Turkey - The Strategic View - Corporate Restructuring 2016

Ufuk Yalçın and Deniz Peynircioğlu provide an insight into restructuring procedures in Turkey in light of recent political developments.

Contributing firm

1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?

The trends that affect Turkish industries and investor focus can be grouped into three main categories: (i) economic trends; (ii) political trends; and (iii) the entry of Chinese products into the Mediterranean/European markets.  The dominant features regarding economic trends have been the devaluation of the Turkish Lira (Lira) against foreign currencies, and the downgrading of Turkey’s credit rating, which together dramatically increased activity in the insolvency market.  The political trends are directly caused by two rounds of national parliament elections in 2015, and regional political positions taken by the Turkish government vis-à-vis Russia, Syria, Iraq, and Iran.

Since the end of 2013, we have observed an increase in activity in the restructuring and insolvency markets in Turkey in concert with the acute devaluation of the Lira against the rise of both the US Dollar and the EURO.  Devaluation had the greatest impact on industries that are dependent on foreign currency loans for their operations, such as the textile, retail, construction, steel manufacturing, mining and house electronics industries.  The devaluation of the Lira is the most commonly cited reason in the Turkish media for domestic market players to either declare bankruptcy or apply for a postponement of bankruptcy initiation proceedings.

Turkey’s credit rating drop has also affected the market: as recently as 4 December 2015, Moody’s gave Turkey a Baa3 rating with a negative outlook, as a result of rising geopolitical risks.  Fitch’s rating for Turkey is BBB- and Standard & Poor’s rating is BB+.  These results cause investors to approach the national market more cautiously as compared to previous years.

In terms of regional politics, the embargos imposed by Russia have had a significant impact on the fruit and vegetables market, leading to the insolvency of many local businesses that rely on export.  The dispute between Russia and Ukraine is also taking its toll in Turkey’s Black Sea economic area.

As regards restructuring trends, we observe that many businesses with foreign currency loans have chosen to go into negotiations with lenders to prolong loan terms, adjust interest rates, convert foreign currency to Lira, and decrease short-term installment amounts.

2. What is the market view on prospects for the coming year?

The election of the national parliament in November enabled the formation of a government without relying on a coalition partner by the AKP, the ruling party since 2002.  This situation seems to have resolved the political “uncertainty” and affected the market positively.

The Grand National Assembly adopted the “Tenth Development Plan of Turkey” on 2 July 2013 and is part of the government’s broader 2023 goals.  The plan has been in effect since 6 July 2013, and it covers the period between 2014 and 2018, establishing a long-term perspective for development (The Economic Policy Research Foundation of Turkey (http://www.tepav.org.tr)).  The key investment and development areas in the Plan are:

  • Education.
  • Health.
  • Manufacturing Industry.
  • Pharmaceuticals.
  • Energy.
  • Agriculture and Food.


The Plan states that a fundamental objective of transforming the manufacturing industry is to increase the share of high-technology sectors in production and exports.  The Plan lists several policies for investment and development in the above listed markets:

  • The use of public infrastructure investments as a support mechanism for promoting strategic investments involving critical technologies.
  • The use of public procurements as an efficient instrument for improving the innovation and green production capacity of domestic firms.
  • The focus on the synergy between urban transformation processes and the transformation of the manufacturing industry; the improvement of production and export capacity in smart buildings, construction materials, public transportation vehicles, and signalisation systems.
  • The efficient use of country credit and guarantee programmes for increasing the export of capital goods and high-technology products.
  • Subsidising the acquisition of foreign companies via incentive programmes that would bring Turkey a strategic advantage for branding in value chains.
  • The development of regular monitoring and evaluation systems for investment incentive practices, the measurement of macroeconomic, sectoral, and regional impacts of incentive schemes, and thereby the improvement of institutional capacities.


We expect that the markets will continue to be liberalised and privatisations will remain a government priority, specifically in the energy sector and railways.  PPP projects will continue to spearhead the growth in the health and education areas.  The Plan suggests that agricultural subsidies and distribution of financial support will also be a top priority of the government.

Geopolitical tension in Southeast Turkey remains a question for the markets as well as for the country’s leaders.  The fight against ISIS continues while the UN officially stated in July 2015 that 1.8 million refugees from Syria and Iraq had crossed the Turkish border.  The government announced employment policies and its intention to exercise an economic integration process for these refugees.

Global decline in oil prices had a positive effect on Turkey’s economy since consumption is highly based on imports, and Turkey has an increasing need for energy.  The positive effect is also seen in current account narrowing: Turkey’s current account deficit has moderated in 2015 and is expected to narrow in 2016 as well.

3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?

Most of the provisions regarding corporate restructuring are set forth in the Execution and Bankruptcy Law No. 2004 (“EBL”), while some provisions can be found in the Turkish Commercial Code (“TCC”).  These tools include:

Restructuring of corporations and cooperatives through reconciliation was introduced in 2004.  Reconciliation shortens the time spent in court and provides an effective way for corporations and cooperatives to ameliorate their financial status.  Debtors who are insolvent or under an imminent risk of insolvency may prepare a restructuring plan and, if accepted by a “requisite majority” of affected creditors, submit the plan to the Commercial Court.

Reorganisation can be initiated before and after bankruptcy.  Debtors enter into an agreement with at least two-thirds of their creditors and agree to pay a certain percentage of their debts.  There are two types of reorganisation procedure: ordinary reorganisation; and reorganisation by way of abandonment of the debtor’s assets.

Ordinary reorganisation is where debtors, who are incapable of paying their debts in full, submit a reorganisation project to the execution court and ask for the commencement of a reorganisation procedure.

Reorganisation by way of abandonment of debtor’s assets is where debtors allocate some or all of their assets for their creditors and propose that those assets are sold and then distributed to creditors in accordance with their entitlements.

One of the major differences between reorganisation and restructuring through reconciliation is that in the latter, the creditors do not have to be treated equally.

Postponement of bankruptcy offers a last opportunity to businesses before the bankruptcy to set out the steps to be taken during postponement period and to improve their financial position.  This procedure, specific to joint stock corporations and cooperatives, was introduced in 2012.  In this procedure, both debtors and their creditors have the opportunity to request postponement of bankruptcy by submitting a development plan to the commercial court.  This development plan sets out future actions of the company in order to improve the debtor’s financial status.  If the submitting party persuades the court that the plan is sufficient and feasible, the bankruptcy can be postponed for up to a year with further extensions permitted if business meets the conditions.

Merger is another corporate restructuring solution.  Companies in liquidation, insolvent companies, and companies who have depleted half of the total capital and legal reserves may be financially improved and restructured through mergers under certain conditions.

Generally, Turkish restructuring provisions aim to provide companies with the maximum lifespan, offering various solutions before the liquidation process.  Although the courts are highly involved in the restructuring process, decreasing flexibility, it is always possible for debtors and creditors to mutually agree on specific restructuring processes based on their specific needs.

4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?

Between shareholder and foreign creditors, the balance of power definitely lies with the foreign creditors with the exception of the few financially robust companies that survived the above-mentioned political and economic trends.

Regarding domestic creditors, in order to compete with foreign lending institutions and generate a sustainable operation plan, they are more likely to participate in negotiations with Turkish businesses and maintain an almost equal balance among the parties.

The balance of power between senior lenders and junior/mezzanine lenders depends on multiple conditions including: (i) the lender’s financial strength; (ii) securities obtained by lenders from the borrowers; (iii) ranking order of securities provided by borrowers to lenders; and (iv) the amount of the loans.

In market practice, Turkish banks tend to ask for one or more of the security options depending on the creditworthiness of the borrower and the specifications of the development project.  In the majority of non-recourse financing transactions, banks ask for a mortgage as one of the collaterals in addition to others.

One exception where Turkish banks agree to provide financing without a mortgage is when the borrower has rental generating assets backed up by secure lease agreements, through which rental payments can be assigned directly to the banks.

5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?

We have not observed any changes in the capital structures of Turkish companies, which like many jurisdictions, generally consist of a combination of debt and equity capital.  Generally, banks utilise loans that are three times the legally required minimum capital (minimum capital for joint stock corporations is TRY50,000 (approximately USD 16,670) and TRY10,000 (approximately USD 3,340) for limited liability partnerships) of the companies to avoid thin capitalisation.  For larger amounts requiring solid securitisation and for non-recourse financing, companies postpone or fully abolish their plans for capacity increase or other forms of development when the banks retreat from loan origination.

6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?

Under Turkish Law, there are two different types of distressed debt funds. These are:

(i)         Asset management companies

According to Banking Law No. 5411, asset management companies are companies which buy and collect distressed debts of banks and other financial institutions.

Asset management companies entered into the market following the 2001 crisis during which Turkey had a very fragile banking system.  Since then, asset management companies bought distressed debts from several banks in the total amount of TRY21 billion for TRY2.9 billion and at the time being, the total amount of receivables collected by the asset management companies is TRY2.3 billion.  Currently, there are 12 licensed asset management companies and they are managing 37% of the distressed debt funds within the Turkish financial system.  Even though those figures might lead one to think that the sector could face financial difficulty, as per the publicly available sources, companies continue to buy portfolios since distressed debt funds are increasing day by day.

(ii)        Factoring companies

As a necessity for keeping up with the world economy and to promote the entry of foreign funds into the domestic market, banks have been providing new financial services to their clients to satisfy their needs and to provide factoring services since 1988, even though the Law on Financial Leasing, Factoring and Finance Companies No. 6361, entered into force in 2012.

Turkish factoring companies became visible in economic activities by providing three main services: discounting; collection; and guaranteeing domestic and international future receivables.  Currently, there are 66 factoring companies that operate in Turkey.  As per the latest statistics announced by the Association of Financial Institutions, in 2015, the sector grew by 18.5% and the turnover of the sector increased by 20% for international transactions and 14% for domestic transactions, although factoring revenues decreased compared to 2014.

7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?

The legal framework of insolvency and restructuring is regulated under the Execution and Bankruptcy Law and the Turkish Commercial Code.  One unusual feature under Turkish laws is, unlike other jurisdictions, the law sets forth a definitive ranking system to be applied during the liquidation process.

Creditors having a pledged receivable rank first among all other creditors and the ranking for the remaining creditors are as follows:

  • First rank:

(1) debts owed to the employees arising out of their employment with the Company, (including, but not limited to, their notice and severance payments accrued during the year prior to the start of bankruptcy, and their notice and severance payments accrued upon termination of employment in relation to the bankruptcy);

(2) debts owed by employers to any employment funds or organisations, having a separate legal personality, established for supporting workers and employees; and

(3) all maintenance allowances and alimonies arising out of family law, required to be paid in cash and accrued during the year prior to the start of bankruptcy (applicable only to real persons).

  • Second rank:

All debts, arising out of guardianship or tutelage, owed to persons whose properties are in custody and under management of the debtor due to guardianship or tutelage (applicable only to real persons).

  • Third rank:

Debts defined and specified as “privileged” debts (e.g., any fees in relation to immovable properties, and any attorney fees).

  • Fourth rank:

Unsecured creditors.

Another inhibition on the general principles of freedom of contract comes up with the prohibition of “lex commissoria”.  Lex Commissoria provision prohibits inserting any provision in the pledge agreement enabling the pledgee to become the owner of the pledged securities in case of default.  However, the pledgee has the right to start the foreclosure process and apply to the enforcement office in order to sell the pledged security, in case of default.  The Execution and Bankruptcy Law is based on the satisfaction of the pledgee from the proceeds of such sale with obvious disregard for minimum forty percent (40%) depreciation in the value of the securities when put to sale by the enforcement office.

Another unusual feature under Turkish laws is that the company itself and/or the shareholders may bring a claim against the board members for the damages and/or losses incurred by the company, and the creditors may bring claims against the board members for the damages and/or losses they directly suffered.

Aside from the aforementioned unusual legislative features, another unusual detail that business will face in practice is the extensive time period of the restructuring/bankruptcy proceedings, which may take a minimum of six to 18 months.

8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?

Currently, there are two separate draft bills, which have been in progress since November 2015 regarding the legal framework that governs insolvency and restructuring:

-Draft Amendments to the Execution and Bankruptcy Law dated 22 November 2015: This draft bill aims to convert the sentence of imprisonment to an administrative monetary fine since the number of citizens who are sentenced to imprisonment due to breach of undertaking is increasing day by day.  The draft bill is focused on the impact of a sentence on commercial life, and states that debtors are losing their ability to pay their debts totally while they are trying to avoid imprisonment.

-Draft Amendments to Execution and Bankruptcy Law dated 23 November 2015: This draft bill aims to rank governmental authorities behind all other creditors for recovery of debts in order to protect creditors.

In addition to the above, the Execution and Bankruptcy Law may be fully renewed.  As per the news published on the website of the Ministry of Justice, a Science Commission has been formed under the Ministry of Justice in order to update this law to comply with economic and social developments around the world.  

9. If it was up to you, what changes would you make?  

Most wished for changes can be categorised into two groups: (i) amendment of the statutory ranking system to better serve the creditors; and (ii) implementation of modern techniques to expedite the enforcement and bankruptcy system in general.

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