COVID-19's impact on Turkey, like everywhere else worldwide, has become the most important issue on companies' agendas. The discrepancies in cash flows and unavailability of conventional financing sources are forcing companies to treat alternative financing methods as top-priority agenda items.
New public offerings and/or traditional bond issuances for Turkish companies may be unattractive in the current market conditions. However, there are many other alternative capital markets instruments to finance businesses.
Capital injection may be in the form of a rights issue or a private placement.
A rights issue refers to the issuance and offer of new shares, for cash, made to existing shareholders on a preemptive basis. This process requires the Capital Markets Board's (the "CMB") approval of the prospectus. Registered shareholders are issued pro rata pre-emptive rights. Preemptive rights are separately tradable securities which entitle its holder to subscribe to new shares being offered by the issuer at an offer price.
Private placement refers to the issuance and offer of new shares, for cash, by wholly or partially restricting preemptive rights. Private placements can be conducted as private placements to designated investors or the sale of new shares to the qualified investors without a public offering. The issuer is not required to prepare a prospectus or an offering circular. However, the issuer must prepare an issuance certificate (a one-page document describing the terms of the issue) to be approved by the CMB.
Capital injection can also be made by restricting all pre-emptive rights and offering the new shares to the public. This requires an offering circular to be approved by the CMB.
Convertible bonds are bonds the holder of which can convert them into a specified number of shares at the end of maturity. Therefore, convertible bonds are hybrid securities, possessing characteristics of both debt and equity.
Companies can issue convertible bonds with a maturity of at least one year and offer them through a public offering, private placement to designated investors, or a sale to qualified investors without a public offering.
Convertible bonds' interest rates are generally lower than traditional bonds, because these bonds grant bondholders the right to convert the bonds into shares. Consequently, bondholders can benefit from both the value increase in the shares of the issuer and interest income from the bonds.
Reverse Mergers /Merging Private and Public Companies
Financing can be obtained through the merger of private companies possessing a strong financing structure with a public company.
The merger will increase the total share capital and minimize the effects of the current market volatility on merging companies.
Private companies can become public companies without going through an IPO process. While public companies' capital raising through public offerings or secondary IPOs can take months to materialize, reverse mergers can take much less time. This saves time and energy, allowing the management to devote ample time to reducing operational costs and strengthening centralized management.
In the share-based crowdfunding system, companies can obtain financing through the sale of a portion of the company's shares in exchange for the amount of money needed for financing.
Crowdfunding transactions are conducted by the crowdfunding platforms authorized by the CMB.
To raise funds through share-based crowdfunding, companies must (i) engage in technology and/or manufacturing; and (ii) have been established within the last five years.
For further information on share-based crowdfunding, please check our client alert "Share-Based Crowdfunding: An Alternative Method For Investors".
Asset or Mortgage Backed Securities
In general, financial institutions (i.e. banks, factoring companies, etc.) prefer to utilize asset or mortgage-backed securities as a financing method. This method allows gives companies to issue securities backed by long-term secured or unsecured receivables.
Since the bonds are based on receivables, they are investment instruments that carry a low risk for investors.
Companies engaged in the production of goods and services have the opportunity to convert their long-term receivables into cash before the maturity date by selling them to the asset-based securities' funds.
Companies may consider alternative instruments in the finance markets instead of capital markets tools if they need quick and cost-effective financing. Companies that utilize alternative finance market instruments can restructure their existing debts, conduct factoring and other receivables finance transactions, or consider intra-group loans.
Receivables Finance: Factoring – Invoice Discounting
Companies in the production and sale of goods and services can consider selling their long-term receivables to factoring institutions and banks in order to cover their short-term cash needs.
Receivables financing transactions can help maintain a company's cash flow and stabilize its balance of payments in a short period of time. Receivables financing transactions also decrease the collection costs of these receivables and the human resources to be allocated for the same purpose.
Also, large corporates with many suppliers can use their credibility and relationships with financial institutions to establish supplier finance programs whereby the smaller suppliers can optimize their cash flows by selling their receivables to the bank which would also ensure the sanity of the supply chain.
Group companies can also consider intra-group loans to ensure the stability of the company's cash flow and generate financing quickly and cost-effectively.
Since Turkish companies cannot lend to their group companies and intra-group loans procured from abroad are subject to strict FX borrowing restrictions, companies must evaluate these transactions in detail and structure them in accordance with these restrictions.
Financial restructuring is one of the most important options for strengthening companies' financial structures.
Financial restructuring offers many benefits to companies in financial distress. Companies can stabilize their cash flows with financial restructuring tools such as (i) extending loan maturities; (ii) refinancing loans; and (iii) write offs concerning principal and interest, among others.
Transaction and finance documents entered into within the scope of financial restructurings are exempted from a number of tax liabilities, including but not limited to the exemption from stamp tax; the resource utilization support fund; the banking and insurance transaction tax; and other levies and charges.
For further information on financial restructuring, please check our client alert financial restructuring client alerts.
Companies should reconsider their financing methods in the face of the new normal, assess their financial structure and liabilities with their financial and legal advisers, and take the necessary steps soon as possible.
Originally published May 18, 2020
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.