The recent volatility experienced in Turkish financial markets and in particular the devaluation of Turkish lira have brought many borrowers to the brink of default. This has prompted the Turkish authorities to take action. Accordingly, the Banking Regulatory and Supervision Authority in Turkey (the “BRSA”) has published a new set of restructuring rules, the Regulation on the Restructuring of Debts Owed to the Financial Sector (the “Restructuring Regulation”), which came into force on 15 August 2018.
The aim of the Restructuring Regulation is to establish a set of common rules and procedures to enable the turnaround of businesses by restructuring their financial debts. The Restructuring Regulation provides that the detailed rules and available restructuring methods are to be set out in framework agreements (the “Framework Agreements”) to be prepared by the Turkish Banks’ Association which are to apply generically to determined sectors and/or companies of certain size. Specific company restructurings will then be implemented under restructuring agreements entered into by the relevant company and its creditors. This follows a previous practice implemented in the aftermath the 2001 financial crisis, known as the “Istanbul Approach”.
The first of the Framework Agreements entered into force from 19 September 2018 upon approval by the BRSA having been reportedly signed by banks and other financial institutions holding 90% of the existing loan portfolio in Turkey. There may be more Framework Agreements as the applicable legislation refers to the possibility of “sector-specific” framework agreements, each subject to the BRSA’s approval to take effect.
With both the Restructuring Regulation and the first Framework Agreement now in place and effective, the BRSA has prepared a draft law on the restructuring of debts owed to the financial sector (the “Draft Restructuring Law”). The Draft Restructuring Law essentially confirms the restructuring rules under the Restructuring Regulation and introduces additional elements. The scope of the Draft Restructuring Law is to elevate the Restructuring Regulation to the force of law and this enables additional measures such as tax and other incentives to be added to the restructuring framework.
Major principles underlined in the Draft Restructuring Law, the Regulation and the first Framework Agreement can be summarised as follows:
- The companies that can seek to restructure their financial indebtedness under the new restructuring rules (the “Qualified Debtors”) are those companies which (i) owe more than TRY 100,000,000 to banks, factoring companies, leasing companies or financing companies in Turkey (the “Creditors”), either as cash or non-cash loans; (ii) are not subject to pending execution proceedings initiated for more than 25% of the debt qualified for financial restructuring; (iii) are not declared bankrupt; and (iv) are able to demonstrate conclusively that the restructuring will result in repayment of the outstanding indebtedness.
- To achieve restructuring, each Qualified Debtor and its Creditors shall enter into a restructuring agreement (the “Restructuring Agreement”) within two years from the execution of the corresponding Framework Agreement. The Restructuring Agreement shall cover the terms and conditions of the restructuring. These may include new facilities being extended, accrued interest or portion of principal amount being waived, forced sale of assets etc.
- A Restructuring Agreement signed by Creditors holding two thirds of a Qualified Debtor’s receivables is binding on the remaining Creditors, provided such Creditors are a party to the Framework Agreement.
- Once a Restructuring Agreement has been entered into, any ongoing execution proceedings against such Qualified Debtor shall be suspended and no new proceedings shall be initiated henceforth, including the proceedings to collect public receivables (such as taxes or social security contributions). Furthermore, court decisions on interim injunctions and attachments shall no longer be enforceable and periods of prescription and statute of limitation shall come to a halt.
- The Draft Restructuring Law proposes that the Framework Agreements and the Restructuring Agreement shall be exempt from certain taxes and duties such as stamp duty, banking and insurance transaction tax, resource utilization support fund etc. Such exemptions would also apply to the disposal of assets acquired by the Creditors on the basis of a Restructuring Agreement.
As shown above, the Turkish banking authorities have reacted swiftly to ensure a restructuring framework is in place and supported by market players. It now remains to be seen how the implementation in practice will unfold and help further develop and fine-tune the regulations.