Framework Agreement on Financial Restructurings Entered into Force

Recent Developments

The financial restructuring framework agreement (“ Framework Agreement “) prepared by the Banks Association of Turkey (“ BAT ”) under the Regulation on the Restructuring of Debts Owed to the Financial Sector (“ Regulation ”) was signed by banks and other financial institutions (“ Creditors “). The Framework Agreement entered into force with the BRSA’s approval.

What’s New?

• The Framework Agreement determines the borrowers that could be subject to financial restructuring. In this respect, the total principal debt of a borrower must be at least TRY 100 million at the time of its financial restructuring request.
• Borrowers facing execution proceedings initiated by Creditors for maximum 25% of their total debts could be subject to financial restructuring. Borrowers declared bankrupt by a court judgment are excluded from the scope of the financial restructuring.
• A borrower’s financial status and repayment ability must be assessed prior to financial restructuring. This assessment will be done by the institutions to be appointed by the Creditors’ consortium (“ Consortium “).
• The Consortiums formed by the Creditors will be the decision making mechanism. Depending on the Creditors’ decision, single or separate Consortiums for each borrower or risk group could be established.
• Creditors other than the banks or financial institutions can become members in the Consortium if they are voted in by the Consortium members.  The creditors that become members to the Consortium must execute the Framework Agreement.
• The Framework Agreement reiterates the obligation for all Creditors who signed a Framework Agreement to agree to restructuring, if the Creditors that own two thirds of the concerned receivables sign the financial restructuring agreement (“ Restructuring Agreement “).
• The Framework Agreement sets forth the scope of the measures to be taken for financial restructuring. These measures include, among others, rescheduling the existing debts; providing additional loans; change of management or shareholder structure; asset sale; establishment of additional securities, public offering and other relevant measures intending to ameliorate the borrower’s financial status.
• Additional loans could be granted to the borrowers. If at least two banks that are Consortium members have shares that constitute at least 90% of all the claims of the Consortium member banks, they can decide to provide additional loans to the borrower. In this case, all Consortium members will disburse additional loans pro-rata their current share in the claims. If this quorum is not reached, the borrower may utilize the loans from the Consortium members willing to provide financing or from the banks that are not members of the Consortium, if the relevant quorums are respected.
• Writing off the principal amounts in whole or in part, converting debts to equity or implementing collection in kind requires the unanimous decision of the Consortium members.
• The financial restructuring proceedings will terminate if the Consortium does not adopt a decision within 90 day following the borrower’s application for restructuring. The Consortium could extend this period for a maximum of two months.  The Restructuring Agreement must be concluded within 150 days following the borrower’s application.
• Borrowers wishing to benefit from the financial restructuring arrangements must apply to one of the three major Creditors (“ Application Bank “). The application will be made by executing the application and undertaking a letter, the example of which is attached to the Framework Agreement. Documents relating to the borrower’s financial status and its assets should be attached to this letter.
• Upon due application to the Application Bank and distribution of the application to the relevant Creditors, Creditors cannot initiate execution proceedings against the borrower and cannot continue the proceedings save for the steps to be taken to avoid the expiration of any status of limitation. These limitations are also applicable to Restructuring Agreements.
• The Restructuring Agreements will regulate, among others, the determination of the claims of the Consortium members; the repayment mechanism; breaches of the Restructuring Agreement; and its sanctions and security structure.
• Disputes arising out of the Framework Agreement will be settled by an arbitration committee.
• The Framework Agreement will be effective for the Restructuring Agreements to be executed within two years from the BRSA’s approval of the Framework Agreement.

Conclusion

The entry into force of the Framework Agreement clarifies the principles for the implementation of financial restructuring.

Nevertheless, it appears that the standstill periods provided in the Framework Agreement and the Draft Law on the Restructuring of Debts Owed to the Financial Sector (“ Draft Law “) do not overlap.

Pursuant to the Framework Agreement, the fact that a borrower (“ Borrower “) of a Turkish bank (“ Bank “) enters into a Framework Agreement with other Creditors would not affect the legal rights of a Bank against such Borrower, as the Framework Agreement sets forth that it is applicable only to the Creditors that are parties to it. Therefore, a Bank will be able to enforce its claims against such Borrower without the Framework Agreement being an issue. Furthermore, the standstill period whereby execution proceedings cannot be initiated against the Borrower begins with the Borrower’s application for restructuring.

The Draft Law implies that all enforcement actions against a Borrower (including those initiated by the Creditors that are not parties to the Framework Agreement) will cease and no creditor (including those that are not parties to the Framework Agreement) will be able to take any enforcement action against the Borrower once the Restructuring Agreement is executed.