To restructure or not to restructure?
The concept of “financial restructuring ” was introduced in Turkey following the country’s currency crisis in the summer of 2018. Financial restructuring, defined as revising a debtor’s financial structure and re-determining its financial strategy, became the major agenda of Turkish financial institutions. Regulators intervened immediately and began working to form the legal infrastructure for restructuring. The framework agreement that entered into force as a result of the joint efforts of the Banking Regulatory and Supervisory Authority (BRSA) and the Banking Association of Turkey (BAT) was of particular importance. Nevertheless, we observe that restructurings have been progressing very slowly and in most cases have come to a deadlock. While questioning the reasons for the slow progress, I had the chance to compare the framework agreement with international restructuring methods such as Chapter 11 (U.S.) and Administration and Scheme of Arrangement (UK), and to identify the obstacles preventing financial restructuring from becoming effective in Turkey. I would like to share with you my opinions on how to remove these obstacles.
Lawmaking: Following the regulation’s entry into force, Turkey quickly enacted the framework agreement. However, both required amendments in short order after criticism from international and Turkish financial institutions. These criticisms first led to the preparation of a draft law proposing various amendments to the Banking Law, then to the preparation of a separate draft law specifically on financial restructuring. Both of these draft laws are still being discussed
from different perspectives. Not following the usual order of lawmaking and having multiple drafts on the same subject matter is understandable given the necessity to respond quickly to the significant impact of the fluctuations in the Turkish currency. However, considering that the currency crisis is under control and the financial restructuring trend will be long term, the drafting of the legislation must be undertaken more calmly and in a more structured manner by taking into account all stakeholders’ opinions.
Embezzlement concern: While embezzlement, as defined under Article 160 of the Banking Law, hangs over bankers like the sword of Damocles, it is hard to expect them to undertake restructuring in real terms. We observe that methods such as write-down, debt to equity swap, super senior DIP financing, and takeover of the debtor’s management and operations are frequently used around the world. Nevertheless, Article 160 gives the impression that such methods can invoke criminal liability, as it states: “damaging the credit institution by any means whatsoever by using the credit institution’s resources in his or others’ benefits is deemed embezzlement.” In this respect, there is no restructuring method left for our banks except to amend and extend the loan terms. The crucial issue here is to clarify that restructuring methods such as those noted above do not constitute embezzlement and to assure bankers that they will not be subject to personal liability in this respect. NPL issue: Banks must keep their capital structures steady while restructuring their receivables. A method for this is to expeditiously remove NPLs (non-performing loans) from their balance sheets. However, it would be unfair to expect Turkish asset management companies, whose job is to buy and collect NPLs, to undertake the major NPL burden alone. At this point, another option may be to benefit from international funds focused on NPL investments. That being said, the fact that the tax exemptions granted to asset management companies for NPL purchases are not applicable to international funds’ purchases increases the costs of funds and renders the option of shifting the NPL burden to these international funds unfeasible. In light of these considerations, in order to convert the international interest in Turkish NPLs into investments, Turkish tax and NPL laws must be amended to enable the above transactions. Tax costs: One of the critical points of restructuring is to enable the cash flow of the debtor by providing additional financing to the debtor in default experiencing a shortage of working capital. Naturally, it would be unfair to expect Turkish banks that cannot collect their receivables to undertake the additional financing burden. However, we can be released from this vicious circle with the help of international funds that provide specialized funding (mezzanine, distressed, etc.). Since most of these funds are not considered a “financial institution” under our tax laws, loans utilized from these funds are subject to additional taxes. To overcome these obstacles, it would be reasonable to render the tax exemptions provided for loans utilized from financial institutions applicable to the types of loans to be utilized by financially distressed companies.
Two heads are better than one. I believe that the most viable approach is to hold a convention composed of financial institutions, restructuring lawyers, financial advisors and the international institutions mentioned herein under the leadership of the BAT. The purpose of this convention is for the participants to agree on the necessary legislative changes and implement this plan in the quickest way possible. In this way, it will be possible to establish a system in accordance with international standards, which considers all stakeholders’ interests, a necessity given that financial restructuring will be instrumental in the coming years.