Impact of new capital markets legislation on debt capital market issuances in Turkey
March 2020 – The Law Amending the Banking Law and Other Laws No.7222 (the “Amending Law”), published in the Official Gazette dated 25 February 2020 and numbered 31050, has introduced several amendments to Turkey’s Capital Markets Law No. 6362 (“CML”). The goal of the new legislation is to foster more efficient, transparent and competitive financial markets in Turkey. Among the most important changes introduced by the Amending Law are the creation of a Board of Debt Instrument Holders, the concept of a Trust, Project Finance Funds and Project Bonds. Other changes include expanding the scope of crowd-funding and limiting the scope of significant transactions and rights to exit for shareholders.
While the Amending Law affects several areas, in this article we focus specifically on its impact in relation to new debt capital market issuances, where the most significant changes have been made.
Board of Debt Instrument Holders
Under the previous Turkish Commercial Code, bondholders were granted the authority to call general meetings under certain circumstances. However, such provisions were not effectively used in practice and they were not adopted in the new Turkish Commercial Code introduced in 2011. In order to improve the investment climate and provide ease of investor control, this concept has been re-introduced through Turkish capital markets legislation.
The Amending Law establishes a Board of Debt Instrument Holders (“Bondholders’ Committee”), which is formed by bondholders and may be established to cover all issued debt capital markets instruments of an issuer or separately for each tranche. The Bondholders’ Committee enables bondholders to act jointly to negotiate amendments or restructure the terms of debt instruments with the issuer. The prospectus for the debt issuance or issuance certificate should set out the terms and conditions for the convening of the Bondholders’ Committee and its decision making process. The minimum quorum to constitute both a valid Bondholders’ Committee meeting and to pass a resolution is half the total nominal value of (i) all outstanding debt instruments; or (ii) the relevant tranche issuance, as the case may be. The thresholds for the meeting and decision quorum may be increased (but not decreased) under the terms and conditions of the bonds or the CML. Decisions adopted by the Bondholders’ Committee will be binding upon all holders of the relevant debt instruments.
In the event of a payment default in relation to a debt instrument issuance, the Amending Law provides various options for the Bondholders’ Committee. These include the ability to suspend on-going legal proceedings of the bondholders as well as interim injunctions and interim seizures obtained during those proceedings. These powers ensure the feasibility of restructuring by bondholders outside a court process.
The concept of a bondholders’ committee has been market practice for Eurobond issuances by Turkish companies for investors outside of Turkey. It is expected that this legal framework will bring further clarity as to scope of powers of bondholders in relation to issuances both in Turkey and for cross-border issuances.
Further principles and procedures of Board of Debt Instrument Holders will be regulated by secondary legislation to be issued by the Capital Markets Board (“CMB”).
Security Agent and Security Management Agreement
The Amending Law also introduces the concept of a Security Trust or Agent into Turkish capital markets law. The use of a security trustee is common in international practice for secured bonds under English or New York law but has not been formally introduced into Turkish capital markets law until now.
The Amending Law stipulates the creation of a Security Management Agreement (Teminat Yönetim Sözleşmesi) and Security Agent (Teminat Yöneticisi) (i) to speed up the collection of the receivables of bondholders, unlike the current practice; and (ii) to enable the creation of security over assets of the issuer in favour of the security trustee through a Security Management Agreement. The Security Management Agreement must be executed in writing between the Security Agent and the issuer prior to the issuance. In order to protect investors’ rights, the Security Management Agreement regulates the duties of the Security Agent, such as management of the assets granted as security for the bond, enforcement of security and distribution of the proceeds of enforcement to investors.
The Security Agent is authorised to sell the secured assets and distribute the proceeds among the investors without any obligation to fulfil any prior conditions such as notification, granting a remedy period, obtaining any permission and/or approval from any authority or to comply with any requirement to sell the assets through auction. This will significantly speed up the process for the enforcement of the rights of bondholders through the Security Trustee.
Secured assets are segregated from Security Agent’s assets and monitored separately. Therefore, such assets are not a risk from the general insolvency of the Security Agent.
To ensure investor protection, the Security Agent must be an investment firm that holds a general custodian license issued by the CMB. Please note that if assets are used for purposes other than agreed in the Security Management Agreement, the Security Agent may be sentenced to the equivalent of 5 to 7 years of prison.
Further secondary legislation is expected to be issued by the CMB in this respect.
Project Bonds and Project Finance Funds
In order to ensure the long-term financing of public projects and to attract foreign investors, the Law aims to enable financing of large-scale projects such as infrastructure, energy and TMT assets through the issuance of project bonds by project finance funds.
The Law establishes Project Finance Funds (“PFFs”), which manage a portfolio of funds and/or other assets within the scope of a specific project in the name of the project bondholders. Project bonds are to be issued by PFFs to investors whose investment will be effectively tied to the return on assets in the PFFs.
Only investment firms authorised by the CMB may establish PFFs. The assets of the PFFs are segregated from the investment firm establishing such PFF and therefore risks related to the insolvency of such investment firm do not impact the PFF assets.
The principles and procedures regarding PFFs and the issuance of project bonds will be determined through further secondary legislation.
The Amending Law provides a general framework for the introduction of the new, above-described concepts into Turkish capital markets law. We expect that it will create a more secure legal environment for investors and encourage more investment in debt capital markets instruments, particularly by Turkish corporate issuers, which has been relatively quiet over the past couple of years. There will be further secondary legislation that is expected to be issued by the CMB in the coming months and which will provide much needed detail on the scope of the above concepts.