The popularity of out-of-court debt restructuring in Turkey surged in the second half of 2018 with the introduction of the Financial Restructuring Program (“Financial Restructuring Program”) by the Banking Regulation and Supervision Authority (“BRSA”). The scheme was introduced to facilitate the repayment of debts held by debtors who face or are likely to face financial difficulties and was previously analysed in our Winter 2019 newsletter article “The Financial Restructuring Regulation and Framework Agreement.” The article covered the originally introduced Financial Restructuring Program, its eligibility criteria, and the restructuring measures that may be taken within its scope; however, following the publication of our earlier article, the legislative framework for the program and its eligibility criteria were substantially amended. As a result, in this article we will reintroduce you to the Financial Restructuring Program in its currently amended form.
Initially regarded as an emergency measure aiming to prevent unemployment through shielding large employers from bankruptcy, the Financial Restructuring Program has gradually adapted to the needs of the Turkish financial sector by undergoing several changes varying in size and scope. Despite these changes, the revamped Financial Restructuring Program currently in force continues to share many aspects in common with its originally introduced version. As such, it would be helpful to briefly summarize the key aspects of the original Financial Restructuring Program before exploring the current system in more detail.
As noted above, the financial restructuring program was first introduced in August 2018 when the BRSA issued the Regulation on the Restructuring of Debts Owed to the Financial Sector (“Regulation”), which aims to increase the likelihood of the repayment of debts owed by businesses that have not been declared bankrupt through the restructuring of such debts. Subsequently, a Framework Agreement dated 19 September 2018 (“2018 Framework Agreement”) was published by the Banks Association of Turkey (“BAT”) following its approval by the BRSA. The 2018 Framework Agreement served to set out the rules and procedures for the financial restructuring process and its signatories included banks and other financial institutions collectively representing around 90% of the total market lending. The 2018 Framework Agreement enabled Creditor Institutions (i.e., signatory Turkish banks and financial institutions) and their debtors whose loans contain principal amounts exceeding TRY 100 million to be restructured by the parties in accordance with the provisions set out therein. Following criticism regarding the exclusion of foreign credit institutions and international organisations, the Regulation and the 2018 Framework Agreement were both amended in November 2018 to include these lenders within their scope and to adopt a new definition for “Debtor”, which includes nearly all Turkish companies save for exceptions such as insurance companies, electronic money institutions, and capital markets institutions excluding investment funds.  The term of the 2018 Framework Agreement was specified as two years from its date of approval by the BRSA and thus expired on 19 September 2020.
The Current Financial Restructuring Framework in Turkey
A new chapter of the Financial Restructuring Program began on 17 July 2019 through the introduction of Provisional Article 32 to the Banking Law no. 5411. This provision, which will be valid until 17 July 2021 unless extended, outlines the fundamental aspects of the current financial restructuring system in force in Turkey. The wording of the newly introduced provisional article is broad, stating that the goal of the financial restructuring system is to facilitate the repayment of debts owed to banks, financial leasing companies, factoring companies, and finance companies and to prevent unemployment. The provision itself does not delve into the specifics of the Financial Restructuring Program; rather, it sets out definitions for key terms and outlines the measures that may be taken within the Financial Restructuring Program in general. The primary function of this provision is believed to serve as a legislative basis for the secondary legislation and other regulations detailing the applicable financial restructuring framework.
Following the enactment of this provision, the Regulation on the Restructuring of Debts Owed to the Financial Sector was amended a second time in September 2019. Amendments to the Regulation include incorporating a reference to Provisional Article 32 as a legal ground for the Regulation, expanding the definition of the term “Creditor” to cover a wider range of lenders such as international financial institutions and investment funds, and bringing this definition in line with the previous amendment to the Regulation as discussed above, which already expanded the types of lenders included in the Financial Restructuring Program. Additionally, the amendment grants the BRSA the right to request all kinds of information in relation to the financial restructuring process, the debtors, the executed restructuring agreements, and all transactions completed within the scope of the restructuring.
After the necessary legal groundwork was laid, the BAT issued a press release in October 2019 announcing the implementation of the large-scale Financial Restructuring Program for debts with principal amounts exceeding TRY 25,000,000, together with a framework agreement tailored to this program (“Large-Scale Framework Agreement”). A subsequent announcement in relation to the small-scale Financial Restructuring Program for amounts below TRY 25,000,000 followed in November 2019 with its corresponding framework agreement (“Small-Scale Framework Agreement”). This two-pronged approach intends to include small and medium-sized enterprises within the scope of the Financial Restructuring Program while introducing a simpler and faster restructuring process to better suit their needs.
The Framework Agreements
Pursuant to the Regulation, the two Framework Agreements currently in force serve as a basis for the restructuring process and contain a template for the financial restructuring agreements to be concluded with each creditor following negotiations. These agreements also include a sample letter of application to the Financial Restructuring Program, in which the Debtor agrees and undertakes to refrain from utilising facilities from any new creditors, establishing any other encumbrances in favour of third parties over its assets, and entering into any agreement that affords additional privileges to its existing creditors, as well as providing short, middle, and long-term action plans and detailed information on its finances.
The Large-Scale Framework Agreement
The Large-Scale Framework Agreement sets out the procedure to be followed for the restructuring of large-scale debts. Pursuant to the provisions set out therein, an application duly made by the Debtor to one of its top three (in terms of indebtedness) Creditor Institutions commences the restructuring process. Following notification of the application to the other Creditor Institutions by the addressee, a “standstill process” automatically begins. During this process, which covers a reasonable negotiation period, the legal status of the parties with respect to each other and the assets, collateral, and shareholders of the Debtor remain protected, and execution and bankruptcy proceedings may not be initiated towards the Debtor by the Creditor Institutions. The Creditor Institutions form the Consortium of Creditor Institutions (“CCI”) and negotiate with the Debtor collectively during the restructuring process. Additionally, the creditor who has the largest amount of receivables amongst the CCI is generally appointed as the Leader Bank to manage and conclude negotiations. Foreign Credit Institutions and International Organizations are able to join the CCI without the consent of the Creditor Institutions, whereas other creditors, i.e., all real persons or legal entities that are creditors of the Debtor other than the Creditor Institutions, can only join upon approval of the Creditor Institutions. The CCI decisions can be made with the approval of at least two creditor institutions representing 2/3 of the total receivables of the CCI, with the exception of a number of matters including but not limited to extending new lines of credit to the Debtor (which requires the approval of one or more banks holding at least 90 percent of the total receivables of the banks included in CCI) or writing off any part of the debt (which requires a unanimous decision by the Creditor Institutions in the CCI).
The Large-Scale Framework Agreement is similar in form and content to the 2018 Framework Agreement with a few key differences:
- the previous eligibility threshold of principal debt exceeding TRY 100,000,000 has been lowered to TRY 25,000,000,
- the maximum negotiation period for an application has been increased from 150 days to 180 days,
- Creditor Institutions may resume certain actions already taken in relation to ongoing execution proceedings as of the application date, such as pending lawsuits regarding the annulment of asset disposals or any steps taken in relation to foreclosure; however, in such case, the CCI must vote on whether to continue the financial restructuring process, and
- all parties to the process are now obliged to keep any information they have obtained with respect to other parties strictly confidential as per the relevant provisions of the Personal Data Protection Law no. 6698 governing the disclosure of information and the Banking Law no. 5411 regarding banking and customer secrets.
The amendments listed above signify a desire on the part of the BRSA to accommodate the needs of the financial sector by expanding the scope of the Financial Restructuring Program and affording more time and legal protection to its participants.
The Small-Scale Framework Agreement
The rules and procedures of the small-scale financial restructuring process are similar in essence to the large-scale one, albeit more simplified. Unlike its large-scale counterpart, the Small-Scale Framework Agreement merely allows for a 45-50 day period to complete the entire process and does not involve the formation of a CCI or the selection of a Leader Bank. Instead, the Creditor Institution who has accepted the restructuring application automatically serves as the leader for the process.
Additionally, the Small-Scale Framework Agreement limits the measures that may be taken within the scope of the restructuring to: (i) postponement of loan maturity dates, (ii) novation of the loans, (iii) write-off of default interest receivables, (iv) assignment or transfer of the loans in exchange for payment in-kind, cash, or other receivables provided conditional on the collection of such receivables, full or partial sale, or disposal of debt in exchange for assets of the Debtor or third parties, and (v) the execution of protocols with other banks or creditors. Under the agreement, the Debtor may not be forced to utilise additional loans, the currency of the restructuring must be in Turkish Liras, and the maximum term of the restructuring may not exceed 60 months. Debt-to-equity swaps and any write-off of the principal debt are also not possible in this type of restructuring. A grace period of up to 12 months may be afforded to the Debtor.
The key changes made to the program are outlined in the below table:
The Success of the Financial Restructuring System
The Financial Restructuring Program has been touted as a success by the BRSA ever since its initial introduction in 2018. The BRSA expressed its satisfaction with the number of restructurings achieved through this Program, as well as its high hopes for its future success in its 2019-2021 Strategic Plan. The revisions made to the program in late 2019, such as lowering the amount of principal debt required to participate in the large-scale restructuring and introducing a small-scale restructuring program, are clear indicators of the BRSA’s intention to further increase the popularity and attractiveness of out-of-court restructuring.
According to the monthly data published on the BAT website, as of December 2020, the total amount of restructured debts under the Large-Scale Framework Agreement since October 2019 is TRY 30,400,000,000, collectively owed by a total of 140 debtors. The numbers for the Small-Scale Framework Agreement are, aptly, smaller with a total of TRY 303,000,000 debt owed by 27 companies restructured between November 2019 and December 2020.
The Financial Restructuring Program also remains more desirable in comparison to statutory restructuring processes, such as concordat, in many aspects. Since the rules and procedures to be followed during the concordat process are set out in the Execution and Bankruptcy Law no. 2004, the system is more rigid in nature in comparison to the flexibility afforded by the Framework Agreements. The debtors, provided that they meet the legal requirements for both, are free to choose the process they wish to participate in and may even partake in both simultaneously. This system is also preferable to the Creditor Institutions, particularly banks, due to the provisions that may be included in the financial restructuring agreements concluded with the debtors which exclude liability for the restructuring measures implemented within the scope of the financial restructuring process (e.g. write-off of receivables, reduction of interest rates), as such measures are usually not taken due to the liability imposed pursuant to Banking Law no. 5411.
We anticipate that the negative economic outlook and the disruption to cash flow suffered by companies of all sizes due to COVID-19 will make the restructuring of debts an integral factor in determining the viability of many businesses. As such, the Financial Restructuring Program may prove to be a lifeline to a large number of businesses across Turkey in the near future.