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General structuring of financing

Choice of law

What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?

Transaction agreements between Turkish parties are generally governed by Turkish law. When there are foreign parties involved, the documentation is mostly governed by English law or other foreign laws. Collateral arrangements for creating security interest over the assets located in Turkey should be governed by Turkish law (due to the lex rei sitae principle) without prejudice to the nature of the transaction.

Pursuant to rules specified in the International Private and Procedural Law, Turkish courts will recognise and give effect to parties’ choice of foreign law in principle if the transaction involves a foreign element except for transaction agreements which are required to be governed by Turkish law (eg, agreements for the establishment of a mortgage over immovables located in Turkey). Any judgment rendered in foreign courts should be recognised and enforced by Turkish courts provided that the following requirements are satisfied:

  • the judgment should be final and binding under the relevant foreign laws;
  • a contractual or de facto reciprocity on enforcement of foreign judgments should exist between the country where the foreign judgment was rendered and Turkey;
  • the judgment should not be in relation to the exclusive jurisdiction of the Turkish courts;
  • the judgment should not contradict public policy in Turkey; and
  • the counter-party’s right of defence should be complied with during the course of the trial.

Restrictions on cross-border acquisitions and lending

Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?

In general, there are no statutory restrictions regarding acquisitions carried out by foreign entities in Turkey. However, there may be required authorisations or certain restrictions for regulated sectors (ie, media, energy and banking). For instance, the consent of the Banking Regulation and Supervision Board is required for the acquisition of shares of banks established in Turkey which exceed a certain threshold, or the consent of the Energy Market Regulatory Authority must be obtained for direct or indirect acquisition of more than 10 per cent of energy companies or for any change of control thereof. There are certain restrictions regarding acquisitions of Turkish media service providers by foreign natural persons or entities. Apart from these statutory requirements, the target company’s articles of association may also impose certain limitations, such as requiring shareholder or board of directors’ approval for an envisaged share transfer.

Although no explicit restrictions were foreseen regarding cross-border lending except for utilisation of revolving loans from foreign financial institutions by Turkish residents, certain restrictions are introduced regarding foreign currency denominated loans either from abroad or from within Turkey by Turkish residents as per the amendments made on Turkish capital control rules in 2018. Accordingly, Turkish residents may use foreign currency denominated loans without being subject to any limitations if their outstanding foreign currency denominated loans are equal to or higher than US$15 million at the time of the envisaged use. For Turkish borrowers whose outstanding foreign currency denominated loans are less than US$15 million, certain thresholds and limitations regarding the loan amounts are set forth under the amendments. As the amendments specify certain exceptions for the requirement of having an outstanding foreign currency denominated loan which is equal to or higher than US$15 million, the involved parties and type of transaction must be evaluated on a case-by-case basis. For instance, entities that are incorporated for the sole purpose of acquiring the shares of a company will not be entitled to comply with this requirement.

Types of debt

What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?

Acquisitions in Turkey are financed with either equity or debt, or most commonly by a combination of the two. A common debt structure used in acquisition financing in Turkey is debt financing provided by financial institutions in the form of senior secured debt. Although subordinated loans may be structured depending on nature of the transaction, this is not common for acquisition financings. Equity that may be granted by shareholders is generally provided in the form of shareholder loans.

Certain funds

Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?

There are no statutory provisions that require certainty of financing for the acquisition of public companies. However, the offer documents must contain the amounts and sources of committed funding dedicated for the acquisition of a public company, as per Turkish Capital Markets rules. It is also possible for the Capital Markets Board to request a guarantee of funds from bidders. Turkish law does not require bidders to obtain confirmation by third parties (ie, generally banks or financial advisers of the bidder) that ensures availability of funding on the completion of such acquisition.

Restrictions on use of proceeds

Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?

Even though there are no statutory limitations regarding the use of loan proceeds by the borrower under Turkish law, the provisions of the relevant financing documentation generally restrict the use of proceeds and designate specific purposes for the loans depending on the type of loans utilised. According to the provisions of Decree No. 32 regarding the Protection of Value of Turkish Currency and Capital Movements Circular, loan amounts that have been extended by foreign financial institutions to Turkish residents should be transferred to Turkey through banks residing and licensed in Turkey. Similar to loan proceeds, Turkish law does not foresee any statutory limitations regarding the use of proceeds from debt securities. On the other hand, guidelines published by the Capital Markets Board require issuers to include the envisaged use of proceeds provided from the offering of debt securities under the relevant prospectus. Such statements should include detailed information regarding the planned area of use, especially if the proceeds are envisaged to be used for transactions other than the ordinary activities of the issuer, such as acquiring an asset or payment of debts.

Licensing requirements for financing

What are the licensing requirements for financial institutions to provide financing to a company organised in your jurisdiction?

Turkish Banking Law implements the principles and procedures of financial markets governing banks and other financial institutions that carry out financial services in Turkey, including but not limited to, accepting deposits, providing financing etc. There are no additional licensing requirements for domestic banks that hold an operating licence issued by the Banking Regulation and Supervision Board for providing bilateral and syndicated financing. No licensing requirements shall apply to foreign banks and financial institutions if they are entitled to provide financing in their relevant jurisdiction of incorporation.

Withholding tax on debt repayments

Are principal or interest payments or other fees related to indebtedness subject to withholding tax? Is the borrower responsible for withholding tax? Must the borrower indemnify the lenders for such taxes?

No withholding tax will apply for interest/fee charges in relation to financings provided by local banks or financial institutions. Interest charges regarding loans obtained from foreign banks and financial institutions are subject to withholding tax at the rate of 0 per cent. Withholding tax at the rate of 10 per cent shall be applicable to interest payments pertaining to shareholder loans, assuming that shareholders are established as corporations but not as financial institutions. In Turkish market practice, all taxes and fees that are applicable to lenders and borrowers are indemnified by borrowers.

Restrictions on interest

Are there usury laws or other rules limiting the amount of interest that can be charged?

Although the Turkish Code of Obligations foresees certain limitations on interest rates, the Turkish Commercial Code, which generally regulates commercial transactions, including acquisition financing, indicates that interest rates determined in commercial transactions can be freely agreed between parties provided that there are certain exceptions regarding consumer transactions and the use of compound interest. Therefore, provisions of the agreement may freely determine interest rates if the parties are involved in commercial transactions (ie, commercial loan agreements).

Indemnities

What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?

Borrowers will generally be required to indemnify lenders for any claims, losses, damages, fines, penalties and related expenses arising from the inaccuracy of representations and warranties granted by the borrower or breach of any obligations by the borrower as per the terms set forth under the financing documentation. The inclusion of tax indemnities, funding indemnities and currency indemnities in financing documents is also market practice in Turkey.

Assigning debt interests among lenders

Can interests in debt be freely assigned among lenders?

Receivables arising from finance documents may be assigned freely by creditors unless financing agreements unusually require the consent of the borrower. On the other hand, creditors may only assign accrued interests, as interests are accessory receivables to the loans.

Requirements to act as agent or trustee

Do rules in your jurisdiction govern whether an entity can act as an administrative agent, trustee or collateral agent?

Under Turkish law, the administrative agent, collateral or security agent and trustee roles are not recognised concepts, although such roles are often included in financing transactions in Turkey. As per the International Private and Procedural Law, the capacity of an entity as an administrative agent, trustee or collateral agent is subject to the laws applicable in its jurisdiction of incorporation. Therefore, such entities duly established in their jurisdiction should be recognised as authorised legal entities that have capacity to carry out such transactions under Turkish law.

Debt buy-backs

May a borrower or financial sponsor conduct a debt buy-back?

Debt buy-back is not explicitly regulated under Turkish law and such transactions may be restricted under finance documents, which is a common practice in Turkey.

Exit consents

Is it permissible in a buy-back to solicit a majority of lenders to agree to amend covenants in the outstanding debt agreements?

Turkish law does not explicitly restrict a borrower from soliciting the lenders’ consent with an aim to amend financing agreements (including covenants). The quorum required (majority or unanimity) for such an amendment will be determined under the financing documents. In any event, such solicitation should be carried out in compliance with general principles of law (eg, acting in good faith).

Guarantees and collateral

Related company guarantees

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

Other than the financial assistance prohibition, which may invalidate collateral or guarantees provided by target companies to third parties to facilitate the acquisition of their own shares, there are no restrictions on guarantees granted by related parties residing in Turkey or abroad, provided that such guarantee, which shall be deemed a related-party transaction, should be at arm’s length and in compliance with transfer pricing rules. It is debatable among legal scholars whether financial assistance prohibition applies to intra-group collateral and guarantees. Although no precedents have been rendered to date regarding this issue, the Turkish Commercial Code explicitly permits intra-group pledges and guarantees if the losses of the security provider are compensated by the parent company. Hence, in our view, this exception should be evaluated on a case-by-case basis by acquisition financiers and their advisors.

Assistance by the target

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

Transactions entered by joint stock (target) companies to provide, non-exhaustively, advance payments, loans, collateral or guarantees for acquisition of their own shares by a third party shall be deemed null and void as per the Turkish Commercial Code. Financial assistance provided by banks or financial institutions in their ordinary course of business for acquisition of their own shares and share acquisitions by company or subsidiary employees are exempted from the financial assistance prohibition. On the other hand, if such transactions (i) reduce capital reserves that must set aside by law or company’s article of association, (ii) violate the rules regarding expenditure of legal reserves or (iii) do not enable the company to allocate legal reserves required by law, these exceptions shall also be null and void.

Unlike EU legislation, there are no explicit conditions or whitewash procedures under Turkish law regarding financial assistance prohibition or its remedy. As such a prohibition does not apply to limited liability companies, the requested collateral may be provided by limited liability companies rather than joint stock companies. To that end, the target company may be converted into a limited liability company prior to the provision of financial assistance transaction. Although there are no precedents, alternatives suggested by legal scholarship are an upstream merger of the target company into the acquiring entity, a downstream merger of the acquiring company into the target company, the target company’s acquisition its of own shares from the acquiring company, and capital decrease or dividend distribution at the target company level. Making target companies and purchasers parties to facility agreements as joint and several debtors and guarantors is also an ordinary market practice. However, such a transaction falls within the prohibition and hence is exposed to the risk of being deemed null and void. Interpretation by Turkish courts as to whether these alternatives may be considered circumvention of law remains unclear, as no precedents have been rendered to date.

Types of security

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

A pledge over the target company’s shares is the most preferred collateral in acquisition financing, as it does not fall within the scope of financial assistance prohibition. Other common security types are a pledge over movable assets, a pledge over bank accounts, assignment of receivables (eg, the target company’s dividends), mortgages, suretyships or guarantees. Although a floating charge is permitted (eg, movable pledge over stocks of commercial enterprise) under Turkish law, a pledge over all company assets (blanket lien) cannot be established. Alternatively, all of the current and future movable assets of an enterprise may be pledged without transferring usage rights under a movable pledge agreement. Other than movable assets, each security should be separately granted, as each type has its own validity and perfection requirements (eg, a mortgage over immovables should be established before the relevant title deed registry).

Requirements for perfecting a security interest

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Each type of collateral foresees different validity and perfection requirements.

A mortgage security can only be established by executing a written agreement in official form before the title deed registry.

A pledge over movable assets can only be established by executing a movable pledge agreement, which is prepared electronically in the central registration system (TARES) before a notary and by registration of such agreement in the TARES.

To establish a pledge over limited liability company shares, the pledge agreement should be executed before a notary. As for pledges over joint stock company shares, a written pledge agreement should be executed and share certificates (if issued) should be delivered to the pledgee.

A pledge over joint stock company shares listed on the stock exchange may be established through a written pledge agreement and electronic registration before the central registry agency (MKK).

An assignment of receivables agreement is also required to be executed in written form, preferably before a notary, in order to crystallise the perfection date.

Guarantees and suretyships granted by Turkish residents in favour of non-residents must be notified to the Turkish Ministry of Finance within 30 days from the issuance date. This notification is only for statistical purposes and does not constitute a perfection requirement.

Renewing a security interest

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

In principle, there are no renewal requirements for Turkish law collateral. Depending on the transaction type or pursuant to requirements foreseen under certain laws, the parties may choose to establish collateral for a limited period (eg, a mining licence mortgage cannot be established for a longer time than the validity term of the mining licence). If this is the case, the collateral should be renewed or extended prior to the expiry of such period.

Stakeholder consent for guarantees

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Turkish law does not require consents to be obtained from a works council or similar body for provision of guarantees or other security by the company. However, if the collateral grantor is a listed company and grants collateral or guarantee in favour of third parties within its ordinary course of business, the provision of such collateral or guarantee should be approved through a board resolution adopted with affirmative votes of the majority of independent board members.

Granting collateral through an agent

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

In principle, collateral may be granted in favour of all lenders on a pro rata basis, as security interests are ancillary rights to underlying obligations. Nevertheless, although there is no explicit regulation on the concept of parallel debt under Turkish law, it is common for parallel debt structures to be included in financing transactions and for collateral to be created in favour of an agent acting in the name and on behalf of lenders. If the collateral is established on a pro rata basis in favour of all lenders:

  • secured assets that require physical delivery (eg, share certificates for pledge over shares) shall be preserved by one of the lenders in the name and on behalf of other lenders; and
  • in cases where a lender assigns its portion to a new lender, security arrangements should also be amended and the new lender should accede to collateral accordingly.

Turkish law also allows other types of collective collateral arrangement (eg, joint creditorship) which may be structured depending on the specific needs of the transaction parties.

Creditor protection before collateral release

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

There are no explicit rules in relation to protection to creditors prior to the release of collateral. Accordingly, the release process may be time-consuming in certain cases and creditors should ensure before releasing the collateral that they have received and collected all outstanding debts.

Fraudulent transfer

Describe the fraudulent transfer laws in your jurisdiction.

Fraudulent transfers are generally regulated under the Turkish Code of Obligations and the Turkish Execution and Bankruptcy Law, pursuant to which any disposals performed by an insolvent party that are detrimental to its creditors are deemed null and void. Transactions (i) within two years prior to execution or insolvency that were made without any consideration, (ii) within one year prior to execution or insolvency that included non-monetary payments, advances, deed restrictions or establishment of collateral for a then-current debt, and (iii) within five years prior to insolvency that were made with the intention of detriment to its creditors may be subject to cancellation.

Creditors should prove that the third-party purchaser was aware or should have been aware of the insolvent party’s financial condition and that the insolvent party was acting in bad faith or not as a prudent merchant. However, bad faith of the third-party purchaser is presumed in transfers of commercial enterprise and related party transactions. Fraudulent transfers of the deceased may also be subject to cancellation as per provisions of the Turkish Civil Code and the Turkish Code of Obligations.

Debt commitment letters and acquisition agreements

Types of documentation

What documentation is typically used in your jurisdiction for acquisition financing? Are short-form or long-form debt commitment letters used and when is full documentation required?

Depending on the transaction type, lenders may issue short-form letters of intent to state their intention of funding or participation in syndications and to indicate substantial commercial terms, such as interest rate and maturity, which shall be subject to certain conditions (ie, satisfactory legal and financial due diligence). Full documentation, such as general credit agreements, facility agreements and intercreditor arrangements drafted in line with Loan Market Association (LMA) standards and security agreements, is required concurrently with the acquisition documentation. For cross-border financing, facility agreements have become standardised by practice, and Turkish lenders also tend to comply with international standards, as Turkish borrowers have become familiar with the LMA during the past decade.

Level of commitment

What levels of commitment are given by parties in debt commitment letters and acquisition agreements in your jurisdiction? Fully underwritten, best efforts or other types of commitments?

Letters of intent, mandates and term sheets do not generally include commitments or constitute binding effect on lenders’ part (ie, non-binding and uncommitted) and basically state lenders’ intention of funding on a best effort basis. Facility agreements include commitments and conditions of funding required by lenders subject to satisfaction of certain conditions precedent.

Conditions precedent for funding

What are the typical conditions precedent to funding contained in the commitment letter in your jurisdiction?

Preliminary documents (ie, letters of intent, mandates and term sheets) usually include conditions precedent, such as satisfactory legal and financial due diligence, satisfactory acquisition documents, regulatory approvals, financial close within a certain period and project-related representations and warranties.

Flex provisions

Are flex provisions used in commitment letters in your jurisdiction? Which provisions are usually subject to such flex?

Turkish banks generally require flex provisions, which enable lenders to amend amounts, pricing, structure, maturity and other financing terms. Under Turkish law, such provisions are deemed as general conditions that are prepared unilaterally by one of the parties (ie, lenders) with the purpose of using them for similar contracts without holding any discussions or negotiations with counterparties. General conditions are heavily regulated under the Turkish Code of Obligations, albeit the review of commercial agreements is not scrutinised as strictly as consumption agreements.

Securities demands

Are securities demands a key feature in acquisition financing in your jurisdiction? Give details of the notable features of securities demands in your jurisdiction.

In Turkey, securities demands do not constitute a key feature in acquisition financing and lenders do not generally require borrowers to issue securities regarding bridge loan facilities.

Key terms for lenders

What are the key elements in the acquisition agreement that are relevant to the lenders in your jurisdiction? What liability protections are typically afforded to lenders in the acquisition agreement?

Key elements that are relevant to lenders are the conditions precedent and subsequent specified for signing and closing of acquisition transaction, detailed descriptions of collateral granted to lenders by the borrower and target company, representations, liabilities, indemnifications and warranties of the seller and purchaser and payment mechanics regarding sale proceeds. Lenders would request to some extent that the acquisition be completed swiftly, and they would like to be assured that the acquisition will not be reversed for any legal or commercial obstacles (including for any governmental authority approvals etc).

Public filing of commitment papers

Are commitment letters and acquisition agreements publicly filed in your jurisdiction? At what point in the process are the commitment papers made public?

Commitment letters, letters of intent, mandates, term sheets or financing agreements are not required to be publicly filed in Turkey. As with acquisition agreements, filing requirements differ between joint stock and limited liability companies. In limited liability companies, acquisition agreements should be executed before a notary, a general assembly resolution approving the transfer should be registered before the trade registry and the transfer should be registered in the company’s share ledger. In joint stock companies:

  • if no share certificates are issued, the parties should execute the acquisition agreement in writing and register the transfer in the company’s share ledger;
  • if bearer shares are issued, the transfer will be effective upon delivery of the possession; and
  • if registered shares are issued, the transfer will be effective upon endorsement of the share certificates, delivery of possession and registration of the transfer in the company’s share ledger.

Share transfers resulting in a shareholding exceeding or dropping below five, 10, 20, 25, 33, 50, 67 and 100 per cent should be registered before the trade registry and published in the Turkish Trade Registry Gazette. For listed companies, the execution of financing or acquisition agreements may be deemed as information that should be disclosed to the public, as they may have an effect on value and price, and accordingly on investors’ decisions.

Enforcement of claims and insolvency

Restrictions on lenders’ enforcement

What restrictions are there on the ability of lenders to enforce against collateral?

Secured creditors will be entitled to sell secured assets through public sale or bargaining, as per the Turkish Execution and Bankruptcy Law, or private sale, as per the terms of security arrangements. Although in principle there are no restrictions on the ability of lenders to enforce against their collateral, the conditions set forth under the Turkish Execution and Bankruptcy Law and the Turkish Civil Code should be applied by lenders for public sale or bargaining. A private sale is a contractual right that is subject to terms of security agreements. The downside of a private sale, which does not prejudice lenders’ rights under the Turkish Execution and Bankruptcy Law, is that, to our knowledge, there are no precedents in the Turkish market. For pledges over movable assets and listed joint stock company shares, if explicitly agreed in the pledge agreement, the pledgee may appropriate the shares and set off the value against debt.

Debtor-in-possession financing

Does your jurisdiction allow for debtor-in-possession (DIP) financing?

No bankruptcy proceedings may be initiated against the debtor in cases where the concordat project filed by the relevant debtor is approved. New concordat rules were enacted in 2018, pursuant to which the postponement of bankruptcy has been repealed and concordat has been introduced as a functional institution. Accordingly, a debtor who is or will be unable to pay its debts when due, an insolvent debtor or a creditor who is entitled to request the bankruptcy of its debtors is entitled to request a concordat. Unlike bankruptcy postponement, the debtor does not need to be insolvent or in financial distress to apply for concordat. The concordat project should include a proposed amelioration plan demonstrating any potential capital increases, cash injections, potential sale of assets or other solutions and repayment plan, reflecting postponed due dates, maturities and reduction amounts over its receivables.

Alternatively, the Banking Regulation and Supervision Agency has enacted a new regulation for restructuring of debts owed to banks, financial leasing, and factoring and financing companies licensed to operate in Turkey, and the Banks Association of Turkey has published a draft financial restructuring framework agreement pursuant to which the debtor and financial creditors may agree on the extension of loan maturities, renewal of loans, extension of additional loans and deduction or waive from principal, interest, default interest, dividends and any other receivables, similar to the Istanbul Approach implemented in 2002.

Stays and adequate protection against creditors

During an insolvency proceeding is there a general stay enforceable against creditors? Is there a concept of adequate protection for existing lien holders who become subject to superior claims?

In principle, if the collateral has been validly perfected, the rights of creditors, such as foreclosure, would not be subject to any stay or otherwise be affected by commencement of insolvency of the debtor, other than in a concordat scenario, in which case the foreclosure would be suspended at the stage of the sale of secured assets. On the other hand, all other preparatory works, such as valuation of assets, could be initiated and conducted without being subject to a stay. Secured creditors will have priority over unsecured creditors if the collateral is perfected prior to any lien or attachment established by an unsecured creditor. Once sale proceeds are received during an enforcement proceeding, secured creditors will collect their receivables and then remaining amounts will then be collected by unsecured creditors who have established liens or attachments.

Clawbacks

In the course of an insolvency, describe preference periods or other reasons for which a court or other authority could claw back previous payments to lenders? What are the rules for such clawbacks and what period is covered?

Collaterals may be subject to clawback provisions as per Turkish insolvency laws. The creditors of an insolvent party are entitled to apply to the courts for the invalidation of certain transactions entered into by a bankrupt party as follows:

  • payment of an undue debt or granting of collateral for a current debt created within the one-year period (or the five-year period in cases where a bankrupt party acting with the intention to detriment creditors) prior to insolvency of collateral provider;
  • transactions for no consideration or a very low consideration that have taken place within a period commencing two years prior to the insolvency of an insolvent party; or
  • an insolvent party acting with the intention to detriment its creditors.

Creditors should prove that the third-party purchaser was aware or should have been aware of the insolvent party’s financial condition and that the insolvent party was acting in bad faith or not as a prudent merchant. Capital market instruments provided as collateral as per the Turkish Capital Markets Law or rights of collateral provider or beneficiary will not be affected by any decisions rendered by judicial or administrative authorities regarding the restructuring of assets or liquidation of the collateral provider or beneficiary. Accordingly, parties’ rights and collateral shall continue to be valid, enforceable and binding against restructuring or liquidation institutions. This protection shall be applicable to transactions completed on the decision date to the extent that collateral is granted prior to the relevant decision and in good faith.

Ranking of creditors and voting on reorganisation

In an insolvency, are creditors ranked? What votes are required to approve a plan of reorganisation?

Upon the bankruptcy decision being rendered by the competent courts, a bankruptcy administration will be established to examine all the claims and receivables of creditors, prepare ranking schemes of debts and conduct the liquidation process. During insolvency, creditors are differentiated as unsecured and secured creditors. Turkish insolvency law foresees secured claims (eg, pledge or mortgage) and public debts arising from estates (eg, building tax, inheritance tax and transfer tax) as priority. Unsecured creditors are ranked as follows: (i) claims of employees, unpaid pension plan contributions and alimony receivables, (ii) guardian and ward claims regarding family law disputes and (iii) privileged claims as per the relevant law and public debts.

The debtor may submit a reorganisation plan to the courts pursuant to new concordat rules. If the concordat project submitted to the courts is signed by a majority of creditors that exceeds (i) half of registered creditors or receivables or (ii) one-quarter of registered creditors and two-thirds of registered receivables, the project will be deemed approved. An exclusive settlement process is foreseen for secured creditors. Approval of concordat is a prerequisite for the effectiveness of such a settlement, which shall be deemed agreed if the debtor and secured creditors who hold more than two-thirds of receivables agree on the terms of settlement such as reductions on principal debts and interests, maturity and other repayment offers.

Intercreditor agreements on liens

Will courts recognise contractual agreements between creditors providing for lien subordination or otherwise addressing lien priorities?

Turkish law foresees a fixed-degree system for ranking of mortgages, and the debtor may create independent security rights on each portion. Priority among existing mortgages is determined by their degrees. During foreclosure, creditors in the first degree are paid first. Creditors in the second degree cannot be paid until first-ranking creditors are fully paid. The time of perfection does not necessarily mandate priority in degrees. In cases where a first-degree mortgage is released, lower-degree mortgages do not automatically escalate. However, it is possible for a lower-degree mortgage to escalate to a higher degree if the agreement between parties provides so by virtue of an escalation clause. Priority among pledges, which is created by the execution of a written agreement, will be determined in accordance with the perfection date, which is the date on which all requirements relating to perfection of pledge are satisfied. Priority among assignments is also determined in accordance with the perfection date, and parties generally prefer to execute assignment agreements before a notary in order to crystallise perfection dates.

Furthermore, if a creditor accepts to subordinate its receivables to receivables of other creditors, as per the relevant provisions of the Turkish Commercial Code, such a subordination agreement between the creditor and the debtor would need to be blessed by the commercial courts, and if they approve the subordination agreement then such subordination shall be recognised following a bankruptcy declaration by competent courts.

Discounted securities in insolvencies

How is the claim of an original issue discount (OID) or discount debt instrument treated in an insolvency proceeding in your jurisdiction?

Turkish law and market practice do not foresee any specific regulations or precedents regarding claims of original issue discount or discount debt instruments.

Liability of secured creditors after enforcement

Discuss potential liabilities for a secured creditor that enforces against collateral.

During enforcement, secured creditors should seek to reach the maximum value of collateral and comply with requirements determined for public sale or bargaining under Turkish law. As for private sale, a genuine arm’s-length process should be run with the participation of a sufficient number of bidders. Lenders should protect the collateral provider’s interest and take reasonable efforts to reach the maximum sale price. Such efforts may include monitoring the valuation process, placing advertisements in national newspapers, inviting people to auctions, obtaining third-party valuation reports, seeking advisory services, liaising in good faith to agree on sale proceeds and list of potential buyers, maximising competitive bids from potential buyers and complying with other conditions to reach the maximum sale price. Assets must be either closed or run by the bankruptcy estate in a fashion to comply with all applicable laws and regulations, and all the expenses of secured creditors in this respect will automatically be included in the secured receivables.

Update and trends

Recent developments

Updates and trends

2018 was not a very productive year for the Turkish market in terms of acquisition finance activity due to an economic slowdown and dramatic currency depreciation. Privatisations, which accelerated considerably during the current government’s term, have been significantly reduced in 2018. This deceleration has also affected activity in the acquisition finance market.

Given the ongoing financial distress and extreme volatility in the Turkish lira throughout 2018, we expect that market players will mostly work on the restructuring and reorganisation of existing financings. Considering the growing size of loans denominated in foreign currencies, it is beyond any doubt that Turkish borrowers and sponsors are willing to sit around the table and negotiate with lenders to restructure or refinance their outstanding debts. Although the banks have already structured over approximately US$20 billion of corporate loans since November 2018, the foreign currency-denominated loans are mostly held by the private sector and many corporations are still struggling to service their debts to lenders, suppliers and other third parties. The Turkish government and banking regulatory authorities have enacted new sets of rules with respect to the restructuring of debts owed to banks, financial leasing, and factoring and financing companies, a scheme similar to the London approach, and we are of the opinion that these new rules should be deemed as Turkey’s efforts to improve the banking sector and ameliorate financial situation of the parties involved.

Predictions for significant decreases in the value of Turkish lira and a potential recession for Turkey have never been off the table this year. Besides all the efforts in Turkish banking sector, 2019 will be a busy year in relation to distressed M&A transactions (ie, asset sales). Considering the exposures of Turkish and foreign lenders and prolonged economic overheating, we expect to see many sales and purchases of distressed assets and companies, and non-performing/distressed loans or purchases from lenders or bankruptcy administration. In a nutshell, this new era of distressed M&As will require more intensive knowledge of Turkish law practice and high-level collaboration with international law firms.