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.

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