Structured finance and securitisation in Turkey: overview
A Q&A guide to structured finance and securitisation law in Turkey.
This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.
This Q&A is part of the global guide to securitisation. For a full list of contents visit www.practicallaw.com/securitisation-guide.
Market and legal regime
How developed is the market and what notable transactions and new structures have emerged recently?
What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?
Is securitisation particularly concentrated in certain industry sectors?
The securitisation market began developing in the second half of the 1990s in Turkey. Until the last few years, compared to many developed countries, securitisation was mostly undertaken by the banking sector, and the asset classes were limited to credit card receivables, cheque receivables, diversified payment right receivables and leasing receivables. However, in the last few years, due to changes in the tax regulations, transactions in the banking sector have decelerated. Therefore, Turkey offers much potential for the securitisation market.
As a result of the development of the Turkish sukuk market, ijara sukuk, for example, provided an excellent basis for securitising a pool of ijara financings originated by Turkish islamic banks. There have been a couple of "onshore" securitisation structures in the past where Kuveyt Türk, Bank Asya and Turkiye Finans issued lease certificates (sukuk ijara) which attracted a great amount of attention, but so far these remain the only transactions of their kind. Turkish islamic banks, such as AlBaraka, Turkiye Finans and Kuveyt Turk, have also issued and offered sukuk to RegS investors outside Turkey this year, which initially started back in 2012 with Kuveyt Turk tapping international markets with the very first sukuk issuance through a Turkish SPV.
What are the main laws governing securitisations?
What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?
The main laws governing securitisations are the:
Communiqué on Asset-Backed and Mortgage-Backed Securities, Serial: III, No. 58.1, published in the Official Gazette dated 9 January 2014.
Communiqué on Principles of Mortgage Finance Institutions, Serial: III, No. 60.1, published in the Official Gazette dated 17 July 2014.
Communiqué on Lease Certificates, Serial: III, No. 61.1, published in the Official Gazette dated 7 June 2013.
The CMB is the regulatory and supervisory authority in charge of the capital markets in Turkey (www.cmb.gov.tr). The CMB aims to ensure the safe, fair and orderly functioning of the capital markets and to protect the rights and benefits of investors.
Reasons for doing a securitisation
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy?
Risk retention requirements?
Implementation of the Basel III framework in your jurisdiction?
Usual reasons for securitisation
The main reasons for doing a securitisation transaction are:
Transfer of risk
Having an off-balance sheet alternative to raise funds (giving balance sheet benefits).
Accessing the capital markets without necessarily being listed.
Providing investors with an alternative exposure to credit risk.
Cheaper source of funding (for lower rated originators).
Adjusting operations to reflect regulatory capital requirements (applicable to financial institutions).
The Turkish Accounting Standards Board published its financial reporting standards in 2005 and are mostly identical to the IFRS. Turkish companies listed on Borsa Istanbul must prepare their financials according to these standards. The new Commercial Code which entered into force on 1 July 2012 has also taken a similar approach.
The new Commercial Code provides capital thresholds that companies must sustain to avoid technical bankruptcy, although under the Commercial Code a company has a period of time to remedy any capital inadequacy.
There is no authority which regulates and supervises capital adequacy of companies in Turkey. However, the CMB issues capital adequacy regulations for capital market entities such as brokerage houses and asset management companies, and is responsible for the implementation of these rules.
To implement the rules of Basel III into Turkish law, the Banking Regulation and Supervision Agency (BRSA) (the regulatory and supervisory authority in the banking sector) has been regulating the capital adequacy rules and principles for the banks in accordance with Basel III regulations and monitors their implementation, which have been in effect as of 2013.
The special purpose vehicle (SPV)
Establishing the SPV
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How the SPV is usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
A securitisation governed by the Capital Markets Law and implementing communiqués on asset-based securities requires incorporation of an asset/housing financed fund, which is subject to strict requirements of the CMB.
Asset-financed funds are defined as a separate asset pool formed by the proceeds of the asset-based securities sold. They do not have a legal personality and must be managed according to fiduciary ownership principles. Therefore there is no legally recognised shareholding right in a fund, but an ownership right over the issued asset-backed securities.
Asset-based funds operate under the rules stated in the internal bye-laws of the fund, which includes:
General terms about management of the fund.
Custody of the assets.
Conditions of investing in the fund.
Funds can only be established in the specific forms defined by the CMB communiqués, by certain entities listed in the regulations (for example, banks, financial leasing and finance companies and brokerage houses).
The fund must have a board with at least three members, internal controllers, and must enter into agreements with a service provider and custodian entity for the fund's assets. There are restrictions on the quality and qualifications of assets that can be included in the fund's portfolio. For ordinary asset based securities, for example, only the following assets can be included in the fund's portfolio:
Receivables of banks and financing corporations arising from consumer loans and commercial loans.
Receivables arising from financial leasing agreements entered into pursuant to the Law on Financial Leasing, Factoring and Financing Companies.
Receivables arising from sale of real estate property by the Housing Development Administration of Turkey, based on instalments and contracts.
Commercial receivables attached to deeds or collateral, arising from invoiced sales by joint stock companies engaged in production of goods and provision of services to their customers, excluding financial institutions.
Short-term deposits with a maturity of less than three months, participation accounts, reverse repo transactions, money market funds, funds for short-term debt securities and Settlement and Custody (Takasbank) Bank Money Market transactions, destined to invest the cash originating from the assets available in the fund portfolio.
Assets in the reserve accounts.
Assets, other than the capital market instruments, as may be approved by the CMB.
Asset-backed securities sold through a public offering or private placement must also be registered with the CMB. While it is mandatory to prepare disclosure documents (such as an offering circular) for public offerings, it is mandatory to prepare an issue document for private placements or sale to qualified investors.
The security holders are beneficial owners of the asset portfolio managed by the service provider. Since there is no trust concept under Turkish law, the relationship between the fund and its investors can be defined as a sort of agency relationship (fiduciary ownership).
Ensuring the SPV is insolvency remote
Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?
Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?
Funds (the form of SPV that must be used in a Turkish securitisation, see Question 4) are insolvency remote vehicles. Due to restrictions on the quality and quantity of fund assets (see Question 4), the operations of the fund and the expenditures to be made, it is unlikely that a fund would become insolvent. To the best of our knowledge, such insolvency remoteness has not been eroded in recent years.
In addition, it is possible for the originator to guarantee to pay the part of obligations which cannot be paid by the fund itself.
Turkish courts give effect to the structures that are agreed between the parties unless they are against public policy rules.
Ensuring the SPV is treated separately from the originator
There is no risk that the courts will treat the assets of the SPV as those of the originator. Legal ownership of assets must pass to the fund and those assets cannot be subject to insolvency proceedings of the originator. A guarantee can be used as a tool to ensure payment of obligations which cannot be paid by the fund itself (see Question 6). However, if the originator cannot fulfil its obligation for the guaranteed part of the payments, the investors can attend the liquidation process of the originator for this part pari passu along with the other creditors.
Issuing the securities
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
Publicly issued securities are generally listed on foreign stock exchanges, such as in Luxembourg, London or Ireland.
If the securities are publicly issued in Turkey (asset-based securities and mortgage based securities) they must also be listed on Borsa İstanbul. For the listing requirements, see www.listingistanbul.com.
Constituting the securities
The SPV can only be in the form of a fund (see Question 4) and the asset-based security issued by the fund to each investor represents the investor's beneficial ownership in the fund assets.
Transferring the receivables
Classes of receivables
Types of assets and receivables which can be subject to securitisation include:
Receivables arising from the financial and operational leasing agreements.
Receivables arising from factoring transactions.
Receivables arising from export transactions.
Receivables arising from loans which are provided to small and medium-sized enterprises (SMEs).
Receivables arising from real estate sales contracts.
Receivables arising from real estate sales by the Housing Development Administration (in Turkish shorthand: TOKI).
Other assets whose quality is to be determined by the CMB.
During the last couple of years most Turkish retail banks have securitised their diversified payment rights through offshore SPVs.
Transferring receivables from the originator to the SPV
The originator, as the owner of the receivables, creates a pool of the receivables, which is then transferred to the fund through a written assignment agreement (so that it constitutes a true sale (see Question 16)). However, to perfect the transfer of mortgages and pledges on motor vehicles, the transfers must be registered at the land and motor vehicle registries.
Although notification to the debtors is not required to perfect the assignment, it is recommended that the agreement include a provision obliging the originator to notify its debtor(s) of the assignment and to request an acknowledgment of no prior ranking assignments or counterclaims from the debtor(s). The debtor cannot then raise a good faith claim for the payments directly to the originator after they have received the assignment notice. In other words, the debtor, following receipt of such notice, is legally barred from discharging its payment obligations to the originator. Serving a notification and requesting an acknowledgment of no prior ranking assignments or counterclaims from the debtor of the relevant receivable should also assure the SPV that the receivables were not previously assigned or subject to counterclaims.
Generally, receivables are freely transferable as a matter of Turkish law other than certain healthcare/social security related receivables. Also, it is not possible to securitise future receivables that are not identifiable, and it is not recommended to securitise receivables which are not:
Collected in installments.
Providing a constant cash flow.
Prohibitions or restrictions on transfer
There is no prohibition on the transfer of receivables as long as all the requirements are met (for example, a written agreement and perfection requirements).
Depending on the mutual agreement between the parties, certain contractual restrictions may exist, therefore due diligence on the underlying contract becomes important.
There is no general legislative restriction. With regards to data protection, where there are no specific data protection requirements, the general provisions of Turkish law prevail. There is no specific data protection law in Turkey. However, note that banks cannot disclose documents and information about their clients to third parties, other than the official authorities that are legally authorised to demand confidential information from banks.
Avoiding the transfer being re-characterised
Can this risk be avoided or minimised?
Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?
There is no risk that a transfer of title to the receivables (that is, a true sale) will be re-characterised as a secured loan (see Question 12) as long as parties' intention is sale of the receivables without recourse to the seller. There is no legal requirement of delivering a true sale legal opinion, but the CMB has the authority to request such an opinion during the application process.
Ensuring the transfer cannot be unwound if the originator becomes insolvent
Transactions cannot be unwound at a later date. The Execution and Bankruptcy Law has specific provisions regulating the procedure for unwinding transactions.
The following transactions are voidable if made within one year before the declaration of the bankruptcy of an insolvent party:
The creation by the insolvent party of an encumbrance over its assets to secure an existing debt where that person had not previously promised (or is under contractual obligation) to execute such an encumbrance.
Any payments made by the insolvent party other than with money or ordinary payment methods.
Prepayment of debts that are not yet due.
Registrations made to the title deed registry to strengthen contractual rights.
The court will not declare such arrangements void if third parties that benefit from the security arrangements prove that they were not aware of the financial condition of the insolvent party.
Also, the transactions that may be invalidated would consist of those made for no consideration (including donations) or for a consideration that is significantly less than the actual value of the transaction. The clawback period for such action is two years (prior to the insolvency).
Disposals made intentionally to impair the interest of the creditors may be challenged by the creditors within five years after the date of such disposals.
Establishing the applicable law
In principle, the parties to a contract are free to determine the governing law of the contract. Generally, English law is chosen for cross-border security issuances. A choice of English law to govern the transaction documents is valid under Turkish law and the courts of Turkey will recognise and give effect to the choice of English law as the governing law of the transaction documents, except to the extent that to recognise and give effect to such choice of law would be clearly against Turkish public policy rules.
Security and risk
Security taken over movable assets must be by means of a pledge. Pledges can take the following forms, each requiring different methods of perfection:
Share pledge. To perfect the pledge:
if there is a physical share certificate, it must be delivered to the lender (in addition to the endorsement in case of registered-form share certificates);
if there is no physical certificate, the pledge must be registered in the share ledger.
Asset pledge. To perfect the pledge, the asset must be delivered to the lender.
Commercial enterprise pledge. To perfect the pledge, it must be registered with the trade registry. The ranking among commercial enterprise pledge holders is determined according to the date of registration with the trade registry.
Pledge over receivables. To perfect a pledge over receivables, a written contract is required to establish a pledge (and the debtor must be notified accordingly in order to avoid debtors discharging payment obligations to the originator).
Pledge over motor vehicles. To perfect a pledge over a motor vehicle, an registration is made at the motor vehicle registry for the benefit of the lender.
For asset/housing-based finance funds, the fund is party to these perfection processes, such as by:
Receiving the assets from the original lender.
By being annotated in the motor vehicles registry.
By executing a contract with the original lender for pledges on the receivables.
Notifying the debtor accordingly.
A mortgage over real estate can take the form of either:
A fixed mortgage. Under which the total indebtedness secured by the real estate is registered with the Land Registry Office. There is no requirement for a mortgage to be executed in a certain form.
A maximum amount mortgage. Under which the maximum amount of security provided by the relevant real estate is specified, but the precise amount of indebtedness is not revealed.
A piece of real estate can be mortgaged more than once. Mortgages can be registered in a ranking order such as first, second, and third. The first-registered mortgage has priority over later mortgages.
Asset-based securities issued by funds are held directly by the investors. This relationship is governed by rules of representation (see Question 4).
The trust concept is not legally defined under Turkish law. However, it is widely accepted that trust provisions in agreements are enforceable under the general provisions of law. However, so far this has not been tested in the Turkish courts.
A Turkish law governed issuance must fully comply with the CMB's strict requirements which increase the creditworthiness of the transaction (see Question 4). Apart from this, the regulations also define some credit enhancement mechanisms which originators can apply. These mechanisms include the following:
The fund can enter into an insurance, guarantee, letter of guarantee or other similar types of security arrangements with the originator or another third party.
The fund can diversify the securities with different rights and classes.
The fund's assets in excess of its liabilities can be transferred to reserve accounts (known as creating retained spread).
Any other mechanism approved by the CMB.
Risk management and liquidity support
The only methods defined in the regulations are securing loans and creating reserve funds to manage periodic payments. These methods were used in the recent limited number of securitisations. Loans can be secured from anyone, including the originator, as long as the terms of the loan are determined on an arm's-length basis.
Cash flow in the structure
Distribution of funds
There is no swap counterparty or liquid support provider in the structures defined in the CMB regulations although these elements can be used in practice.
The parties listed as taking part in a securitisation under the regulation are:
Fund (with its board manager and internal controller).
Credit enhancement provider.
Banks are also natural participants due to their role of being payment vehicles.
All the fund expenditures must be made on an arm's-length basis. The list of allowed expenditures is as follows (CMB):
Compulsory registration and announcement fees.
Fees to be paid to the fund employees and to the providers of legal, accounting, custody, settlement and other management services.
Servicing fees to be paid to the service provider.
Fees paid to audit firms.
Fees paid to rating agencies.
Fees, commissions and other payments paid to credit enhancement providers.
Underwriting and brokerage fees and commissions.
Accruals to reserve accounts.
Legal fees for the issuance.
Tax charges of the fund (see Question 26).
Expenses associated with cash management loans.
Other expenses that are approved by the CMB.
There must be information in the offer documents presented to investors about what will happen to any remaining assets of the fund after all of the fund obligations are fulfilled.
To the best of our knowledge, enforceability of "flip clauses" under the swap agreements have not been tested before Turkish courts.
The role of the rating agencies
The recent sovereign ratings are:
Moody's. Long-term, foreign currency: Baa3; local currency: Ba1.
Fitch. Long-term, foreign currency: BBB-; local currency: BBB.
The ratings of SPVs are mostly linked to the asset quality. The rating of the originator is also another factor that has an impact on the SPV's rating.
What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?
For tax purposes, offshore securitisation structures are treated as lending arrangements and SPVs are defined as financing institutions. Therefore the following tax treatment applies.
1% interest withholding tax applies to interest payments made to SPVs.
VAT and stamp duty exemptions apply (that is, VAT and stamp duty never apply on a securitisation). According to a Ministry of Finance advance opinion published recently on its website, stamp duty should apply to offshore securitisation documentation. The advance opinion letters are not binding on taxpayers but they are on the tax authorities. This means that taxpayers are not obliged to comply and settle or litigate the matter in case of a dispute, whereas the tax authorities would issue the same opinion for similar transactions unless there is a change in the legislation.
The application of the Resource Utilisations Support Fund Levy depends on the denomination currency and on the average maturity. The rate is 3%. The base amount is interest on Turkish lira loans and principal amount for foreign currency loans. Turkish intermediary banks act as tax agents and usually it is a borrower's liability.
Onshore securitisations are generally made through funds which are technically considered taxable fiscal units (that is, taxable entities) in Turkey. However, this income item of the concerned funds is exempt from corporate income taxation in Turkey.
Onshore securitisations are generally subject to tax (that is, corporate tax on any gains, VAT and stamp duty). However exemptions apply for some types of securitisations such as sukuk issuances under sale and leaseback models and mortgage-backed securities.
An agreement between Turkey and the US to improve international tax compliance through enhanced exchange of information was signed on 29 July 2015.
Recent developments affecting securitisations
Other securitisation structures
Generally, single issue structures are most commonly used. Also note that a sound Turkish legal framework exists for securitisation and associated forms of structured finance, including mortgage covered bonds and asset covered bonds. The Turkish securities regulator, the Capital Markets Board (CMB) issued on 21 January 2014 the Communiqué on Covered Bonds (Series III-59.1) (as amended on 5 September 2014 and 21 October 2015) which replaced the two communiqués on mortgage-covered bonds and asset-covered bonds, creating a single framework for both debt securities.
Turkish banks with large mortgage lending portfolios are considering issuing covered bonds, particularly after VakifBank established a EUR3 billion denominated covered bond programme in July 2015, and YapiKredi applied to the CMB in late October 2015 for EUR1 billion worth of covered bonds. Most Turkish banks are in good shape to come to the market, despite high establishment costs and limited rating increase.
Covered bonds can be issued by housing finance institutions (konut finansmanı kuruluşları) or mortgage finance institutions (ipotek finanmanı kuruluşları). Housing finance institutions are banks authorised to extend loans (or provide financial leasing) to consumers. Financial leasing companies and finance corporations are authorised by the Turkish banking authority to perform housing finance activities.
Mortgage finance institutions are defined as joint stock companies established within the scope of housing finance and asset finance for the purpose of acquiring and transferring CMB-qualified assets, managing such assets or taking such assets as collateral and conducting other activities approved by the CMB.
Capital Markets Board of Turkey
Description. The official website of the Capital Markets Board of Turkey. English translations are for information purposes only.
Omer Collak, Partner
Paksoy, Attorneys at Law
Professional qualifications. Istanbul Bar, 2005
Areas of practice. Banking and finance; Islamic finance; specific focus on capital markets transactions, acting for issuers and international underwriters in equity, debt and equity-linked instruments in international public offerings, tender offers, and private placements.
Professional associations. American Bar Association; International Bar Association; Assembly of Turkish American Associations; board member of Darüşşafaka Society.
Okkes Sahan, Senior Associate
Paksoy, Attorneys at Law
Professional qualifications. Lawyer, Turkey; holds licences for capital market activities (advanced level), derivative instruments, real estate appraiser, credit rating specialist, corporate governance rating specialist, and independent auditing in capital markets.
Areas of practice. Capital markets; banking and finance; banking regulatory; corporate governance
Professional associations. Ankara Bar Association; worked for 14 years at the Capital Markets Board of Turkey as legal counsel in the department of legal affairs.