While the law is an improvement on what went before, especially regarding taxation and embezzlement, it fails to solve several issues and its scope is limited, according to market participants polled by Debtwire.

The legislative changes reflect an adoption of the so-called ‘Istanbul Approach,’ according to a London-based trader. The ‘Istanbul Approach’ emerged in Turkey after the 2001 crisis for out-of-court debt restructurings, taking the 1970s London approach as a model, and sought to come up with a solution for the post-crisis debt pile with a restructuring scheme between local banks and large-scale corporates.

Turkey’s financial restructuring  framework agreement, prepared by the Banks Association of Turkey last year, to assist companies with more than TRY 100m (USD 17.6m) of debt was also inspired by this approach.

The new changes in the law are a step in the right direction, but very inadequate, according to an Istanbul-based lawyer. The law only facilitates debt restructurings being undertaken under the financial restructuring framework agreement, which -- so far -- local banks have failed to embrace, he added.

Liable no  longer

On a positive note, the new implementation to the Banking Law about embezzlement is considered adequate and untangles the local banks’ long-running  reluctance to write-off, as agreed by all the participants.

The risk that a banker who writes off a bad loan could face potential criminal liability was flagged as a major concern by several local market participants last year. The newly introduced provision explicitly states that such actions shall not constitute the crime of embezzlement under Turkey’s Banking Law.

Another positive change is the tax exemptions stipulated under the new law, according to the sources, regulating taxation issues for both the banks and corporates. It also regulates the tax issues arising from potential debt-to-equity swaps, said an Istanbul-based financial advisor.

Exemptions now include stamp tax, banking and insurance transaction tax and the resource utilisation support fund. It is also now possible to show the written-off portion of the loan as “bad debt” for tax purposes. Additionally, at least 50% of the profit from the disposal of bad assets will be exempt from corporate tax and asset transfers from debtors to lenders will not be subject to VAT.

Room for  improvement

However, cross-class cram down -- considered to be vital for debt-to-equity swaps -- is not regulated under the new law, according to the Istanbul-based lawyer and the financial advisor.

The only way to exercise cram down in practice is via a voluntary agreement with existing shareholders where their shares are diluted, added the financial advisor. There is nothing that would force shareholders’ hands in this respect, and “it is all on a voluntary basis”, said the lawyer.

Another unregulated issue is standstills, according to the financial advisor. It is only covered under the framework agreement, which provides a standstill for banks’ financial receivables and for very limited commercial receivables, he continued.

Turkish bankers were expecting a wider arrangement, but there is nothing on this issue under the new law. This will affect the frequency of applications to restructure under the new law, he added.

The newly enacted provision lacks a number of vital international restructuring tools, according to the local lawyer. Apart from these issues, there are no investor incentives or anything about operational restructuring, said the financial advisor.

“This new draft law seems to be more concerned about banks’ balance sheets. The political reasons behind this are obvious; cash flow is prioritised and local banks are the means to achieve this goal,” he said.

There needs to be an upper authority -- either a court or a separate authority -- and a legal mechanism imposed on the parties to improve the efficiency of Turkey’s restructuring scene, he continued.

Setting  the scene for secondary

The new law is seen as a useful first step to invigorate the secondary loan market in Turkey but there are several integral aspects missing from the new regulation, the financial advisor and lawyer said.

From a bank’s perspective, the first question that comes to mind is the applicability of the tax exemptions and embezzlement article to loans that are traded before they are restructured, said an Istanbul-based banker. The law is not clear about if it will be applicable when banks sell the loan first and the debt is restructured later, said the banker.

Banks are waiting for a legal opinion as to the secondary market loan trading, said the trader. We expect the loan sales to kick-off afterwards, he added.

On a separate note, tax exemptions do not include the non-residents -- such as international hedge funds -- which is a potential issue for secondary market trading, according to the local lawyer.

“Is this a new regime? I believe not. A new regime would not be just a set of principles, it should also have incentives,” according to the financial advisor. The regulator must take both the capital deficit and the need for growth into consideration, and a regime would ideally regulate both.

Turkish legislation did not previously have any debt restructuring regulations apart from the framework agreement, which is not a law, said the financial advisor.

The Banking Law, Enforcement and Bankruptcy Law and Tax Law are currently being updated, and the new law brings a solution to the issues that everyone was most vocal about, but we definitely need at least a couple more rounds, he said.

Asli Orbay Assistant Editor Debtwire CEEMEA

Asli Orbay is a reporter working for Debtwire CEEMEA, with a focus on arbitration, litigation and distressed situations. Prior to joining Debtwire, Asli worked as a banking and finance lawyer for Clifford Chance in Istanbul. Asli holds an LLM in international economic and trade law and a she is currently a PhD candidate studying at Brunel University.