An extract from The Restructuring Review, 13th Edition
Overview of restructuring and insolvency activityi Liquidity and state of the financial markets
Following the introduction of foreign exchange (FX) loan restrictions in May 2018, which aim to limit the foreign currency indebtedness of Turkish companies with no foreign currency earnings, the ratio of Turkish legal entities' FX debt decreased in 2019. According to the financial stability report published by the Central Bank of the Republic of Turkey (Central Bank), FX loan restrictions created an awareness of FX risk management.
As at September 2019, the non-performing loan ratio of Turkish banks increased to 4.9 per cent, whereas it was below 3 per cent in September 2018. The increase is mostly on corporate loans, since retail loans seem to have stabilised at a ratio below 4 per cent.
Fitch kept its sovereign rating of Turkey as BB– on 21 February 2020, Moody's lowered the sovereign rating of Turkey to B1 from Ba3 in June 2019, and Standard & Poor's decreased the rate to BB– from B+ in August 2018.
Covid-19 has caused a slowdown in the Turkish economy, as is the case in other major economies, and the financial markets expect the Turkish economy to reopen gradually in the near future.ii Impact of specific regional or global events
Turkey has geographical risk owing to its close proximity to conflict zones such as Syria. Furthermore, its natural trade partners, such as Iran and Russia, are sanctioned countries.
European countries are also significant trade partners for Turkey, and political relations with the United States and the European countries therefore have a substantial level of importance.
Additionally, we expect to see more impact caused by covid-19 on the Turkish economy in the short and medium terms. As of 1 May 2020, Turkey had 122,392 confirmed cases of the disease. According to Worldbank, economic growth is estimated to be 0.5 per cent now, while the estimate was approximately 3.5 per cent before the outbreak. Moody's states in its research paper that covid-19 has accelerated capital outflows and reduced the foreign exchange reserve in Turkey.iii Market trends in restructuring procedures and techniques employed during this period
The preferred restructuring technique in the Turkish market has always been informal restructuring, usually in the form of bilateral negotiations between creditors and debtors, mostly by way of the refinancing of bank loans. The main reasons driving this trend, we believe, have been that formal restructurings generally provide broad discretion and authority to the courts over the creditors and that the banks are proactive in refinancing loans before a potential payment default.
Financial restructuring based on financial restructuring framework agreements published by the Banks Association of Turkey in 2019 and signed by financial institutions has also started to be used as a restructuring tool in the Turkish loan market. As of February 2020, 138 companies have initiated a financial restructuring process and 13 companies have concluded a financial restructuring agreement under large-scale financial restructuring framework agreements; likewise, 42 companies have initiated a financial restructuring process and seven companies have concluded a financial restructuring agreement with their financial creditors under small-scale financial restructuring framework agreements.iv Number of formal procedures entered into or exited during this period
Most of the restructurings are based on informal procedures, and these data are not available. However, according to the data collected from announcements made by companies in the Trade Registry Gazette, 899 different companies applied for concordat in 2019.
Recent legal developmentsi Recent legislative developments
The Turkish government has announced a number of economic policy responses designed to mitigate the impact of covid-19 for businesses and individuals. Pursuant to the Law on Amendment of Certain Laws No. 7226 and Presidential Decree No. 2279, except for enforcement proceedings concerning alimony receivables, all pending enforcement, debt collection and bankruptcy proceedings for all corporates as well as individuals were suspended until 30 April 2020 and the initiation of new enforcement and bankruptcy proceedings and implementing interim attachment orders was prohibited for all corporates as well as individuals until 30 April 2020. The prohibition was extended until 15 June 2020 and the proceedings started on 15 June 2020. Further, as of 30 March 2020, guarantees provided by the Ministry of Treasury and Finance to lending financial institutions have been increased to 50 billion lira from 25 billion lira.
The BRSA prolonged the default periods of for the loans to be classified as group 2 and as non-performing loans as follows:
- the 30-day default period for loans to be classified under group 2 loans pursuant to the BRSA Regulation on Classification of Loans and Provisions has been changed to 90 days; and
- the 90-day default period for loans to be classified as non-performing loans has been changed to 180 days for loans classified as group 1 loans and group 2 loans pursuant to the BRSA Regulation on Classification of Loans and Provisions.
Ulusoy Ulaşım Petrol Sanayi Ticaret A.Ş. (Ulusoy), one of the leading passenger transportation companies operating in Turkey, applied for concordat in November 2018 and obtained a three-month temporary standstill period from the court. After the temporary standstill period, the Istanbul First Commercial Court refused a definite standstill period request from Ulusoy and ruled on the bankruptcy of Ulusoy on 20 February 2019. Likewise, Pamukkale Turizm İşletmeciliği A.Ş. (Pamukkale), another leading passenger transportation company, after having been declared bankrupt by the decision of the Izmir First Commercial Court in early 2019, appealed the bankruptcy decision. This decision was reviewed and annulled by the 17th Chamber of the Izmir Regional Court of Appeals in April 2019. The case is still under court review.
In January 2020, Tekin Acar, a company operating in the cosmetics industry, was officially declared bankrupt following various restructuring attempts.
In addition, Yörsan Gıda Mamulleri Sanayi ve Ticaret A.Ş. (Yörsan), a leading company in the food industry, has applied for bankruptcy through its major shareholder Dairy Fresh Süt Ürünleri ve Gıda Yatırımları A.Ş., controlled by the Abraaj Group headquartered in Dubai. Since then, the company has been managed by an appointed trustee and is negotiating the restructuring of its debts with the private banks.
Furthermore, the bankruptcy cases in the tourism industry were followed by the bankruptcy declaration of Atlasjet Havacılık AS (Atlasjet) in February 2020, a major Turkish airline company operating both domestically and internationally. Atlasjet has failed to repay debts in an amount of US$60 million, including a loan from Şekerbank T.A.Ş., debts to various airport and terminal operators, ground services and fuel companies. Moreover, Borajet, another Turkish regional airline company which suspended its operation in 2017 and entered into restructuring of its debts, was also declared bankrupt in early November 2019.
Most recently, a well-known energy company Yeni Elektrik Üretim A.Ş. (Yeni Elektrik), which is 40 per cent owned by the Italian Ansaldo Energia group and operates a power generation site in Gebze, was declared bankrupt on 20 February 2020 after the banks rejected the restructuring of its debts in an amount of US$560 million.iii Impact of insolvency and restructuring on the market
It is reasonable to expect the number of bankruptcy and restructuring proceedings to increase in the near future due to the impact of covid-19, and a new wave of restructurings may emerge as soon as the markets reopen and conditions allow financial predictability.
Significant transactions, key developments and most active industries
Following the Turkish economic crisis in 2001, postponement of bankruptcy has been the most frequently used technique in restructuring. However, the system was abused by some companies, which were creating or reflecting fictitious debts to be able to apply for postponement of bankruptcy so as to benefit from halting payments. Accordingly, creditors complained about this owing to the abuse of the postponement of bankruptcy by malicious debtors. With the enactment of Law No. 7,101 on Amendments to the Enforcements and Bankruptcy Code and certain other Codes on 15 March 2018, the postponement of bankruptcy has been completely abolished. New rules and regimes were introduced to the concordat scheme, with the aim of simplifying the process and promoting such insolvency and restructuring methods. Following the amendments, concordat has become the new popular restructuring tool in the Turkish market.
Energy sector players took the lead in financial restructuring applications in 2019. Bereket Energy Group restructured its consolidated debts owed to nine different banks in an amount of US$4,600 billion in March 2019. Although the energy companies had restructured US$7.5 billion debt as of October 2019, the indebtedness of the energy sector, which was restructured through financial restructuring, is 4,934 billion lira as of February 2020, which is the highest amount of any sector. In addition to the energy groups, other major restructuring transactions have been conducted by construction sector companies. For instance, TAV İnşaat, one of the biggest construction companies in Turkey, restructured US$350 million of debt in 2019. Within the scope of this restructuring, transfer of Akfen Holding's shares in Tav İnşaat to other shareholders or to the third parties is on the table as part of the restructuring plan.