Loan document terms

Standard forms and documentation

What forms or standardised terms are commonly used to prepare the bank loan documentation?

The standard form documentation of the Loan Market Association has been common practice in the Turkish debt financing market over the past two decades. Both Turkish lenders and borrowers are very familiar with these terms.

English law-governed facility agreements as well as other ancillary documents are usually drafted in line with Loan Market Association standards and principles. Many Turkish law facility documentation clauses are also mainly adapted from Loan Market Association’s published documentation.

However, when a bilateral facility agreement is executed between a local commercial bank and a local borrower, the normal practice is to use a standard Turkish general credit agreement containing more generic terms and conditions and with no room for negotiation on the side of the borrower.

Pricing and interest rate structures

What are the customary pricing or interest rate structures for bank loans? Do the pricing or interest rate structures change if the bank loan is denominated in a currency other than the domestic currency?

The most frequent pricing structure used in the Turkish bank loans market is a floating rate based on LIBOR, EURIBOR or Turkish Inter-Bank Offered Rate (TRLIBOR) with an addition of a contractually agreed margin to the rate. However, when debtors are reluctant to use the floating reference rate in the market, they may opt for fixed rates even if these are more expensive in practice. It is also possible to determine different interest rate structures for different sections of a loan facility (eg, a floating interest rate for the acquisition facility and a fixed interest rate for the working capital facility).

Fixed interest rates are usually favoured by the debtors in the Turkish market when borrowing in Turkish lira.

Have any procedures been adopted in bank loan documentation in your jurisdiction to replace LIBOR as a benchmark interest rate for loans?

With the impending termination of the use of LIBOR as a benchmark interest rate by the end of 2021, countries are making an effort to launch national reference interest rates. In Turkey, there are a variety of interest rate types, such as TRLIBOR, the policy rate, loan interest, deposit interest and bonds-bill interest. However, there is no reference interest rate calculated based on transactions made in market. With the aim of preparing for the period after LIBOR, Borsa Istanbul (the national stock exchange of Turkey) announced the Turkish Lira Overnight Reference Rate (TLREF) in 2019. Under the relevant rules published by Borsa Istanbul, the TLREF is defined as a measure of the rate at which Turkish banks lend and borrow from each other in Turkish lira under circumstances where credit, liquidity and other risks are minimal. The TLREF is expected to be used as an underlying rate or a benchmark in financial products, debt instruments and different types of financial contracts in Turkey.

Other loan yield determinants

What other bank loan yield determinants are commonly used?

Pricing floors are commonly instituted in Turkey in respect of the determination of interest rates. Accordingly, zero floor provisions that are similar to the standard wording of the Loan Market Association are included in the loan documentation. The zero floor provisions provide that if the relevant rate is below zero, it is deemed to be zero for the purposes of the relevant agreement.

However, original issue discount transactions are very rare in the Turkish market.

Yield protection provisions

Describe any yield protection provisions typically included in the bank loan documentation.

Bank loan agreements in Turkey usually contain yield protection provisions, such as increased costs, prepayment fees, break costs and market disruption clauses.

A typical increased cost provision will state that the borrower will reimburse the lenders for any costs that result from the introduction of, or any change in, any applicable law or any applicable guideline or policy (regardless of whether it has the force of law), or any change in the interpretation or application thereof by any governmental authority charged with the administration thereof, subsequent to the date of the agreement.

Application of a prepayment fee in cases of repayment of the loan before its maturity date (ie, voluntary prepayment) is another mechanism to protect the costs of lenders in the financing.

In addition to the above-mentioned prepayment fee clauses, some lenders, in cases of prepayments made before the predetermined interest period, oblige borrowers to pay a break cost attributable to the prospective interest amount to be accrued for the remaining interest period.

Market disruption clauses in loan documentation are also market standard in Turkey. These set forth that if the agent bank receives notifications from a lender or lenders (with a specific participation percentage in the loan) that the cost to it of funding its participation in that loan from whatever source it may reasonably select would be in excess of LIBOR, then an alternative interest rate would be applied.

Accordion provisions and side-car financings

Do bank loan agreements typically allow additional debt that is secured on a pari passu basis with the senior secured bank loans?

Bank loan agreements in Turkey do not generally permit the borrowers to incur additional financial indebtedness. It is not very common in the market (and subject to hard negotiations) for debtors to have permitted indebtedness. Likewise, negative pledge provisions normally restrict the borrower from granting security interests to any third parties.

Financial maintenance covenants

What types of financial maintenance covenants are commonly included in bank loan documentation, and how are such covenants calculated?

Debt service coverage ratio covenants are very common in loan documentations in Turkey, especially in project finance transactions. These are tested periodically based on the financial statements provided by the debtor in accordance with the applicable financial reporting requirements. Failure to comply with these covenants will normally constitute an event of default under the facility agreement.

That said, subject to negotiations among the parties, those breaches can be resolved by way of providing cash equity injections or subordinated shareholder loans to the debtor company. Although not very common and not favoured by lenders, the provision of a bank letter of credit by the shareholders with respect to those ratios is also sometimes seen in the market.

Other covenants

Describe any other covenants restricting the operation of the debtor’s business commonly included in the bank loan documentation.

Negative covenants, such as change of control, disposal of assets, change of business, amendment of the constitutional documents, grant of negative pledges, financial indebtedness and the distribution of dividends, are customary covenants of the borrower under facility agreements. The scope and level of the restrictions in these covenants are subject to negotiation among the parties.

Mandatory prepayment

What types of events typically trigger mandatory prepayment requirements? May the debtor reinvest asset sale or casualty event proceeds in its business in lieu of prepaying the bank loans? Describe other common exceptions to the mandatory prepayment requirements.

Typical mandatory prepayment events in Turkey are as follows:

  • change of control (although this can sometimes be stipulated as an event of default under the facility agreement rather than a mandatory prepayment event);
  • illegality;
  • insurance proceeds; and
  • disposal of assets.

 

In the event of a casualty, lenders generally do not allow debtors to use insurance proceeds for the business and will instead require the amounts to be used for the prepayment of the outstanding debt. However, in some cases, in more borrower-friendly documentation, the parties may agree on a certain threshold for the amount of insurance proceeds, and the lenders may allow the debtor to use insurance proceeds below that threshold for the recovery of damages (eg, for the reconstruction, fixing or replacement of the damaged asset) and oblige the debtor to use any amounts above the threshold for prepayment of the loan.

Debtor’s indemnification and expense reimbursement

Describe generally the debtor’s indemnification and expense reimbursement obligations, referencing any common exceptions to these obligations.

Virtually every bank loan agreement contains an indemnification provision pursuant to which the borrower undertakes to pay and reimburse the lenders for all liabilities, obligations, losses, damages, penalties, claims and taxes, as well as out-of-pocket costs and expenses incurred by the lenders in the financing.

It is also very common for the borrowers to bear the costs of the drafting, execution, perfection, amendment, waiver and release of the security documents.

It is customary for the parties to the loan agreement to agree on an (annual) cap for those costs and expenses. Costs ‘not reasonably incurred’ or ‘not documented’ are typical exceptions to these obligations.

Law stated date

Correct on

Give the date on which the above content is accurate.

8 May 2020.