I. Introduction and General Overview of the Current Financial Restructuring Rules
The concept of "financial restructuring," which may be defined as "the process of reorganizing the borrowing structure of a debtor" was set forth in Turkey through the Regulation on the Restructuring of Debts Owed to the Financial Sector, which was published in the Official Gazette No. 30510 on August 15, 2018 (amended with the Regulations on Amending the Regulation on the Restructuring of Debts Owed to the Financial Sector, published in the Official Gazette No. 30602 on November 21, 2018) ("Regulation"). The Regulation created an opportunity for the debtors to fulfil their repayment obligations and allowed them to restructure their debts through restructuring agreements executed within the scope of framework agreements ("Framework Agreement"), as drafted by the Banks Association of Turkey and approved by the Banking Regulatory and Supervisory Agency ("BRSA"), and regulating the minimum content of individual restructuring agreements to be executed between the debtors and the banks.
Creditors applied for financial restructuring based on the provisions of the abovementioned Regulation, until the Provisional Article 32 of the Banking Law No. 5411 ("Law") entered into force upon its publication with the Omnibus Bill in the (Repeating) Official Gazette No. 30836 on July 19, 2019 ("Provisional Article").
A few months after the implementation of the Provisional Article, new amendments were introduced to the Regulation by the BRSA through the Regulation on Amending the Regulation on the Restructuring of Debts Owed to the Financial Sector, published in the (Repeating) Official Gazette No. 30886/1 on September 12, 2019 ("Amending Regulation"), in order to accord with the principles put forth in the Provisional Article.
While the Provisional Article widened the scope of applicability of the financial restructuring process, it also adopted the provisions contained in the Regulation with minor changes. In a similar manner, the Amending Regulation implemented the provisions of the Provisional Article into the Regulation.
II. Changes Brought Forth by the Provisional Article 32
Firstly, the Provisional Article broadened the definition of "creditors" who can benefit from financial restructuring. Accordingly, the definition of creditors was now expanded to include non-resident banks and financial organizations that have lent directly to Turkish resident debtors, multinational banks and institutions that have directly invested in Turkey, as well as special purpose vehicles ("SPV") established by such creditors and investment funds established for the same purposes, as per the Capital Markets Law No. 6362 ("CML"); as well as deposit banks, participation banks, development and investment banks established in Turkey, financial leasing companies, factoring companies and financing companies ("Creditor").
Secondly, the Provisional Article clarified that the debtors would have to be companies incorporated in Turkey, but specifically excluded those entities that fell under the following laws and institutions ("Debtor"):
(i) Banking Law No. 5411 (i.e., deposit banks, participation banks, development and investment banks established in Turkey);
(ii) Insurance Law No. 5684 (i.e., insurance companies, reinsurance companies carrying out business activities in Turkey);
(iii) Law No. 6361 on Financial Leasing, Factoring and Finance Companies (i.e., financial leasing, factoring and financing companies established in Turkey);
(iv) Law No. 6493 on Payment and Securities Settlement Systems, Payment Services and Electronic Fund Institutions (i.e., payment institutions and electronic payment institutions); and,
(v) Capital markets institutions listed in Article 35 of the CML (i.e., residential property finance and asset finance funds, portfolio management companies, mortgage finance institutions, central depository institutions), with the exception of investment institutions.
On the other hand, as per paragraph 3 of the Provisional Article, the Debtor will be able to benefit from the financial restructuring provisions only if its financial status and condition has been assessed by the Creditor and it has been deemed feasible for the Debtor to enter into financial restructuring. In other words, the Debtor is expected to be able to repay its debts once they are restructured. The assessment of the Debtor's financial situation and applicability of the financial restructuring provisions will be undertaken by independent auditors, by those institutions with sufficient expertise and knowledge as stipulated under the Framework Agreements, or by the Creditor itself (subject to prior approval of the Debtor).
Contrary to the Regulation, the Provisional Article has provided further options for restructuring measures that may be applied to the Debtor. Following completion of the abovementioned analysis, the Creditor may grant certain measures to the Debtor, such as the following:
(i) Extension of maturity,
(ii) Renewal of loans,
(iii) Granting additional loans,
(iv) Reducing or waiving (fully or partially) the principal amount, interest, default interest, late payment penalties, dividends, and any other receivables arising from the loan,
(v) Reducing collaterals,
(vi) Conversion of principal amount, interest or dividends into equity (fully or partially),
(vii) Executing protocols with other banks and Creditors,
(viii) Selling or assigning the principal amount, interest or dividends to SPVs or investment funds incorporated pursuant to the CML in return for a price contingent upon payment in kind, cash or collection.
It is also important to note that the Provisional Article specifies that a reduction in the collaterals, the waiver of the principal amount or any other receivables, and similar transactions made in accordance with the Provisional Article will not be deemed to constitute grounds for an embezzlement charge, as per the applicable banking regulations.
The Provisional Article also provides several tax exemptions for the transactions and documents to be entered into within the scope of the Framework Agreement and the relevant restructuring agreements. For instance, exemption from stamp tax, resource utilization support fund tax, and banking and insurance transaction tax may be applicable; however, those Debtors who have benefitted from financial restructuring with respect to the same debts within the previous two years and who are undergoing financial restructuring again will not be able to benefit from the relevant tax exemptions and subsidies.
Lastly, the Provisional Article will be applicable only for a limited term of two years, starting from the date that the Provisional Article was published in the Official Gazette, i.e., July 19, 2019. The President of the Republic of Turkey can extend such period for an additional two years.
III. Changes Brought Forth by the Amending Regulation
The main purpose of the changes made by the Amending Regulation is to align the Regulation with the new rules introduced by the Provisional Article. In this context, the definition of "creditors" under the Regulation was amended to reflect the changes made by the Provisional Article, and it now encompasses non-resident banks and financial organizations that have directly lent to Turkish resident debtors, multinational banks and institutions that have directly invested in Turkey, as well as SPVs established by such creditors and investment funds established for the same purposes under the CML. Additionally, investment institutions have been included in the definition of "debtors," and it has been clarified once again that such debtors must be incorporated in Turkey.
It should be noted that another change has been made to Article 4 of the Regulation. Pursuant to the amendment, it was reiterated that the scope of the Regulation and the Framework Agreements would encompass only those financial restructurings that sought to enable the Debtor to repay its debts within a reasonable time period, and that any extensions, instalments and other refinancing transactions that did not have this aim would not be considered to fall within the scope of the Regulation or the Framework Agreements. Furthermore, those financial restructuring agreements, that were executed prior to enactment of the Provisional Article and outside the scope of the Framework Agreements, will not be considered to fall under the scope of the Framework Agreements and the relevant restructuring agreements. As a result, such financial restructuring transactions will not benefit from any applicable tax law or criminal liability exemptions.
Furthermore, with the newly added provision to Article 5/4 of the Regulation, non-resident banks and financial organizations that have directly lent to Debtors, and multinational banks and institutions that have directly invested in Turkey can join the financial restructuring process under the Framework Agreements, irrespective of the consent or decision quorum of the Creditors. It should also be pointed out that the approval of at least 30% of the Creditors representing 75% of the total receivables is required for other creditors to be able to join the financial restructuring process, as per the Framework Agreements.
Finally, with the new changes introduced to Article 9, the BRSA can request documents and information in relation to transactions that fall within the scope of the financial restructuring provisions. Accordingly, any information that may be deemed necessary regarding the debtors, signed restructuring agreements, transactions and developments have to be submitted to the BRSA within the requested period and according to the requested form and content.
Even though there is still a lot of work to be done to fully regulate the financial restructuring process in Turkey, it is abundantly clear from the recently introduced amendments that the lawmakers and the BRSA intend to unify the existing regulations and set forth more expansive and detailed rules on this issue. As part of this process, we expect the BRSA to revise the Framework Agreement draft in the near future, in accordance with the changes made to the Law and the Regulation.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2019. A link to the full Legal Insight Quarterly may be found here