Recent Development
The Capital Markets Board’s (“CMB”) Communiqué No. II.-31/B.1 on the Communiqué Regarding the Issuance of Asset Secured Capital Market Instruments (“Communiqué”) entered into force upon its publication in the Official Gazette No. 31731 and dated January 26, 2022. As previously discussed in our Legal Alert dated September 23, 2020, the CMB submitted a draft version of the Communiqué (“Draft Communiqué”) for public opinion on September 10, 2020.
The Communiqué regulates the principles of the long-awaited issuance of secured capital market instruments and introduces new concepts into the Turkish legal system, such as security agent/trust.
What Does the Communiqué Say?
Secured Capital Markets Instruments
The Communiqué authorizes the CMB to require security for the issuance of any specific capital markets instrument by reference to the qualifications of the issuer or issuance.
In addition to the transfer of the security assets to the security agent for the protection of investors, the Communiqué also regulates in detail how security (i.e. rights in rem depending on the type of the asset subject to security, such as pledge and mortgage) will be established.
Which Assets Can Be Subject to Security?
According to the Communiqué, (i) cash (Turkish lira/convertible currencies) and foreign currency bonds issued by the Ministry of Treasury and Finance, domestic government bonds, lease certificates; (ii) debt instruments issued by Turkish banks, excluding those that would be included in the calculation of bank equity; (iii) mutual fund participation shares; (iv) receivables of Turkish banks and financing companies arising from consumer loans and commercial loans; (v) receivables arising from financial leasing agreements; (vi) mortgage backed commercial loans of Turkish banks, financial leasing companies and financing companies; (vii) rights arising from derivatives; (viii) public companies’ shares listed on Borsa Istanbul Star Market and standard precious metals that are being traded; and (ix) real properties, provided that they are insured, are among the assets eligible to be used as security for capital markets instruments.
The Draft Communiqué counted debt instruments issued by Turkish banks as assets that could be subject to collateral. However, the Communiqué excludes debt instruments included in the bank equity calculation.
As stipulated in the Draft Communiqué, the Communiqué adopts the principle that there must be no encumbrance or other restriction for the transfer of these assets or the establishment of a right in rem there at the time of transfer of the assets to the security agent.
As a general rule, the Communiqué does not stipulate any valuation requirement for the assets subject to security. However, the CMB may request valuation, change or diversification of these assets in order to protect investors due to the nature of the issuer or the security. The CMB will also be able to determine at what rate the assets subject to security can be accepted as security.
Security Agent
The security agent will be authorized and in charge of: (i) taking legal remedies regarding the assets subject to security; (ii) liquidating the security in order to repay the receivables from the security; (iii) the distribution of the proceeds to investors; (iv) repaying the receivables; (v) returning the assets to security provider in case of redemption; and (vi) protecting investors’ rights and interests.
The security agent must have general custody authorization pursuant to Turkish capital markets laws.
In the event of default, or in cases specified in applicable laws, the security agent is entitled to liquidate security and pay creditors without any prerequisites such as notices or warnings, time extensions, or permissions or approvals from the judicial or administrative authority.
In cases where the proceeds of the sale of the security is insufficient to repay all the secured obligations, the security agent will make a proportional payment to the investors.
Default
If the principal, interest and other payments arising from the capital market instrument are not made within the timeframes specified in the prospectus or the issuance document, this constitutes a default. In addition, if there are other events that trigger the liquidation of the security in the security management agreement or applicable laws, these events will trigger default as well.
Public Disclosure and Records
The Communiqué also obliges the security agent to make public disclosures in the following cases in order to inform the investors about the status of the security.
The security agent must make a public disclosure on the Public Disclosure Platform when (i) there is change in the security management agreement; (ii) its independence is affected; (iii) there is a decrease in the value of the security assets; (iv) the issuer defaults or violates its obligations arising from the default or its non-payment obligations; (v) when the secured claims are repaid from the security; and (vi) other cases deemed necessary by the CMB.
The security agent will keep a special security book for the assets subject to security.
Conclusion
The Communiqué implements the concept of security agent, and provides investors with protection by allowing the security agent to keep and manage security independently.
The Communiqué ushers in a revolutionary period in capital markets.
