The long awaited debt assumption model has been finally introduced recently into Turkish legislation through a new piece of regulation paving the way for the Turkish Treasury to assume project debt borrowed by project companies in large-scale BOT model infrastructure investments and healthcare and educational campus PPP projects. The Debt Assumption Regulation was published in the Official Gazette on 19 April 2014.
The Turkish Treasury’s direct backing of energy and infrastructure projects is not something entirely new; it was a vital element of energy and infrastructure projects for at least a decade in the 1990’s for realization of large size projects in Turkey. Multiple financial crises forced the government to stop providing Treasury guarantees in 2001.
Now, a similar concept has been introduced in our modern day! The newly instituted debt assumption mechanism allows the Treasury to assume the outstanding debt sourced from abroad and the amount arising from its derivative transactions in case of an early termination of the project agreement in eligible PPP and BOT projects in infrastructure, healthcare and education investments.
The minimum investment requirement for debt assumption is 500 million Turkish Liras for investments with respect to integrated PPP model health campuses as well as education campuses realized under their respective relevant laws governing these investments. The minimum investment requirement available to debt assumption for BOT model investments is higher than the above PPP projects and requires at least a one billion Turkish Lira investment cost for eligibility for the Treasury’s review or discretion. In addition to the minimum investment requirement, pursuant to the Debt Assumption Regulation, the Treasury can assume the debt of the project company under its financing obtained abroad if (i) there are debt assumption and early termination clauses in the project agreement allowing the administration to take over the facility and (ii) the Council of Ministers approves the debt assumption.
As a general rule, the maximum limit for debt assumption in a financial year is determined by the annual State, Budget Law. The Council of Ministers may double such limit. Currently, the maximum limit for debt assumption is three billion US Dollars. The provisions regarding partial debt assumption, the requirement for the Treasury’s affirmative opinion prior to the tender and the maximum debt assumption limit for a year will not be applied to any projects whose tender announcement was already made as of 1 December 2012. As to the early termination and other relevant clauses with respect to the debt assumption in a project agreement, the Treasury’s affirmative opinion is required before the execution of the project agreement.
Following the Treasury’s prior affirmative opinion, a debt assumption agreement is executed by and among the Treasury, the project company and the lenders.
Pursuant to the regulation, the Treasury can cover, or assume, 85% of the loan facilities and the amounts arising from its derivative transactions in the event of early termination due to the project company’s fault. On the other hand, debt assumption is available for 100% if early termination is not attributable to the project company’s fault.