Turkey's Restructuring Regime Favours Company Rescue

The COVID-19 pandemic has impacted companies in Turkey in many ways. Companies have experienced reductions in the demand for products and services and disruptions in supply chains. Financially, getting credit has become more difficult, and companies have had a hard time paying current debt. Financial distress has been reported in many sectors, and the possibility of corporate insolvencies has increased.

The COVID-19 pandemic is not the only cause for the financial difficulties of companies in Turkey. High inflation and depreciation in the country’s currency are among other reasons. On the other hand, sharp increases in real estate/property prices have made it easier for debtors to restructure their debt. Even the legislature took steps to make it easier for debtors to sell distressed or pledged real estate property to third parties.

This article outlines the concordat process and provides general information on financial restructuring. In regard to both, the article provides insight on the structural, cultural, and experiential changes favouring company rescue outcomes in Turkey. The last part of the article discusses what more needs to be done.

Insolvency and Restructuring Laws

The need of restructuring for companies is higher than ever, and the Turkish legislature has taken steps to help companies to recover. To understand the restructuring regime in Turkey, it is necessary to look at the country’s laws of insolvency and restructuring.

There are three main sources for restructuring and rescuing insolvent companies: Turkish Commercial Code (Law No. 6102), Execution and Bankruptcy Law (Law No. 2004), and Bank Law (Law No. 5411) and related legislation.

Turkish Commercial Code Article 376 regulates capital loss and overindebtedness and provides a path to concordat, a court-supervised restructuring process. According to this law, if there are doubts as to over-indebtedness of the company, the board shall issue an interim balance sheet based on both the going concern value of the assets and their potential sale prices. If the interim balance sheet shows that the assets are not sufficient to cover the debts due to the company’s creditors, the board shall apply to the commercial court of the company’s domicile and request bankruptcy of the company.

Out-of-court financial restructuring under the framework agreements is a valuable alternative to concordat, especially in relation to debts owed to financial institutions, such as banks.

However, this request is dismissed if, prior to a bankruptcy order, creditors whose receivables are sufficient to cover the capital deficit and eliminate the over-indebtedness agree in writing to be ranked after all the other creditors of the company and if the appropriateness, accuracy, and validity of such acceptance or agreement are confirmed by the experts appointed by the court upon the board’s request for expert investigation. Otherwise, the board’s request for expert investigation is deemed to be a bankruptcy filing.

To prevent bankruptcy of companies, Article 377 stipulates that the board or any creditor may request concordat from the court, together with bankruptcy filing in accordance with Article 376, paragraph (3), or during the bankruptcy proceeding in accordance with Law No. 2004 (Execution and Bankruptcy Law) Article 285 and following articles.

Execution and Bankruptcy Law regulates concordat, the rules of which are generally debtor friendly. As an alternative to concordat, Banking Law and related regulations also provide for financial restructuring outside of court proceedings.

Concordat

The concordat process is functioning well in terms of keeping companies in business without getting into bankruptcy. Any debtor that is unable to pay current debt or may be in such a situation shortly may apply for concordat. Even companies which are over-indebted in the sense of Article 376 of Turkish Commercial Code are eligible to apply, so companies which are in a position to apply for bankruptcy can also apply for concordat.

The application process is not complicated. Every company which has the necessary documents are rewarded by three months’ temporary relief/respite (stay of execution/moratorium). The term of this stay of execution may be extended to five months in total. The company submits a preliminary remedial project plan, which shall specify how it plans to pay the debts and identify the resources to pay the debts.

The court appoints a commissioner (commissar) or three to supervise the process and protect the rights of creditors, whether financial institutions, private companies, or individuals.

The commissioners report to the court, and at the end of the temporary relief period, provide the court with an opinion on whether the project is likely to succeed. If the opinion is in favor of the project, the court shall grant a period of one year of definitive relief/precise respite to the debtor. This period may be extended to 18 months.

During the concordat process, some companies reach agreement with the banks and other creditors under the framework agreement which are done by Banking Law and related legislation. If an agreement is reached, the company waives the concordat relief period and the file is closed.

If there is no framework agreement on financial restructuring, at the end of the relief period, the project shall be voted on in a meeting of creditors. If onehalf of the creditors whose receivables exceed two-thirds of the total debt of the debtor approve the concordat project, after the court certifies the project, the debtor shall pay the remaining debt in accordance with the project. The options in the project include: i) The debtor is granted a period of time to pay all debts (extending the maturity/payment dates), ii) the debtor shall pay the debt in installments without any reduction, or iii) creditors take a haircut with regard to the debt.

Framework Agreements

Out-of-court financial restructuring under the framework agreements is a valuable alternative to concordat, especially in relation to debts owed to financial institutions, such as banks. There are differences between the two regimes, including the perception of third parties.

A concordat process is announced publicly, so everyone knows that the debtor is in the concordat process. Some people remain doubtful about concordat, thinking that this debtor company is going bankrupt, though that is not true in most cases. Also, concordat is not just an agreement between the debtor and creditors. It also involves the court, commissioner, etc., so it is also somewhat more costly.

This restructuring method has been introduced by Banking Law (Law No. 5411) Provisional Article 32. According to the article,

Borrowers that are in credit relationship with banks, financial leasing companies, factoring companies and financing companies and other financial institutions may restructure their debts in order for them to continue performing their debt repayment obligations and contributing to employment. So, the law aims companies to be able to pay their debts and continue to employ their workers by restructuring their current debts.

Provisional Article 32 also stipulates that the procedures and principles regarding financial restructuring transactions to be executed pursuant to this article will be determined and regulated by frame agreements to be prepared in accordance with the provisions of the regulation issued and enacted by the Banking Regulation and Supervision Agency.

The term “frame agreements” refers to the Financial Restructuring Frame Agreements prepared by the Banks Association of Turkey that are signed by the creditor institutions pursuant to the regulation issued and enacted by the agency.

According to the Framework Agreement on Financial Restructuring, [1] the purpose of the agreement is to enable commercial loan debtors which are already facing or are likely to face temporary difficulties in repaying their debt to creditor institutions the opportunity to fulfill their debt repayment obligations and to continue contributing to employment through measures such as:

• Extension of the maturities of the loan debts
• Loan renewals
• The extension of additional facilities
• A reduction of the amount of, or a waiver in part or in full from, principal sums, interest, default interest, delay charges, dividends, and all kinds of other receivables arising from the loan relationship of these debtors
• Conversion of principal, interest, or dividend receivables arising from the outstanding debts of these debtors partially or completely into equity participation, or transfer or assignment of these receivables to special purpose vehicles or investment funds founded under the Capital Markets Law No. 6362 against a consideration in kind, in cash, or subject to the condition of collection, or settlement, sale, or otherwise removal of these receivables from the balance sheet partially or completely, in consideration of the values in kind, belonging to the debtor or to third parties
• Acting together with, and entering into protocols with, other creditor institutions and creditors with respect to the loan debts of these debtors.

More than 30 financial institutions, including the banks, have signed up to framework agreements for largescale companies. In this out-of-court financial restructuring scheme, the signatory creditors must participate in the framework agreement and cannot initiate legal proceedings once the framework agreement is executed. The debtors have the opportunity to negotiate with many banks at the same time, and if an agreement is signed with the necessary quorum, all signees are obliged to restructure the debts of the respective debtor.

In addition, The Banking Regulation and Supervision Agency of Türkiye has also implemented many other national measures giving the financial sector discretion to restructure loans and manage other financial indicators during volatile times.

On the other hand, there is no connection or cooperation between the out-of-court financial restructuring framework and court restructuring (concordat) processes. Recognizing that, TMA Türkiye has been working to develop a preventive restructuring mechanism which combines both out-of-court restructuring processes, such as consensual restructuring or financial restructuring framework, with a court restructuring mechanism, which is needed in certain situations.

In addition, TMA Türkiye has been working on studies demonstrating the importance of operational restructuring/corporate renewal while companies are being restructured. Since its inception, TMA Türkiye has sought to bring together and improve the efficiency and effectiveness of the country’s turnaround professionals.

Conclusion

In addition to the financial difficulties of companies caused by the COVID-19 pandemic, high inflation and depreciation of the Turkish currency have added to their problems. Yet, sharp increases in real property prices have made easier for debtors to restructure their debt, and the legislature has taken steps to make simpler for debtors to sell distressed or pledged real estate property to third parties.

The COVID-19 pandemic, inflation, and increased real estate prices have made it easier for financially stressed companies to apply either for concordat or framework agreements. Many companies have exercised both methods, and a majority of them have been successful, as evidenced by a reduction in the non-performing loan (NPL) ratio from 5.3% to 2.1% over the past three years.

1. www.tbb.org.tr/fyyen/Framework%20Agreement%20on%20Financial%20Restructuring-Large%20Scale.pdf

* This article is co-authored with Önder Yılmaz.

** Önder Yilmaz is a director of Regulatory Compliance at Odea Bank A.Ş. He is also a board member of the Banks Association of Turkey (TBA) Risk Center and a founding member and chair of TMA Turkiye. Between 2006 and 2020, he worked at the Banking Regulation and Supervision Agency (BRSA) in a number of positions. Yilmaz holds an undergraduate degree from Istanbul University and graduate degrees in finance from Boston University and in banking from Marmara University.