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Editorial

Recent Measures to Support Financial Stability in Turkey

The Banking Regulation and Supervision Authority (the “BRSA”) and the Central Bank of the Republic of Turkey (the “Central Bank”) introduced certain legislative changes, to support financial stability and sustain the effective functioning of markets, following the plunge in the value of Turkish Lira.>

New Regulation on Restructuring of Loans

The Regulation on Restructuring of Loans was published in the Official Gazette and entered into force on August 15, 2018 (the “Restructuring Regulation”). Under the Restructuring Regulation, the lenders may extend maturities, refinance loans and extend new loans to help troubled companies, thus providing some comfort to the real sector.

The Restructuring Regulation mainly introduces precautions in relation to the restructuring of the loans provided by banks, financial leasing companies, factoring companies and other financial institutions (the “Lender”), to ensure that companies are able to comply with their repayment obligations and continue providing employment opportunities. Eligibility for benefitting from the Restructuring Regulation will be determined on the basis that following implementation of the restructuring or repayment plan, the borrower will actually be able to repay its debts.

The financial restructuring agreements between the Lenders and the borrowers will be executed within the scope of the agreement which the Banks Association of Turkey (Türkiye Bankalar Birliği) (the “TBB”) will prepare and execute with the Lenders as a framework agreement for the restructuring of loans (the “Framework Agreement”). The Framework Agreement may be tailored for different borrower groups, classified by scale and industrial scope of activity, and shall mainly include: (i) fundamental terms and conditions applicable to the financial restructuring process mechanism, (ii) minimum qualifications for the borrowers, (iii) obligations of the parties to the agreement, (iv) breach of the agreement, (v) fundamental elements of the agreement to be executed between the Lender and the borrower and the minimum framework outlining the rights and obligations of the parties. The executed copies of the Framework Agreements will be submitted to the BRSA, for review of compliance with the Banking Law numbered 5411 and the Restructuring Regulation. The TBB will amend the agreement upon the request of the BRSA and will re-submit the executed copy to the BRSA for its approval. The Framework Agreement enters into force following the approval of the BRSA and can only be amended with the prior approval of the BRSA.

Troubled companies may refinance their loans under the umbrella of the Framework Agreement within two years of its execution and such Framework Agreement will be in effect only upon execution of the relevant financial restructuring agreement. The TBB may extend such two year term. The terms and conditions for the eligibility of the borrowers, to execute the financial restructuring agreements, will be determined under the Framework Agreement. Accordingly, the financial status and the eligibility of the borrower will be analyzed by institutions, set forth in the Framework Agreement and approved by the BRSA.

Although the Restructuring Regulation is quite similar to the financial restructuring legislation which was enacted as a response to the financial crisis of 2001 in Turkey, we expect the specific terms and conditions, as well as certain rights granted to the Lenders, e.g. demanding borrowers to sell their assets to repay their loans, to be determined under the Framework Agreement. For the time being, the Restructuring Regulation sets forth that the Framework Agreements and the financial restructuring agreements may take precautions by: (i) extending the maturity of the loan; (ii) renewing the loan; (iii) extending an additional loan; (iv) lowering or waiving any kind of receivables arising from the loan, interest, default interest, dividend payments and other receivables; (v) partial or complete conversion to contribution; assignment or transfer in kind, in cash or in exchange of a collection requirement; partial or complete liquidation, sale or taking off-balance of the loan, interest or receivables from dividend payments; (vi) executing protocols with other banks and Lenders, with the aim of acting in concert. Upon execution of the financial restructuring agreement, the statute of limitations relating to the loans of the borrower will cut off.

Furthermore, in the event the financial restructuring agreement is executed by the majority of the Lenders corresponding to two-thirds of the receivables from the borrowers, then all Lenders will be under the obligation to restructure the loan of the borrower. This requirement was not provided in the restructuring legislation enacted with the 2001 financial crisis, under which any Lender was able to block the restructuring of a loan simply by vetoing.

Another regulatory change was the amendment to the Regulation on Procedures and Principles for Classification of Loans and Provisions to be Set Aside, published on August 15, indicating that after monitoring of “loans under close monitoring due to significant financial risk” (classified as Group II Loans) for a period of at least three months, such loan may be reclassified as “loans of a standard nature” (classified as Group I Loans), provided that it meets certain requirements. Also amending the terms or partial or entire refinancing of the “loans of a standard nature” (classified as Group I Loans) shall not fall within the scope of a restructuring and shall continue to be monitored as a Group I Loan.

As a follow up to the above, there were additional regulatory changes which shortened the maximum maturity on consumer loans, allowed a restructuring of the outstanding amounts under consumer loans and placed new limits on credit card instalments to control consumer spending.

  Restrictions on the Banking Sector                              

The BRSA and the Central Bank further introduced changes in swap, liquidity management and reserve requirements of banks, aiming to ease the market concerns over the fluctuation of the Turkish Lira.

The BRSA imposed a restriction on foreign exchange swap operations, preventing Turkish banks to enter into currency swap and other similar dealings (spot and foreign exchange forward dealing transactions), where the activity exceeds 25% of the bank’s capital. The rates will be calculated daily on a consolidated and individual basis, and new transactions will not be performed or renewed until the current excess amount is eliminated. The aim and the expected result of such restriction is to preclude the Turkish Lira devaluation as a result of the transactions where foreign actors become indebted in Turkish Lira and purchase foreign currency.

The Central Bank announced that it will provide all the liquidity needed by banks, within the framework of intraday and overnight standing facilities and raised the foreign exchange deposit limits for Turkish lira transactions of the banks from Euro 7.2 billion to Euro 20 billion. It set forth that the discount rates for collaterals against Turkish lira transactions will be revised based on their type and maturity, thus providing banks with flexibility in the management of collaterals. Further, to provide flexibility in the banks’ collateral management, upon request of the banks, the winning bids in one-week repo auctions will be allowed to be fully or partially used in deposit transactions, instead of repo transactions at the Central Bank Interbank Money Market with the same interest rate and maturity.

The Central Bank also lowered Turkish lira reserve requirement ratios by 250 basis points for all maturity brackets and reserve requirement ratios for non-core FX liabilities by 400 basis points for up to three-year maturities. The banks’ current foreign exchange deposit limits of around USD 50 billion may be increased and utilization conditions may be improved if deemed necessary and banks are allowed to borrow FX deposits in one month maturity in addition to one week maturity.

This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu.