Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i Securities

In general, the following types of security interests would be available for project financing:

  1. pledges:
    • over movables;
    • over shares; and
    • over bank accounts;
  2. mortgages;
  3. transfer or assignment of receivables; and
  4. guarantees and suretyships (which are summarised later on in this section).

In principle, the conditions below should be met for the establishment of a pledge under Turkish law:

  1. secured receivable: there must be an existing underlying right, loan or debt prior to or at the time of the establishment of the pledge;
  2. pledge over movables: the pledge should be registered within the registry of the pledge over the movables; and
  3. written agreement: a written pledge agreement must be executed between the parties.
Movable pledges

A new law aiming to facilitate the use of a movable asset pledge with regard to commercial operations entered into force on 1 January 2017 (the Movable Asset Pledge Law) along with three regulations regarding procedures under the Movable Asset Pledge Law.

The Movable Asset Pledge Law and these regulations broaden the scope of the assets that can be the subject of a movable pledge, introduce a central registration system as opposed to the previous system, which was based on physical delivery of the assets, and introduce alternative enforcement methods.

ii Scope of pledgesPledges over movables

The scope of the commercial enterprise pledge is now extended and includes real property allocated to the operations of an enterprise as well as all the movables (including tangible and intangible assets).

Regarding a pledge on assets on an individual basis or as a group, the previous pledge system required the physical delivery of the pledged assets to the pledgee and this was one of the reasons why the commercial enterprise pledge (which didn't require physical delivery of the pledge assets) was commonly used in Turkey. The Movable Asset Pledge Law does not require the physical delivery of the pledged asset to the pledgee. The following assets are subject to this law:

  1. existing and future receivables, income of the enterprise;
  2. inventory, raw materials;
  3. rental proceeds, rental rights;
  4. IP rights, trade name;
  5. licences that are not qualified as administrative approvals;
  6. all movable assets of an enterprise such as machinery, equipment, IT hardware, etc;
  7. agricultural products, livestock;
  8. commercial projects;
  9. vehicles, licence plates;
  10. commercial routes, train wagons; and
  11. revenues of the pledged assets.

A pledge of the following assets is not subject the Movable Asset Pledge Law and should be regulated by the Civil Code or by its special laws:

  1. bank accounts;
  3. derivative agreements;
  4. aircraft;
  5. ships or vessels; and
  6. mines.

It is also still possible to pledge vehicles under their specific traffic laws.

Pledges over shares of a company

The shares of a company can be pledged under Turkish law. The scope of the share pledge can be commercially agreed between the parties.

A pledge over the shares of a company can only be established by entering into a written share pledge agreement by and between the pledgor and the pledgee. In addition, the pledgor should make a pledge endorsement (or blank endorsement depending on the agreement between the parties) on registered shares, and physical possession of the pledged shares must be delivered to the pledgee.

Although it is not legally required for a valid perfection of share pledge, it is advisable (to protect the pledge from third-party claims) that:

  1. the company whose shares are pledged passes a corporate resolution acknowledging the pledge and resolving to register it in the share ledger of the company; and
  2. the pledge is registered in the share ledger of the company in which the shares are pledged.
Pledges over bank accounts

A pledge over accounts held with a bank is another form of security arrangement that is generally provided under Turkish law.

A written pledge agreement is required for the establishment of a bank account pledge.

There is no requirement for a pledgor to obtain consent from the account holding bank for the pledge in favour of the creditor. However, an acknowledgment notice from the bank is highly recommended, particularly if the account bank is not a lender or a security agent, and any obligations (e.g., restricting withdrawals on paying funds direct to the creditor) are to be assumed by the bank. In addition, the same acknowledgement would serve to confirm that no prior ranking pledge, assignment or counterclaims exist.

MortgagesIn general

A mortgage can be established over immovable property or certain rights connected to the immovable property, such as a ground lease or usufruct right, to secure the payment of existing or future debts. In general, a mortgage established over immovable property covers the accessories of that property.

Conditions for establishment

A mortgage is created validly by means of an official mortgage deed, which shall be executed before the title deed registry having jurisdiction on the relevant real estate. The mortgage is recorded within a special mortgage column on the relevant page of the title deed registry where the records of the real property subject to mortgage are kept.

In principle, the amount of the mortgage must be registered, and if the amount of the receivable is indeterminable, the maximum amount secured by the mortgage agreed by the parties can be registered in Turkish lira. However, an exception for foreign loans provided by Turkish or foreign banks or credit institutions is stipulated under Turkish law as a 'foreign currency mortgage', which should be in the same currency as the loan, and can be granted for establishing a security in favour of these banks or credit institutions.


The degree system adopted under Turkish law provides a priority ranking to mortgagees holding a mortgage with a higher degree over other mortgagees in subsequent rankings. Each degree of mortgage on the immovable property separately secures the obligations for which they are established up to the mortgage amount in those degrees. The degrees set the order of distribution of the foreclosure proceeds.

Transfer or assignment of receivables

Transfer or assignment of receivables is commonly utilised as a security mechanism, which includes the transfer of the receivables of the creditor (transferor) to a third person (the transferee) by execution of a written agreement.

In the case of a transfer of receivables by way of security, the following mechanisms are seen: (1) lenders collect the assigned receivables for repayment purposes; (2) the assigned receivables are collected into a reserve account for repayment or security purposes, and (3) the assignment is silent until an event of default, hence it is not perfected and the lender has the right to collect the receivables upon an event of default.

Present and future determinable receivables can be transferred through a written agreement executed between the transferor and transferee.

Although notification or approval of the debtor is not required for the perfection of the transfer, it is recommended that the transfer of receivables agreement includes a provision obliging the transferor to notify its debtors of the transfer and to request an acknowledgment of no prior ranking assignments, transfers or counterclaims from such debtors.

iii Guarantees and other forms of credit supportGuarantees

Since there is no specific legislation with regard to guarantee agreements, these agreements are subject to the general provisions of the Turkish Code of Obligations No. 6098, dated 11 January 2011 (TCO) regarding the concept of 'undertaking of performance of a third party' whereby the obligation of the guarantor is characterised by its independent nature.

Since the obligation of a guarantor is independent from the primary obligation, the invalidity or unenforceability of the primary obligation does not have any effect on the validity or the enforceability of the guarantee obligation. Therefore, unless otherwise agreed, a guarantee is effective until the risk ceases to exist.

There is no condition for the establishment of a guarantee (other than a personal guarantee) such as a written agreement or requirement to determine a limit or cap for the guarantee. However, according to the TCO, in the case of a guarantee provided by a real person (personal guarantee), the conditions for a suretyship will be applicable for the establishment of a personal guarantee.


Although a suretyship appears to be similar to a guarantee agreement, the security obligation of the surety depends on the validity of the debtor's debt. This is to say that when a debtor's debt becomes invalid for any reason, the surety is – contrary to a guarantee agreement – entirely released of all its obligations. Accordingly, a surety's liability is always ancillary in nature.

According to the TCO, a written agreement is required between the parties and a statement of the amount of maximum liability agreed in handwritten form by the surety should be provided under the agreement.

In addition, the suretyship period for real persons and the type of suretyship, for example, ordinary or several, should be specified under the agreement. Also, if a married individual is the surety, the TCO requires the spouse of the surety to provide consent on or before the date of the surety agreement, except for in certain cases. The consent of the spouse is not required for securities that are given as follows:

  1. for a business or company by the owner of a commercial enterprise registered with the trade registry or the shareholder or manager of a commercial company;
  2. by craftsmen and artisans registered with the craftsmans' associations related to the occupational activity;
  3. for credits used under Law No. 5570, dated 27 December 2006; or
  4. for credits given by credit and security cooperatives, or credits extended by state institutions and organisations to cooperative partners.

Finally, the TCO provides that if the surety is a real person, the suretyship automatically expires at the end of a 10-year period beginning from the execution of the surety agreement. However, the parties may extend the suretyship for an additional 10 years upon the consent of the surety, which may be obtained at the earliest one year before the expiration of the surety agreement.


In recent years, common quasi-securities in the foreign lending markets have been introduced to the Turkish markets, especially for energy and infrastructure project financing transactions. One of the most important features in this regard is the step-in provision that gives lenders and banks the right to step into the project company's rights and obligations under the project documents.

In principle, the Turkish energy markets (electricity, petroleum, gas and liquefied petroleum gas) are strictly regulated and restrict the transfer of licences. However, starting with the first amendment to the electricity markets licence regulation in 2008, banks and financial institutions that provide limited or irrevocable project financing to the relevant generation licence holder within the scope of their loan agreements are also entitled to apply to the Energy Market Regulatory Authority to grant a new licence to another third party, provided that the third party agrees to take on all of the obligations arising under the relevant licence. The legal entity proposed by the banks or institutions shall be granted the related licence on the condition that it complies with the obligations under the relevant licensing regulations. There is no time restriction with respect to the transfer of licences under these regulations, such as prohibition of transfer during or after the construction or operation phase.

However, direct agreements – the objective of which is basically to enable the banks to 'step into the shoes of the project company' if it defaults in its loan obligations – are also common on the Turkish markets but only provide a contractual obligation, which may not be enforced before the regulatory or governmental authorities unless it is drafted in compliance with the above-mentioned energy regulations.

Protection under constitutional documents

Lenders or banks (through a security agent) may also acquire one single privileged share of a project company (and parent company, if necessary) to control the powers and entitlements at the corporate level and prevent certain resolutions to be taken by the company that may jeopardise the lenders' rights in the finance documents. For example, a provision stating that no security may be granted over any of the company assets and no disposal of shares in the project company, or no subordinated debt lent to the company, can be made without the vote of the single privileged share in the company.

Completion guarantees

Completion guarantees provided by the parent companies of the project companies are also used as a quasi-security on the Turkish lending markets. In most of the project finance transactions, lenders or banks require a completion guarantee in which the parent company undertakes relevant equity contribution to the project company, the cost overrun of the project and other financial covenants in the facility agreement such as the debt service coverage ratio.

Negative pledge clauses

Unlike certain continental law jurisdictions where negative pledge provisions are registered with the registrar of companies, negative pledge covenants, binding upon the parties, only constitute contractual undertakings under Turkish law, and specific performance cannot be imposed on the pledgor breaching such a covenant. Pursuant to the applicable legislation, such restrictive clauses cannot be agreed under movable pledge or mortgage agreements. Still, these provisions are commonly used in the Turkish lending markets. In the case of a breach of such a covenant, the claimant may request damages or, in certain exceptional circumstances, file for the cancellation of the transaction.

iv Priorities and subordinationSubordination

Although subordination is valid as a contractual undertaking and the parties have contractual claims against each other if the provisions of the subordination agreement are not honoured, Turkish law does not recognise subordination of debts in the event of the bankruptcy or insolvency of a Turkish company. Accordingly, in the event of the insolvency or bankruptcy of a Turkish company, subordination will not be upheld by the liquidators and, as a result, the claims of the subordinated creditors will rank pari passu with the claims of all unsecured creditors.

In practice, to give effect to subordination arrangements, the lenders request the subordinated creditors to assign or transfer all their subordinated loans – including the receivables to arise in relation to loans to be granted in the future (most commonly shareholder loans) – to them through an assignment or transfer of future receivables.

Pledged and non-pledged claims, and priorities in the ranking system

According to the Enforcement and Bankruptcy Law No. 2004, published in the Official Gazette, dated 19 June 1932, receivables of secured creditors have priority over the sale proceeds of secured assets after deduction of the relevant taxes in rem (i.e., taxes arising from the use or mere existence of the secured assets such as real estate taxes, motor vehicle taxes and custom duties), and expenses arising from the administration or preservation of the secured assets, or from sale auctions in the case of the bankruptcy of the debtor. In other words, if the debtor goes bankrupt, the pledged assets will be sold and the sale proceeds will be paid to the creditor whose receivables are secured through the pledged asset.