I. Introduction

The Law No. 7222 Amending Banking Law and Certain Other Laws published in the Official Gazette on February 25, 2020 made certain changes in Capital Markets Law No. 6362 ( "Law") by including a new Article 31/B. This new article introduced the "security agent" concept to Turkish capital markets stage, which has been a well-known concept in foreign capital markets to ensure that issuers fulfil their obligations arising from the capital market instruments.

While Article 31/B contains several provisions regarding security agents and the security management agreement, it has granted the Capital Markets Board of Turkey ("CMB") the power to determine the principles including the type of assets that can be utilized as security and the capital market instruments which can be secured.

In this respect, the CMB announced the Draft Communiqué Regarding Issuance of Secured Capital Market Instruments No.II-31/B.1 ("Draft Communiqué") on September 10, 2020 on its official website for review of the public. In this article, we will be briefly summarizing the provisions introduced with the Draft Communiqué.

II. Provisions of the Draft Communiqué

  • Secured capital market instruments

According to Article 4/2 of the Draft Communiqué, issuers are allowed to secure capital market instruments they will issue. On the other hand, the CMB can require a capital market instrument to be secured depending on the type of issuer, the amount issued and/or the type of capital market instrument.

The issuers can secure their capital market instruments by (i) transferring the ownership of the assets to be utilized as security to the security agent or (ii) establishing limited rights in rem (e.g. pledge or easement) in favor of the security agent as per Article 4/1 of the Draft Communiqué. Please note that this procedure has to be completed at least one day prior to the sale of the capital market instrument and announced in Public Disclosure Platform (i.e. KAP) before the sale as per Article 4/3 of the Draft Communiqué.

Moreover, trade name of the security agent, information about the capital market instrument and security agent's powers have to be registered by the issuer at the relevant registry where the issuer's headquarters is located. The registered information also has to be announced in the Turkish Trade Registry Gazette prior to the first sale to be made within the scope of the prospectus or issuance document as per Article 10/3 of the Draft Communiqué.

  • Security assets

According to Article 5/1 of the Draft Communiqué, some of the assets that can be used as security to the capital market instruments are as follows:

  1. cash (Turkish lira/convertible currencies)
  2. certain assets,
  3. foreign currency bonds and government domestic debt securities, lease certificates,
  4. shares traded on Borsa Istanbul Star Market,
  5. debt instruments issued by banks,
  6. letter of guarantee payable upon first request, without any restrictions,
  7. standard precious metals traded on Borsa Istanbul,
  8. mortgage-based securities and asset-based securities,
  9. Real property, and
  10. Limited rights in rem established on the assets listed above.

Article 5/4 of the Draft Communiqué states that as of the day the security asset has been transferred to the security agent: (i) all of the security assets should be located in the Republic of Turkey except assets stated under item (c) above, (ii) the creditor should be residing in Turkey if the security asset is a receivable and (iii) there has to be no transfer restrictions for the assets which will become the security.

After determining the assets and satisfying the conditions above, the ownership will be transferred to the security agent or a limited right in rem will be established as per Article 6/1 of the Draft Communiqué. In this respect, security assets will be kept separate from the assets and bank accounts of the security agent and security assets will not be subject to pledge, seizure or other encumbrances for the debts of the security agent.

  • Security agent

The security agent will be independent and will have to check whether the assets to be secured satisfy the requirements stated under the Draft Communiqué before obtaining the ownership or establishment of the rights in rem.

The security agent is authorized to and in charge of managing and protecting the security assets, taking legal remedies, converting such assets into cash in order to meet the receivables from the security, distribution of the proceeds to investors, returning the assets to the issuer if there are any remaining amounts following distribution, protecting rights and interests of the investors. 

  • Security management agreement

Pursuant to Article 7 of the Draft Communiqué, a written agreement has to be signed by the issuer and the security agent containing (i) the undertaking to transfer the ownership of the security to the security agent or to establish a limited right in rem, (ii) the rights and obligations of the security agent to protect, manage and liquidate the assets utilized as security.

Article 7 also provides the minimum information that has to be included in the security management agreement. For example, information about the capital markets instrument which is secured, the type of issuer's payment obligation arising from the issuance of capital market instrument, when and how such obligation will be fulfilled, under which circumstances it will be possible to meet the receivables from the security, the salary to be paid to the security agent, whether the security agent can assign its duties to third parties has to be included in the security management agreement.

Security management agreement has to be submitted to the CMB together with the documents prepared for maximum issue limit application as per Article 8/1 of the Draft Communiqué. In this respect, a single security management agreement can be made for the entire maximum issue amount or separate agreements can be made for the issuances to be made within the maximum issue. In case the parties enter into a single security management agreement for the entire maximum issue amount, the security assets have to be separately stated in the agreement in terms of each issuance as per Article 8/2 of the Draft Communiqué.

  • Event of default

Pursuant to Article 9/1 of the Draft Communiqué, failure to make the capital, interest and similar other payments of the relevant capital market instrument within the period stated under the prospectus or issuance document will be considered as a default of the issuer under the security management agreement. Please note that other events of default can be also determined by the parties.

In the event of default by the issuer, the security agent will have the right to liquidate the security assets and distribute the proceeds between the investors without giving any notice or additional time to the issuer, obtaining permission or approval from a judicial or administrative authority as per Article 9/2 of the Draft Communiqué.

III. Conclusion

With the provisions introduced in the Draft Communiqué, investors will be able to collect their receivables more quickly, which will also help the issuer in terms of lower interest rates. In addition, having an independent security agent and granting security agent the right to manage and sell the secured asset, registering and announcing the secured assets in the relevant trade registry will provide transparency and protect the investors' rights more effectively. As a result of such changes, it is expected by the legislators to attract more investors to Turkish capital markets in the near future.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2020. A link to the full Legal Insight Quarterly may be found here



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