The Securitisation Law Review: Turkey
Turkish securitisation market was launched approximately three decades ago, with the first reported future flow securitisation transaction based on credit card receivables in 1992. Although high interest rates in the country have historically caused issuers to be more inclined to invest in sovereign debt securities rather than focusing on issuing asset-backed securities, securitisation has predominantly been explored by the Turkish banking sector until the past few years whereby major banks in Turkey, instead of borrowing from the money markets, reached cheaper, long-term, hard currency funds by securitising receivables arising from cheques, credit cards, remittance and leasing transactions. Since the early 2000s, diversified payment rights (DPRs) – which is Turkey's most frequently used cross-border securitisation structure – have been used by Turkish banks as underlying products assigned to offshore special purpose vehicles (SPVs).
i Recent Developments in the Market
Although securitisation transactions in the banking sector have recently slowed down as a result of certain changes introduced to Turkish tax legislation, securitisation continues to be an emerging field for Turkish market players. Particularly following the Capital Markets Board's (the CMB) – the regulatory authority supervising securitisation transactions in Turkey – initiative to diversify financial instruments for raising more funds through alternative and cost efficient ways, Turkey began experiencing promising developments in the securitisation market.
Since 2018, certain legislative and regulatory changes were progressively introduced in an effort to promote the use of securitisation structures and diversify available products. For example, certain revisions were made to the legal framework of the Development and Investment Bank of Turkey in late 2018 to establish its wealth management fund, the Turkey Development Fund, for the purpose of issuing asset-backed, mortgage-backed or other types of hybrid securities. The Turkey Development Fund made its debut asset-backed issuance worth of 3.15 billion Turkish lira in December 2018 with mortgage loan portfolios of Ziraat Bank, Halkbank, Vakıfbank and Garanti Bank as underlying assets, which was followed in March 2019 by a 1 billion Turkish lira asset-backed issuance by Turkey Development Fund with mortgage loan portfolios of Akbank, İş Bankası and Yapı Kredi Bank as underlying assets. Another milestone was the first issuance in Turkey by a non-bank issuer that took place in 2018, where Volkswagen Doğuş Finansman A.Ş. issued 5 billion Turkish lira securities backed by the company's receivables arising from auto loans.
In terms of recent legislation, in line with the targets set out under the 11th Development Plan (2019-2023) of Turkey:
- On 14 May 2020, the CMB amended the Covered Bonds Communiqué (No. III-59.1) to (among other things) remove the covered bond issuance ceiling limits (previously applied as five times the equity) applicable to Mortgage Finance Institutions (MFI).
- On 13 June 2020, similar amendments were introduced to the Communiqué on Debt Securities (No. VII-128.8) (Debt Securities Communiqué) and the Communiqué on Asset-Backed and Mortgage-Backed Securities (No. III-58.1) (AMBS Communiqué), which removed the issuance ceiling limits previously applicable to MFIs.
- On 24 July 2020, the CMB published the draft Communiqué on Securities Backed by Projects (No. III-61/B.1) for public opinion, which is expected to pave the way for alternative sources for financing Turkey's ambitious projects with high capital costs, by setting the much-needed regulatory framework for project finance funds and issuance of project backed securities. The draft communiqué is expected to be enacted by the end of 2020.
- On 10 September 2020, the CMB published the draft Communiqué on Issuance of Capital Market Instruments Secured by Assets (No. II-31/B.1) for public opinion, which (among other things) provides the details of implementation for collateralised issuances in Turkish capital markets as well as the novel concept of security agent, which was introduced with a legislative amendment to the Capital Market Law (Law No. 6362) (the CML) in February 2020. The draft communiqué is expected to be enacted by the end of 2020.
Moreover, legislative developments in the recent years also paved the way for more diversified sukuk issuances by Turkish Islamic banks by broadening the number of permitted sukuk structures. Following the footsteps of Kuveyt Turk, which was the first to tap liquidity from international markets with the very first cross-border sukuk issuance through a Turkish SPV in 2012, Turkish Islamic banks, such as Türkiye Finans and Albaraka, have had an increasing appetite for sukuk issuances in the recent years.
|Corporate sukuk issuances in Turkey between 2014-20192|
|Lease certificates (LC)|
|Debt securities (DS) |
|(LC/DS) (per cent)||4.11||3.31||2.95||5.10||13.29||15.06|
i Applicable Law
Onshore securitisation transactions in Turkey are regulated by the CMB. Although the Turkish legislator has not provided a specific piece of legislation focused particularly on offshore securitisation transactions that involve foreign SPVs so far, a specific restriction in this regard does not exist under Turkish law either. However, asset-backed securities (ABS) and mortgage-backed securities (MBS) (ABS and MBS together, AMBS) may be issued in Turkey by using an onshore SPV (i.e., a fund) to be incorporated pursuant to the framework provided by the following legislation:
- the CML;
- the Debt Securities Communiqué;
- the AMBS Communiqué; and
- the Communiqué on Principles Regarding Establishment of Mortgage Finance Institutions (No. III-60.1) (the MFI Communiqué).
ii Securitisation structures
A typical legal structure for onshore securitisation transactions involving issuance of AMBS would require establishment of an SPV in the form of a fund in accordance with the applicable secondary legislation issued by the CMB. Such funds may only be established by the entities specified under the applicable CMB regulations, such as banks and certain other financial intuitions. Typically, the actors involved in a securitisation in Turkey would be: (1) the originator; (2) the founder (usually a bank); (3) the fund (i.e., the issuer); (4) the security agent; (5) service providers and (6) custodians.
AMBS can be sold through a public offering or sale to qualified investors or, if the nominal value of the issuance is equal to or more than 100,000 Turkish lira, through private placement. Each issuance (as well as the incorporation of the issuer fund) must also be approved by the CMB.
The funds are defined under the AMBS Communiqué as segregated asset portfolios, which are managed based on principles of fiduciary ownership, and do not have a separate legal personality. Accordingly, the funds do not grant shareholder rights to their investors, which hold an ownership right in the issued securities instead. The funds must be managed in accordance with their by-laws, which set out the applicable rules in relation to matters such as (1) preconditions for investing in the fund; (2) applicable methods of valuation; (3) custodial matters; and (4) general principles pertaining to the fund's management and investments. CMB regulations require funds to enter into service agreements with service providers (e.g., for collection of underlying receivables) and custodians in connection with the fund's assets.
Although an onshore issuance requires incorporation of a fund in Turkey in accordance with the applicable CMB regulations, due to tax concerns, a majority of recent securitisation transactions were conducted through offshore SPVs incorporated in tax haven jurisdictions, and are not subject to CMB's regulatory oversight.
iii Transfer of assets
Thereafter, a written transfer agreement needs to be signed between the originator and the fund in respect of the underlying assets. According to the Turkish Code of Obligations (Law No. 6098), a creditor may assign and transfer its existing or future credits to a third person without the consent of the debtor provided that such assignment is not limited or restricted by law (i.e., statutory restrictions on assignment of certain receivables may apply) or by contract. Unless the assignment of a receivable is prohibited by law or restricted under the relevant contract from which the receivables originate, receivables may be assigned without the consent of the Turkish sub-debtor. While giving notice to the sub-debtor for the assignment of receivables is not a legal perfection requirement as a matter of Turkish law, such a notification would be market standard and advisable primarily because in the absence of any such notification, the debtor may repay the receivable to the relevant assignor whereupon it would be released from its obligation to make payment to the assignee. However, if the sub-debtor receives a written notification of the assignment (and preferably an evidence of receipt is obtained by the assignee), the sub-debtor would be required to pay its debt to the assignee and will not be released from its debt if it makes the payment to the assignor. Ideally, an acknowledgment from the sub-debtor confirming that there are no prior ranking security or counterclaims over the assets would also be beneficial; however, this may not be practical in securitisation transactions concerning large receivable pools.
iv Asset pool
There are also certain rules and limitations as to what may be included in a fund's asset portfolio depending on the type of issuance. For instance, for an ordinary ABS issuance, unless otherwise permitted by the CMB, only the following types of assets may be included in the fund's portfolio:
- receivables of banks and financing companies arising from consumer loans and commercial loans;
- receivables of leasing companies arising under financial leasing agreements;
- receivables of the Housing Development Administration of Turkey arising from the sale of real estate;
- commercial invoiced receivables of non-financial institutions that manufacture goods or provide services, which are either linked to deeds or collateralised;
- short-term deposits with a maturity of less than three months, participation accounts, reverse repo transactions, money market funds, short-term debt securities funds and Settlement and Custody Bank money market transactions used for the purpose of investing the cash generated from the assets in the fund's portfolio;
- assets held in the fund's reserve accounts (as required under the applicable regulations); and
- covered bonds issued by banks and MFIs.
v Risk Retention
According to the AMBS Communiqué, the originator or the founder must repurchase the AMBS corresponding to 5 per cent of the nominal value of the aggregate securities issued and retain this percentage until final maturity. If AMBS are issued in tranches, this requirement shall be applicable:
- on a pro rata basis for each tranche if the relevant tranches of AMBS have not been assigned a credit rating or have the same credit rating; or
- to the tranches having the lowest credit rating, if there are different AMBS classes with different credit ratings.
The CMB has the authority to vary the above ratio contingent upon the type of assets or on the basis of the originators or founders, on the condition that the ratio cannot exceed 10 per cent. In the case of multiple originators, as a result of the amendments made in the legislation in November 2018, the risk retention requirement will be applicable to tranche issuances pertinent to the assets transferred by each originator. In addition, there are banking regulations that particularly deal with the risk-weighted calculations of both traditional and synthetic securitisation transactions which are updated by the Banking Regulation and Supervision Agency (BRSA) in order to improve the level of compliance with the Basel standards.
Security and guarantees
Pursuant to the Turkish conflict of laws rules, security documents creating a security interest over the assets that are located in Turkey should be governed by Turkish law. Therefore, security agreements concerning a mortgage over a real estate property or a pledge over a movable asset located in Turkey, or Turkish securities custodied or listed in Turkey, shall be governed by Turkish law and cannot be governed by the laws of another jurisdiction. Also, security documents that are subject to formal certification or registration requirements or executed between Turkish parties have to be executed in Turkish.
As a general principle, any provision entitling a security holder to become the owner of a secured asset upon the occurrence of default is null and void under Turkish law (the lex commissaria prohibition). However, the security holder can sell the security (depending on whether private sale is permitted for that particular form of security) or have them sold in order to receive sale proceeds for the satisfaction of its receivables and/or it may join such sale and bid against its claims (i.e., the security holder does not have to make an actual payment for the amount of its claims).
As an exception, for the collateral arrangements where the subject matter of the form of security is dematerialised capital market instruments registered in the electronic records of the Turkish Central Registry Agency (CRA), Article 47 of the Capital Market Law (CML) (Law No 6362) allows the pledgee to automatically acquire the ownership of such listed shares on an enforcement event.
Below is a summary of the most common types of security interests established in the Turkish market.
Pledge over shares
Without prejudice to any further requirements in the articles of association of the relevant company, a pledge over the shares of a Turkish joint stock company can be established by:
- entering into a written pledge agreement;
- delivering the share certificates (in printed or temporary form) representing the pledged shares to the pledgee (bearing pledge or blank endorsements if they are registered shares); and
- registering the pledge on the share ledger of the company upon the resolution of the board of directors of such company to that effect (so that no one can claim good faith while conducting any transactions regarding the pledged shares).
Perfection of a pledge over the shares of a Turkish limited company requires a written pledge agreement to be executed before a notary public and registration of the pledge with the share ledger of the company on a resolution of the general assembly of such company to that effect.
The shares of publicly traded companies are in dematerialised form and are recorded with the CRA. Accordingly, the shares of these companies that are subjected to a pledge should be transferred to the sub-account of the pledgee held with the CRA with a record of the pledge.
In the absence of any agreement to the contrary, the voting rights of the pledged shares will be exercised and the dividends will be received by the pledgor.
A mortgage constitutes an encumbrance over the immovable property subject to such mortgage and all buildings thereon including the integral and accessory parts. A mortgage over immovable property may secure:
- the principal amount of the debt;
- delay interest and enforcement costs;
- the contractual interest; and
- the expenses, including but not limited to the insurance premium payments, made or incurred by the mortgagee for the protection of the mortgaged immovable property.
Pursuant to the Turkish Civil Code (Law No 4721), a mortgage can be created as security over immovable property for any kind of debt; present, future or contingent. The perfection of a mortgage requires a mortgage agreement to be entered into by and between the mortgagor and the mortgagee at the relevant Title Deed Registry in ex officio form and thereafter registration of the mortgage with the same.
Mortgages are registered in first and continuing degrees and rankings. The degree of the mortgage holds particular importance in an enforcement scenario. Initially, the first-degree mortgagee receives its receivables (up to the mortgage amount) from the proceeds of the sale of the mortgaged property. If there remain any proceeds, the second-degree mortgagee receives its receivables and the process continues in such a manner.
It is possible to create a joint mortgage on a certain degree (i.e., a mortgage in favour of more than one mortgagee) and unless a different arrangement is included in the mortgage agreement, the rights of each mortgagee under the joint mortgage shall rank pari passu with the rights of the other joint mortgagees.
Mortgages can move up to a higher degree upon its becoming available if the relevant mortgage agreement includes an express provision to this effect.
Pledge over movables
Under Turkish law, perfection of a pledge over movable property requires a written pledge agreement to be entered into by and between the pledgor and the pledgee and transfer of the physical possession of such movable property to the pledgee.
In respect of a pledge over movable property that is legally required to be registered with a special registry (such as vehicles), the pledge may be granted through a registration at the relevant special registry as a perfection condition and, in such a case, physical possession of such movable property is not required to be transferred to the pledgee.
Movables pledge in commercial transactions
The Movable Pledge Law in Commercial Transactions (Law No 6750) provides for the establishment of pledge over movables without any requirement to transfer the physical possession of the pledged asset to the pledgee. As mentioned above, an ordinary pledge over movable assets is perfected by transfer to the pledgee or its custodian of the physical possession (i.e., the delivery) of the movable property is required to create a pledge over the same. As this is highly impractical for especially in commercial transactions, the Movable Pledge Law in Commercial Transactions and come into force on 1 January 2017.
According to the Movable Pledge Law in Commercial Transactions, a movable pledge can be created in commercial transactions as security for any kind of present or future debt without the transfer of physical possession of the assets. Accordingly, the pledge agreement can be made electronically with secure e-signatures or in written form between either
- (1) credit institutions; and (2) merchants, craftsmen, farmers, producer organisations and self-employed natural or legal persons; or
- (1) merchants; or (2) craftsmen.
Written pledge agreements are required to be signed before an official of the Pledged Movables Registry or the signatures of the parties thereof are required to be approved by a notary public. The pledge will be established with the registration of the same to the Pledged Movables Registry. The pledge agreement must include
- detailed information regarding the parties of the pledge agreement (in accordance with the requirements set out for each profession or legal entity);
- if the pledgor is different than the owner of the pledged assets, the identity of such pledgor;
- the subject of the underlying agreement according to which the pledge agreement is entered into;
- if the amount of the secured receivable is ascertainable, the debt and pledge amount or if not, the upper limit of the pledge amount;
- the currency of the pledge amount;
- a list of the pledged assets and details and specifications thereof;
- the degree of the pledge and the amount and rank thereof (if any);
- the value of the pledged assets (if and as determined under the Movable Asset Valuation Regulation);
- (if applicable) the right to assume the ownership of the pledged assets in an event of default; and
- the party who shall bear the costs and expenses arising from the registration of the pledge to the Pledged Movables Registry.
A pledge can be established on the current or potential assets of a pledgor (or revenues thereof). The following items (whether under the possession of the pledgor or a third person) can be subject to a pledge agreement under the Movable Pledge Law in Commercial Transactions:
- trees yielding perennial products;
- intellectual property and industrial rights;
- raw materials;
- all types of revenue and income;licences and permits (save for administrative authorisations) that are not required to be registered with other registries;
- lease income;
- lease rights;
- movable equipment of the enterprise such as machinery, vehicles, equipment, tools, construction equipment, all types of electronic devices including electronic communication devices;
- consumable materials;
- agricultural products;
- trade names or business names;
- commercial enterprises or craftsmen enterprises;
- commercial plates and commercial lines;
- commercial projects;
- wagons; and
- any types of similar asset or right.
The pledge can be registered in fixed degree system or free degree system. Under fixed degree system, pledges are established in first and continuing degrees (i.e., rankings). The degree of the pledge holds particular importance in an enforcement scenario. Initially, the first-degree pledgee receives its receivables (up to the pledge amount) from the proceeds of the sale of the pledged property. If any proceed remains, the second-degree pledgee receives its receivables and the process continues in such a manner. Also, as a general rule, the second-degree pledge does not automatically move to the first-degree upon the release of the first-degree pledge. That said, the right to move to the upper degree can be granted to the pledgees in the pledge agreement. In such a case, if the secured receivable of the pledgee in an upper degree is fully released, the pledgee in the lower degree (who is granted the right to move to the upper degree) will automatically move to such upper degree.
A pledge under the Movable Pledge Law in Commercial Transactions does not prevent the pledgor from using the pledged assets during the course of its ordinary business. However, the pledgor is required to take necessary precautions to maintain the value of pledged assets. Also, negative pledge provisions in respect of the pledged assets or provisions restricting the pledgor's disposal rights over the pledged assets shall be deemed void under the Movable Pledge Law in Commercial Transactions. However, the pledgor is required to notify the Pledged Movables Registry of the transfer of the title of the pledged assets or the underlying debt and the relevant assets would be transferred together with the pledge.
Assignment of receivables
An assignment (transfer) of receivables or pledge over receivables is perfected by entering into a written assignment or pledge agreement. Present or future receivables (including insurance proceeds) can be assigned or pledged but they should be ascertainable.
Bank account pledge
The perfection of a bank account pledge (which is a type of receivables pledge over the receivables of the deposit holder vis-à-vis the account bank) requires execution of a written pledge agreement between the pledgor and the pledgee and a notification to the account bank (unless the pledgee is also the account bank). It is also advisable to obtain an acknowledgement from the account bank to ensure that the pledge is duly registered with its records. It waives any set-off rights it may have in respect of the pledged accounts and it does not have any counterclaims as at the date of the acknowledgement.
Other forms of security
In addition to the above-mentioned forms of security that are most commonly used in the Turkish market, there are also more specific forms of security available, such as aircraft or vessel mortgages or pledges over mines.
The Turkish Commercial Code (Law No. 6102) (the TCC) provides that a parent company cannot use its dominant position (i.e., through voting rights, appointment majority of board of directors members) to force its subsidiary to enter into transactions, which may result in losses to the subsidiary. These include giving sureties or guarantees, making payments or decreasing its assets for the debt of the parent company.
An exemption to this rule was also provided and so upstream guarantees or security can be provided if any such transaction is made for consideration. For the purposes of such consideration, the TCC allows compensation by the parent of any loss suffered by the subsidiary within the operating year that the loss is suffered in, or granting of an express right to the subsidiary against the parent (or a counter-guarantee) to claim any losses it may suffer as a result of providing such guarantee or security ('equal right of demand').
Failure to provide the consideration explained above allows the shareholders of the subsidiary to claim compensation against the parent and its board of directors. Any creditors of the subsidiary may also request payment to the subsidiary of any losses so suffered.
As per the Decree No 32, Turkish residents (excluding banks incorporated in Turkey) are required to notify the Ministry of Treasury and Finance regarding the guarantees and sureties issued in favour of non-residents within 30 days of the date of issuance.
There is no specific requirement under Turkish law in relation to related party transactions to be entered into by privately held companies. However, related party transactions of publicly listed companies are regulated in detail by the CML. Accordingly, prior to entering into a related party transaction, publicly listed companies must adopt a board resolution, which requires the approval of the majority of the independent board members. Unless approved by the majority of independent members, a public disclosure must be made on the Public Disclosure Platform and the transaction must be submitted to the general assembly (shareholders) for its approval. There may be other requirements (i.e., obtaining an evaluation report, disclosure requirements) according to the size of the related party transaction.
Priority of payments and waterfalls
i Cash management
An important aspect of securitisation transactions in Turkey is the control over the use and management of a fund's cash flow, which is usually set out in detail under in the relevant fund's by-laws as well as any the covenants and undertakings in the finance documents relating to specific transactions.
The AMBS Communiqué requires all expenditures of the issuer fund to be made on an arm's-length basis, and to be disclosed in the relevant prospectus or issue document (as applicable). The permitted expenditures that could be made by the issuer fund are listed under the AMBS Communiqué as below:
- mandatory disclosure and registration fees;
- fees to be paid to the fund's employees and to legal, accounting, custody, settlement and other management services providers;
- asset management fees to be paid to the service provider;
- fees to be paid to auditors;
- fees to be paid to rating agencies;
- fees and other payments to be paid to credit enhancement providers;
- underwriting and brokerage fees;
- accruals to reserve accounts;
- mandatory legal fees to be paid in connection with the issuance;
- hedging and derivative costs; and
- other expenses approved by the CMB.
In addition, the CMB regulations also provide some credit enhancement techniques which may be used for specific types of issuances, which may include the following:
the fund may procure insurance or enter into guarantee or security arrangements with the originator or another party in respect of the securitised receivables;
- the fund can issue securities in tranches, diversified in terms of asset quality, rating, tenor etc.;
- the fund may create a retained spread by transferring certain of its assets to reserve accounts; or
- the CMB may request that the payment obligations under the securities are guaranteed by a local bank or another third party.
Although contractual subordination is permitted under Turkish law of general application (i.e., the parties can regulate subordination as a contractual undertaking and a party would have a contractual claim in case the other party breaches such undertaking), mandatory ranking set out under the Enforcement and Bankruptcy Law (Law No 2004) (the EBL) would apply for the mandatory ranking in the case of insolvency. To avoid this, in practice, any subordinated debt is assigned to the senior creditor under an assignment of receivables agreement with the result that, in the event of the bankruptcy of a party that owes subordinated debt, the senior creditor can claim to be the holder of such debt so it will ensure that the subordinated parties are not in competition with the senior creditor to recover their receivables from the bankrupt party. In the case of AMBS, given the pool of assets of an issuer fund is bankruptcy remote and will be liquidated in accordance with the by-laws of the fund, this contractual subordination mechanism may also be reflected in the by-laws of the relevant fund.
Isolation of assets and bankruptcy remoteness
Funds (the form of SPV that is mandatory in an onshore securitisation transaction in Turkey) are bankruptcy remote vehicles with isolated asset portfolios. All assets of the originator must be transferred to the fund in order to be securitised with the result that the legal ownership of assets is transferred to the issuer fund, and those assets cannot be subject to insolvency proceedings of the originator. In addition, all payment to be made by the fund and the use and distribution of proceeds of the fund's assets (including liquidation methods) must be disclosed in the prospectus or offering document. In addition, there may be a guarantor involved guaranteeing the underlying payment obligations, either because of a request by the CMB or voluntarily by the transaction parties. As a result, insolvency risk appears to be remote from a practical perspective in the context of onshore issuances.
The state of uncertainty caused by the covid-19 pandemic affects the securitisation market as well as other units of Turkish economy. However, the securitisation market is gaining more importance, especially among the banks, which have an increasing appetite towards achieving off-balance sheet treatment of their loan receivables. In this respect, the draft communiqués published by the CMB (especially the one relating to project finance funds and the issuance of project-backed securities) are expected to boost demand in the Turkish securitisation market and widen the investor base of Turkey's ambitious infrastructure projects in the pipeline, which have traditionally been reliant on conventional bank loans.