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