maturity and currency of the project finance loans are considered, a zero tax policy is applicable to project finance loans extended by foreign financial institutions, as such loans are not subject to banking and insurance transactions tax, stamp tax or RUSF if the maturity is more than three years and the currency is not Turkish lira. Furthermore, foreign project companies can benefit from any incentives available to local project companies as per the applicable principle of equal treatment of local and foreign investors.

13.3 What restrictions and requirements apply with regard to the remission of foreign exchange? Are local companies permitted to maintain offshore bank accounts?

There are no legal restrictions applicable with regard to the remission of foreign exchange or the maintenance of offshore bank accounts by local companies.

13.4 What restrictions and requirements apply with regard to the import of plant and machinery?

The import of plant and machinery is subject to the general legislation on imports; however, some sector-specific restrictions and incentives apply in specific cases relevant to project financings, as regulated under specific laws. As an example, 20% of the medical equipment to be used in a healthcare project investment must be of Turkish origin, as per the Law on PPPs of the Ministry of Health (6428). The use of local equipment is also supported in renewable energy projects, where the government will increase the purchase guarantee amounts if the equipment used is of local origin. In addition, the tenders relating to such projects might also include local equipment usage quotas.

Investment incentive certificates are commonly obtained in investment projects which are subject to project financing. Once an investment incentive certificate has been obtained, imports of related plant and machinery will be exempt from custom duties and value-added tax.

13.5 What restrictions and requirements apply with regard to foreign workers and experts?

The Law on International Workforce (6735) and its secondary legislation set out the restrictions and requirements that apply to foreign workers and experts.

As per the Law on International Workforce, foreign workers and experts must obtain work permits to work in Turkey, subject to the fulfilment of certain criteria, which include the following:

• employment of at least five Turkish citizens by the employer;
• paid capital of at least TRY 100,000 or TRY 800,000 worth of gross sales or $250,000 worth of annual exports recorded for the previous year; and
• other specific criteria that vary according to the sector.

In addition, the Ministry of Labour and Social Security will issue a work permit to a foreigner only if the relevant job cannot reasonably be conducted by a Turkish citizen, as per the general principle of protecting the local workforce. Work permits are issued to foreigners for one year, specific to a certain employment position, and can be extended for two and three years, respectively.

The Law on International Workforce empowers the Ministry of Labour and Social Security to set out exemptions from the above criteria in certain circumstances – for example, where the foreigners are to be temporarily employed for projects conducted or performed in Turkey, which might be relevant to project financings. The Law on International Workforce also provides that "board members of Turkish joint stock companies and non-administrative shareholders of other types of Turkish companies, who are not residing in Turkey" are exempt from the requirement to apply for a work permit, provided that they obtain an exemption certificate from the Ministry of Labour and Social Security.

If there are any applicable bilateral treaties (eg, relating to certain mega-projects concerning several countries or investment facilitation treaties), the provisions of those treaties must also be taken into consideration in order to determine the applicable restrictions and requirements relating to foreign labour force.

13.6 Is your jurisdiction party to bilateral investment and withholding tax treaties which might facilitate foreign investment?

According to information published on the website of the Ministry of Trade, Turkey has signed bilateral investment treaties with 98 countries, 76 of which are currently in force. The contracting parties include all EU member states except Ireland, as well as all Organisation for Economic Co-operation and Development (OECD) member countries, except for Iceland, Canada, Norway and New Zealand.

According to information published on the website of the Turkish Revenue Administration, operating under the Ministry of Treasury and Finance, Turkey has signed double tax treaties with 85 countries, including all EU member states and all OECD member countries, except for Chile, Colombia and Iceland. These double tax treaties aim to avoid the imposition of double taxes on income, in the form of withholding tax.

14 Environmental, social and ethical issues

14.1 What is the applicable environmental regime in your jurisdiction and what specific implications does this have for project financings?

The Environmental Law (2872) is the main statute that regulates the environment in Turkey. The Environmental Law and its secondary legislation set out rules and procedures in relation to:

• waste management and decontamination;
• pollution prohibition;
• environmental impact assessments;
• environmental licences and permits;
• hazardous chemicals; and
• other waste.

Any breach of environmental law is subject to significant sanctions under the legislation. The polluter pays principle also has a general application.

Turkey is a party to the major conventions on environmental protection, such as:

• the Kyoko Protocol;
• the United Nations Framework Convention on Climate Change; and
• the Paris Agreement.

In order to align the local legislation and practices with the requirements of these conventions, Turkey has implemented an action plan and strategy. In line with these, Turkey is developing a local carbon trading scheme, which is expected to come into force soon.

The environmental regime has a significant impact on projects and project companies. The most relevant regulations in terms of project financings are:

• the Environmental Impact Assessment Regulation; and
• the Environmental Permits and Licences Regulation.

As per the Environmental Permits and Licences Regulation, entities must obtain licences or permits, depending on the polluting impact of their activities, before commencing such activities. The main permit is the integrated environmental permit, which covers air, noise, wastewater and deep-water emissions. There are also single permits available for other emissions.

As per the Environmental Impact Assessment Regulation, any entity which might cause environmental issues due to its activities (eg, hydropower plants with a generation capacity above 10 megawatts, nuclear power plants, thermal power plants with a heating power above 200 megawatts thermal, motorways and public highways) must undergo an environmental impact assessment before the Ministry of Environment and Urbanisation. Upon conducting such an assessment, the Ministry of Environment and Urbanisation must issue a resolution stating either that an impact assessment is not required or that the impact assessment is positive. In the absence of such a resolution, a project cannot commence operations and cannot obtain any other required authorisations, such as construction permits or licences.

In Turkey, projects that are subject to project financing are commonly subject to the environmental impact assessment process and environmental permits and licences. Therefore, the project financing documents will include the procurement of Ministry of Environment and Urbanisation resolutions and environmental permits and licences as conditions precedent to loan utilisation. In addition, the financing documents commonly contain borrowers' ongoing representations and undertakings regarding compliance with the environmental rules and regulations during the life of the loan, with breach triggering the event of default and acceleration.

14.2 What is the applicable health and safety regime in your jurisdiction and what specific implications does this have for project financings?

The Law on Turkish Occupational Health and Safety (6331) is the main statute that regulates workplace health and safety in Turkey. The law is based on the EU Workplace Health and Safety Directive and sets out rules and procedures to:

• ensure occupational safety;
• prevent occupational diseases and accidents; and
• protect the physical and mental health of employees.

The law obliges employers, among other things, to:

• conduct risk assessments and accident prevention plans;
• provide on-site safety experts;
• substitute dangerous substances or procedures with less dangerous ones; and
• provide training to workers.

Any breach of these obligations will result in administrative fines. The law also creates industry hazard classes, as less hazardous, hazardous and very hazardous, with each class being subject to different measures and sanctions.

Project companies must comply with these rules and procedures. In Turkey, the projects that are subject to project financing are commonly classified as very hazardous, which includes projects in the mining, power generation and construction sectors. Under very hazardous conditions, employers must:

• establish full-time health and safety units;
• employ personnel with the necessary requirements and training; and
• employ safety experts with the necessary qualifications.

In addition, if the employer fails to conduct risk assessments, work will be suspended. The project financing documents commonly contain borrowers' ongoing representations and undertakings regarding compliance with the workplace health and safety rules and regulations, with breaches triggering an event of default and acceleration.

14.3 What social and ethical issues should be borne in mind in the project finance context?

Lenders, borrowers and sponsors must:

• respect social and cultural rights;
• contribute to development, sustainability, human rights and freedoms; and
• refrain from actions that would harm these values.

It is common in Turkey for lenders to:

• refer to internal policies on the protection of these values when deciding whether to finance a project; and
• have internal obligations to evaluate any project by taking sustainability and environmental, social and ethical impacts into consideration.

In addition, the Turkish public reacts swiftly to projects that might cause social and ethical problems and opposes them by any means (eg, social media, on-site protests). Such opposition has the potential to harm the reputation of the lenders, the borrowers and other parties involved in the project. Therefore, social and ethical issues should be carefully considered before investing in a project, regardless of any legal requirements.

15 Trends and predictions

15.1 How would you describe the current project finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Due to the COVID-19 pandemic and recent fluctuations in the Turkish lira, the project finance market remains stagnant. New project finance investments are rare and refinancings and restructurings are in demand.

If Turkey succeeds in defying the pandemic and stabilising the Turkish lira, investor confidence is expected to rise and the investment environment to improve. In parallel, lenders will start seeking investment opportunities in order to increase their project loan volumes, which stayed below the regular rates in 2020.

To the best of our knowledge, no new developments or proposed legislative reforms relating to the project finance market are anticipated in the next 12 months.

16 Tips and traps

16.1 What are your top tips for the smooth conclusion of a project financing in your jurisdiction and what potential sticking points would you highlight?

The major challenge in project financing transactions in Turkey is the failure to reflect site realities in the finance documents. If a healthy information flow is not facilitated in the due diligence phase, or if potentially problematic matters are not addressed in the financing documents, financial closing or subsequent disbursements may be delayed due to waiver or finance document amendment processes. Consequently, although standardisation provides a good degree of comfort to the parties, if a balance is not maintained between standardisation and flexibility, this comfort or convenience can easily be replaced by the troublesome implementation process of the finance documents.

Thus, due diligence, the establishment of security and closing transactions should be diligently organised and conducted. Closing should take place at a physical meeting, to ensure a smooth and fast process, and the lawyers of each party should be present at the meeting. Signatures should be obtained in the presence of the lawyers, who should check each document in order to correct any deficiencies while the signatories are still at the meeting. Each deficiency might prove an obstacle to loan utilisation if not corrected.

Conditions precedent and conditions subsequent must also be determined with caution, to avoid any delays to the anticipated utilisation date. In particular, due diligence in relation to security must be carefully conducted and any obstacles to its establishment should be eliminated before utilisation; if not, its establishment should be agreed as a condition subsequent, to avoid delays in utilisation.

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.