Trade Alert - October 2017, Issue 46


Following a constitutional referendum on 16 April 2017 proposed by the governing Justice and Development Party and the Nationalist Movement Party, Turkey voted in favour of 18 amendments to the Turkish constitution. The parliamentary system was abolished and replaced with an executive presidency and a presidential system which gives current President, Tayyip Erdogan, much greater powers to issue decrees, declare emergency rule and appoint ministers and state officials. The referendum was held under a state of emergency that was declared following a failed coup attempt in Turkey in July 2016, that saw over 240 people killed and nearly 2,200 people wounded. Reuters reported that, on 16 October 2017, Turkish Deputy Prime Minister Bekir Bozdag announced that the Turkish government had decided to extend the state of emergency for a further three months. This will be the fifth time that the state of emergency has been extended.

Despite the IMF projecting negative growth earlier this year due to “heightened political uncertainty, security concerns and the rising burden of foreign-exchange-denominated debt caused by the lira depreciation”, in October 2017 the IMF World Economic Outlook Update projected that growth would double from 2.5% to 5.1% in 2017, and would hit 3.5% in 2018. Bloomberg further reports that Turkey’s economy is amongst the fastest growing of the world’s 20 major economies. This positive outlook can be attributed to a number of steps taken by the government to support the economy with greater spending, including its Credit Guarantee Fund which guarantees loans to small and medium-sized enterprises. According to a Financial Times report, this has increased the budget deficit to its highest in seven years.

The Turkish government relies on foreign borrowing to finance the deficit. This includes borrowing from the European Investment Bank (“EIB”) and the European Bank for Reconstruction and Development (“EBRD”) which had lent, as at July 2017, EUR 9,530mn covering 240 projects in energy, financial institutions, industry and infrastructure in Turkey. However, a recent Bloomberg report suggests the German government is using its influence to restrict financing to Turkey from German state-owned KfW bank, as well as the EIB and EBRD, due to escalating political disputes between the two countries. Further, despite a dispute earlier this month that saw the US suspend visa applications from Turkish nationals, closely followed by Turkey imposing similar sanctions on US nationals, Debtwire reports that Turkey has applied to the SEC to carry out a series of bond issues of up to USD 10bn to US-based investors.


The Execution and Bankruptcy Law 2004 is the primary legislation regulating corporate rescue in Turkey. Two of the more commonly used methods of voluntary financial reorganisation are:

  • Composition agreement: This process is initiated upon the request of a debtor that is not able to pay all of its debts, in order to delay bankruptcy. The court may grant the debtor a moratorium of up to three months and will appoint one or several trustees. During this time the debtor will agree a composition agreement with the majority of its creditors, which may include a partial release of its debts or transferring its assets to the creditors for the full release of its debts. The composition needs to be accepted by a majority in number and creditors holding at least 2/3 of the indebtedness of the company and, in this case, will be approved by the commercial court.
  • Postponement of bankruptcy: A debtor or creditor can seek a postponement of bankruptcy by submission of a financial improvement plan to court. Postponement of bankruptcy can be granted without seeking the approval of the creditors. If granted, the court may appoint administrators and give the debtor a moratorium of up to 1 year (which can be extended by a further year). However, a postponement of bankruptcy cannot be sought while Turkey remains in a state of emergency.

Neither a composition agreement nor postponement of bankruptcy protects a debtor from claims secured with pledges on movable or immovable property.


The need for a lending licence and the relevant tax considerations when transferring debt in the secondary market differs depending on whether the foreign lender is considered a bank or a foreign ‘financial institution’ under Turkish law (see below for more detail). As such, it is important that a potential investor considers whether they will fulfil either of these definitions.

In order to be deemed a financial institution, an institution, including a fund, should satisfy the criteria below:

  • it should be authorised to lend in its jurisdiction of incorporation;
  • the lending should be done customarily; and
  • the lending should not only be to related parties but also, to third parties (which can include individuals).


Foreign banks and other foreign financial institutions are permitted to provide term loans to Turkish entities without a banking licence, provided that their lending activities are on a reverse inquiry basis. However, pursuant to the Capital Movements Circular, an entity that does not hold a banking licence in Turkey is not permitted to provide revolving credit facilities to Turkish entities.

Pursuant to the Banking Law No. 5411 (“Banking Law”), domestic lenders and foreign banks with a branch in Turkey are required to obtain a banking licence to provide both term and revolving credit facilities. This process can take up to 2 years and involves firstly obtaining an incorporation licence and then an operation licence from the Banking and Regulation Supervisory Agency (“BRSA”). In order to obtain a Turkish Banking Licence, a lender must satisfy certain criteria including: (i) being a joint stock company with registered shares; (ii) satisfying the corporate governance requirements set out in the Banking Law; (iii) ensuring that, it will take deposits, its paid share capital is at least 30mn Turkish Lira (“TRY”) (around EUR 7mn) and free of any encumbrance; and (iv) having a transparent and open partnership structure.


  • Corporate Income Tax will apply by way of withholding to payments of interest on loans by Turkish corporate borrowers at a rate of 10% (subject to reduction under a relevant tax treaty), except where the lender is a foreign state, a qualifying financial institution or a foreign bank (in which case the rate shall be 0%). There is no withholding tax liability on interest payments made to companies or banks resident in Turkey.
  • Resource Utilisation Support Fund (the “RUSF”) rates with regard to loans extended by foreign lenders to Turkish entities (other than banks and financial institutions) are as follows:
  1. for TRY denominated loans: 1% on loan interest if the average maturity <1 year term and 0% if the average maturity is >1 year term; and
  2. for loans denominated in other currencies: 3% (<1 year term), 1% (<2 year term), 0.5% (<3 year term) of the principal amount.
  • Stamp duty applies at 0.948% of the secured amount, but bank lenders, foreign banks and qualifying financial institutions are exempt.
  • Banking and Insurance Transaction Tax (5% applies by way of a withholding tax on any gains derived from transfer of a loan to a foreign lender): applies to any non-resident bank or entity whose core business includes lending which has a permanent establishment in Turkey.
  • VAT at a rate of 18% only applies to loan interest if the non-resident lender is not a financial institution.


Both assignment (which is the more commonly used method) and novation are recognised methods of loan transfer.

A Turkish law governed assignment (called a ‘transfer’ under Turkish law) will transfer the rights and obligations arising under the facilities agreement along with all ancillary rights (including security), which continue to exist in favour of the new lender. Subject to the terms of the facility agreement, assignment does not require borrower consent or notification to be valid, however notification is recommended to ensure that the debtor cannot discharge its debt by payment to the original lender.

Under Turkish law, novation extinguishes all rights and obligations of an existing lender and substitutes them with new rights and obligations of the new lender. Since the concept of a trust is not recognised under Turkish law (see below), assignment is advisable to ensure that the benefit of security rights attaching to the loan are transferred to the new lender.

English law governed participation agreements, where the existing lender remains lender of record but participates all or a part of its risks and profits of the loan to another party, are also used, primarily by foreign lenders wishing to lend to Turkish borrowers.


The trust concept is not recognised under Turkish law. However, a trust created under a foreign law would be respected.

Turkish law does recognise the validity of a parallel debt mechanism which is established as either: (i) Joint Creditorship (“Müteselsil Alacaklılık”); or (ii) Abstract Debt Acknowledgment (“Soyut Borç İkrarı”), and the security agency concept is commonly used in major financing deals in Turkey. Under the parallel debt structure, the security agent will register the security in its name and on behalf of all lenders from time to time, so a new lender will automatically benefit from the security without taking any other action. The security agent will also enforce the security on behalf of all lenders. However, in the case of insolvency of the security agent, the security granted under the parallel debt mechanism would form part of the security agent’s estate.


In the case of certain types of security it is necessary to follow specific formalities to ensure that the new lender will benefit from the security following transfer of the debt, in particular:

  • Movable Asset Pledge: A movable pledge agreement must be executed electronically with an e-signature, or physically before the notary, followed by registration of the agreement at the movable pledge registry (TARES) for perfection.
  • Mortgage: A mortgage agreement should be signed before the land registrar.
  • Transfer of receivables: Notarisation is not required but is advised for the assignment agreement in order to be able to evidence the time/date of the assignment.


In a decision of the Turkish 11th Civil Law Division of the Court of Appeal earlier this year, a restrictive approach was taken to a contractual clause in favour of the ‘English courts’, on the basis that this was insufficiently precise to comply with the requirements of Articles 40 and 47 of the Private International Law No 5718 (“Law 5718”) and Articles 17 and 18 of the Civil Procedure Law No 6100. As a consequence, to ensure that an exclusive jurisdiction clause will be respected by the Turkish courts, where there is a Turkish debtor, references to English Courts in documentation should be amended as necessary to reflect a specific court (such as High Courts of England and Wales).

Special Note

With special thanks to Omer Collak, Selen Urundul, Sera Somay and Beril Paksoy at Paksoy, who assisted us with this Trade Alert.



Iceland may be yet another western country swept up in the wave of political change impacting politics. Icelandic Prime Minister, Mr. Benediktsson, called a second snap election in September this year following the Independent party’s "breach of public trust". Bloomberg reports that the centre-left educational minister, Katrin Jakobsdottir, is in a tight race with the ruling Independence Party to win this month's election – reports from Reuters show that the opposing parties were once neck and neck, however the polls are frequently fluctuating. If the Green-Left Movement win the election, Jakobsdottir will join Emmanuel Macron, Leo Varadkar, Sebastian Kurz and Jacinda Ardern, as Prime Ministers pushing the inequality agenda. Amongst other policies, Jakobsdottir has expressed reservations about free trade and plans to use dividends from banks to rebuild infrastructure and reduce public debt.



On 24 October 2017, the Court of Appeal handed down its judgment in respect of appeals of various issues relating to the ‘Waterfall II’ proceedings. The appeal concerned the extent of creditors’ entitlements to interest on their debts for periods after the commencement of the administration, and the correct approach to calculating those entitlements.

The Court of Appeal dismissed the appeals and determined that:

  1. the principle in Bower v. Marris does not apply to statutory interest (i.e. that dividends should be applied towards repayment of interest before repayment of principal);
  2. where the relevant rate of statutory interest to be applied under Rule 2.88(9) of the Insolvency Rules 1986 (“IR 1986”) is the “rate applicable to the debt apart from the administration”, and such a rate is a compounding rate, statutory interest does not continue to compound following the payment in full of the principal amount through dividend;
  3. creditors are not entitled to further interest, damages, or any other form of compensation in respect of the time taken for statutory interest to be paid;
  4. statutory interest payable in respect of an admitted provable debt, which was a contingent debt as at the date of administration, is payable from the date of administration rather than any later date;
  5. the “rate applicable to the debt apart from the administration” in Rule 2.88(9) IR 1986 cannot include (i) a foreign judgment rate of interest applicable to a foreign judgment obtained after the date of administration or (ii) a foreign judgment rate of interest which would have become applicable to the debt if the creditor had obtained a foreign judgment, when it did not in fact do so; and
  6. the words “the rate applicable to the debt apart from the administration” in Rule 2.88(9) of the Rules do include, in the case of a provable debt that is a close-out sum under a contract, a contractual rate of interest that began to accrue only after the close-out sum became due and payable due to action taken by the creditor after the date of the commencement of LBIE’s administration.
  7. A copy of the Court of Appeal’s judgment is available here.



On 19 October 2017, the LMA issued a Response to the European Commission's Consultation Document: Development of Secondary Markets for Non-Performing Loans and Distressed Assets and Protection of Secured Creditors from Borrowers' Default.


On 23 October 2017 the LMA published a video interview with Clare Dawson, Chief Executive of the LMA, which considers the potential discontinuation of LIBOR. In particular, the interview considers: (i) what the speech on 27 July 2017 by the Chief Executive of the Financial Conduct Authority, Andrew Bailey means for LIBOR; (ii) what the alternatives are to LIBOR; (iii) the protections in the LMA documentation; and (iv) the LMA's role in facilitating a transition to any alternative rate.


The LMA published a paper on 9 October 2017 explaining the nature of Grantor credit risk in the context of funded participations, the paper aims to make members aware of the possible steps that may be taken to mitigate Grantor credit risk in this context.


Shelley Kay Associate, London +44 207 170 8664

Shelley Kay is an associate in the Financial Restructuring Group in Cadwalader's London office.

Shelley specialises in distressed debt and claims trading. She represents investment funds, brokerage firms, hedge funds and other financial institutions in connection with the acquisition and sale of syndicated bank loans, debt instruments, bond claims and distressed assets, in particular insolvency claims within Europe, the United States and Asia.





The Turkish telecommunication services provider has been in default on its USD 4.75bn syndicated loan, due to a missed amortisation payment since September 2016. The loan is secured against a 55% stake in Turk Telekom. Debtwire reports that OTAS will imminently form an ad hoc committee comprising three Turkish banks (Akbank TAS, Turkiye Garanti Banki AS and Turkiye Is Banki AS) and two international banks to negotiate the restructuring of the loan. This follows international lenders dissatisfaction with a restructuring proposal submitted by Saudi Telecom Company (“STC”) (which indirectly holds a c. 35% stake in OTAS) pursuant to which, STC would inject USD 750m in exchange for taking over OTAS and USD 4bn of the debt would be reinstated across two tranches, a senior tranche of between USD 3bn to USD 3.25bn and a junior of between USD 750m and USD 1bn.


MTN Group, Africa’s largest wireless operator by sales, has asked South Africa’s High Court to dismiss a USD 4.2bn claim by competitor Turkcell, labelling the claim as “opportunistic” and “baseless”.

On 31 October 2017, Reuters states that Turkcell first sued MTN in a U.S. court in 2012. The company has since filed its claim in South Africa, following the U.S. Supreme Court’s ruling in a separate case, stating that U.S. courts would not have jurisdiction in a claim involving two foreign firms in an overseas dispute.

Turkcell allege that MTN used bribery and wrongful influence to win a lucrative Iranian license that was originally awarded to Turkcell. MTN refute this claim, suggesting that the Turkish company failed to comply with the Iranian rule which caps shareholdings in operating licenses at 49%.

The USD 4.2bn damages claim is based on the profit (plus interest), that the Turkish company says it could have made, had it been able to keep its licence. Iran is MTN’s 3rd largest market out of 22 countries that the company operates in. Bloomberg notes that MTN had more than 49.5mn customers in Iran as of the end of September.




On 30 October 2017, Bloomberg reported that the UniCredit SpA USD 21bn NPL portfolio sale to PIMCO and Fortress Investment Group is under review by the European Central Bank to assess whether the reported average price of 13% of gross book value is inflated by fees payable to the buyers for managing the assets. The Bank of Italy previously reviewed the transaction and published analysis in June 2017 (click here) in which it noted the 13% valuation but sited differences in the FINO Portfolio to Federica Ciochetta’s reported Italian banks’ average loan recovery rates (34.7%), including; (i) the “old vintage” cluster (pre-2009 bad loans), (ii) lower collateralisation (FINO portfolio mainly unsecured), (iii) the “firm effect” (i.e. exposures to corporate/small business loans which have a lower recovery rate than households), and (iv) the “market sale” effect, being a disposal to third party investors.


MPS’s shares resumed trading in Milan on 25 October 2017 at around 24% below what the Government paid for the stock in July when it rescued the company in Italy’s biggest state intervention since 1933 after it lost 87% of the banks market value.

In 2016, the bank received EUR 5.4bn in aid from the Italian government as part of a EUR 8.3bn precautionary recapitalisation. As part of this rescue package, the Treasury pledged EUR 1.5bn to purchase the shares of uninformed retail bondholders who had bought the bank’s junior debt without fully understanding the risks.

The Italian Ministry of Economy and Finance (“MEF”) enacted a Decree on 30 October 2017 for the purchase by MEF of ordinary shares in MPS by conversion of the EUR 2.16bn floating rate, subordinated upper tier II 2008-2018 notes mainly held by retail investors. The tender period is 31 October 2017 to 16:30pm on 20 November 2017 with settlement of the offer on 24 November 2017.


The Financial Times reports that Rome has been in discussions with Frankfurt and Brussels over the ECB's yet-to-be-approved addendum to the ECB Guidance to banks on non-performing loans, which Italy claims would disproportionately affect its banks, who are still recovering from the sovereign debt crisis. The latest figures available from the Bank of Italy and Banca Ifis indicate that Italy had EUR 326.2bn of gross non performing exposures at the end of Q1 2017.


Ante Ramljak, the government trustee appointed to oversee the extraordinary administration of the Agrokor group, has revealed specific details about the rights of creditors under the terms of the EUR 1.06bn super-senior roll up facility.

According to Reorg Research, Ramljak explained to a press conference on 26 October 2017 that lenders under the facility (which include Knighthead, VTB, Zagrebačka Banka, Monarch and Erste & Steiermärkische Bank) would be entitled to exit the contract should he or any of the restructuring partners be replaced. In addition, Ramljak noted that creditors would be entitled to increase the interest rate under the facility by up to 10% in circumstances where they conclude that significant changes have occurred which threaten repayment of the loan.

Ramljak is reported to have addressed the various legal proceedings between the company and Sberbank at the press conference, noting that he was able to offer the Russian bank “at least EUR 120mn in the settlement, but without the lengthy process in the courts”.

Sberbank are currently in the process of fighting Ramljak’s application to have the extraordinary administration proceedings recognised by the English courts under the Cross-Border Insolvency Regulations 2006. On 26 October 2017, closing arguments were delivered in respect of the proceedings before the English High Court, which is expected to deliver its judgment within one month. The submissions made on behalf of Agrokor and Sberbank are available here.

Agrokor is reportedly facing claims amounting to 58 billion Kuna (EUR 6.4bn). Blocks of the super senior facility are now changing hands in the secondary market, with the facility reportedly trading at 86%-88%.


The process of resolving Novo Banco S.A. continues, and with it - the problems for participants in the credit derivatives market. Click here for an update of the latest issues that the relevant ISDA Determination Committee is considering or contact:

Assia Damianova
+44 (0) 20 7170 8564

  • CREDITOR FILES FORCEFUL INSOLVENCY ON BEHALF OF BANCO POPULARThe filing has not yet been accepted by Madrid’s Mercantile Court No. 9 but, if it is accepted, up to 50% of the debt of the creditor that filed will rank senior (except if the debt is subordinated). Also, under concurso necesario, the management would be transferred from the board of directors to the insolvency administrator.

Reorg reports that on 18 October 2017 a creditor of Banco Popular has filed a forceful insolvency (concurso necesario) of the Spanish bank. Under Spanish law a creditor is entitled to file for concurso necesario on behalf of a company if they can prove that the entity failed to file for insolvency within two months from knowing it was insolvent or unviable, and/or stopped servicing debt and/or tax obligations.


The European Parliament voted on 26 October 2017 to adopt the new Securitisation Regulation, which is intended to lay down common rules on securitisation (including risk retention) and the creation of a European framework for “simple, transparent and standardised” securitisation. The regulations will apply in the EU from 1 January 2019. Click here for the CWT memorandum.


On 20 October 2017 the High Court ruled in favour of VR Global Partners (“VR”) in a dispute concerning two separate transactions under a USD 55mn loan extended to Ukrainian steelmaker Interpipe, both with trade date 13 August 2013, whereby (i) CVI EMCVF Lux Securities Trading Sarl (“CVI”) sold USD 10mn to Exotix Partners LLP (“Exotix”); and (ii) Exotix sold USD 10mn to VR. The transactions were subject to the Loan Market Association Standard Terms and Conditions.

Both transactions were subject to a comparable term which allowed VR, at its option, to unwind the transaction if registration from the National Bank of Ukraine was not obtained by 30 November 2014. The terms also stated that the parties ‘may’ review the situation and agree a further period. The registration was not obtained by the contractual deadline, VR did not agree to an extension and sought to unwind the transaction.

Mr. Justice Knowles rejected CarVal’s argument that VR was to blame for the fact that the deadline was missed, and found that there was no obligation on any party to agree to extend the deadline. Mr. Justice Knowles also ruled that VR had not breached their obligations of good faith when exercising the right to unwind the transaction, despite the fact that exercising the option was also to VR’s economic benefit as the market had moved and the value of the traded portion had dropped.

Further, Mr. Justice Knowles rejected CarVal’s argument that Exotix was acting as its agentfor the purposes of passing information to and receiving information from VR in connection with” NBU registration and an extension.

Click here for judgment.


On 11 October 2017, The fund Finance Association (“FFA”) hosted its third annual European Fund Finance Symposium. It reported, amongst other things that, private equity fundraising, the life blood of the fund finance market, remains robust in Europe. Preqin data shows USD 134bn of Europe-focused private capital has been raised year-to-date, continuing the rising trajectory experienced in 2016. As is the case across the globe, average private equity fund size continues to increase. Dry powder – the collateral supporting facilities – stands at an all-time high for Europe, now in excess of USD 400bn. Click here for further information.

Cadwalader News

ACI Summit on Controlled Substances: Regulation, Litigation and Enforcement

Jodi Avergun is speaking at this ACI event on January 30 in Washington, DC.

Cadwalader Subscription Center