How will the new FX borrowing restrictions affect acquisition finance/ leveraged buy-outs and project finance?

Recent Development

The Council of Ministers published a decree amending the Decree No. 32 on the Protection of the Value of the Turkish Currency (“Decree No. 32“) in the Official Gazette No. 30312 on 25 January 2018.

Pursuant to the amendments, as a general rule, the Turkish resident companies must have sufficient foreign exchange income or a loan balance of more than USD 15 million at the time of the utilization. Otherwise, they will not be entitled to utilize FX loans except for several limited exceptions.

It is expected that these restrictions will affect leveraged buy-out transactions (“LBOs“) and project finance.

How will the restrictions affect these transactions?

In Turkey, LBOs and project finance transactions are mostly carried out through special purpose vehicles (“SPVs“) established in Turkey by sponsors and these SPVs purchase the target company’s shares or finance their projects through FX loans they utilize from financial institutions.

While public-private partnership projects (PPPs) are exempted from these FX borrowing restrictions, LBOs and project finance transactions are subject to the new FX borrowing restrictions.

Further, as they are newly established for a specific purpose, it will not be practically possible for SPVs to have sufficient FX income or FX loan balance of USD 15 million or more.

Therefore, the Turkish resident SPVs will no longer be entitled to utilize FX loans to purchase the target company’s shares or finance their projects (other than project finance for PPPs as set out above).

In this respect, LBOs may be conducted through Turkish lira borrowing or establishing the SPV abroad. These alternatives must also be reviewed from the perspective of the applicable tax regime and transaction dynamics.

As for project finance, it is, in most cases, impossible to establish the SPV abroad due to legal or practical reasons. Therefore, project finance may be conducted through Turkish lira borrowing which must also be considered in accordance with the transaction dynamics.

Conclusion

LBOs and project finance transactions must be considered from the perspective of the new FX borrowing restrictions. In this respect, further alternatives may be developed depending on the actual conditions of specific transactions.