September 2020
Following the entry into force of the Law No. 7222 Amending the Banking Law and Certain Laws which was previously published in the Official Gazette dated 25 February 2020 and numbered 31050, Article 31/B has been added to the Capital Markets Law No. 6362 which was published in the Official Gazette dated 30 December 2012 and numbered 28513. By virtue of such provision, it is aimed to introduce the “collateral manager” institution, which already finds a wide application area in the capital markets practices abroad, to the Turkish legislation. To this end, the Capital Markets Board (the “Board”) has published the secondary legislation namely, the Draft Communiqué on Issuance of Capital Markets Instruments with Collateral Assets No. II-31/B.1 (the “Draft Communiqué”) and presented it to the public consultation on 10 September 2020 via its official website.
This Monthly Updates aims to provide a brief explanation on the Draft Communiqué and highlights the novelties introduced therein.
Issuance of the Capital Markets Instruments with Collateral Assets
“Collateral Assets” (“Collaterals”) have been defined as the assets which shall be transferred to the collateral manager (the “Manager”) by the issuer or a third party to constitute a guarantee for the timely fulfilment of the liabilities arising from the capital markets instruments issued by such issuer. The Manager shall be an independent investment institution that is authorized to conduct custody services as per the Communiqué on Principles Regarding Investment Services and Activities and Ancillary Services No. III-37.1, published in the Official Gazette dated 11 July 2013 and numbered 28704 and pre-approved and announced by the Board.
For the issuance of capital markets instruments backed with Collaterals, the ownership of Collaterals shall be transferred to the Manager or a limited real right (sınırlı ayni hak) shall be established over such Collaterals for the benefit of the Manager, in order to enable the Manager with the management, administration, protection and preservation of the same. To this end, the sale of the capital markets instruments shall not start before the completion of such transfer or establishment of limited real right and the completion of such procedures shall be announced on the Public Announcement Platform at the latest one day before the sale of such instruments.
Collaterals
The Draft Communiqué regulates the assets that can be considered as Collaterals such as, among others, cash, stocks traded in the star market, debt instruments issued by banks, guarantee letters and investment fund participation shares. Revenues to be periodically generated from Collaterals shall be included in the value of such Collaterals, unless agreed otherwise. It has been further stated that the Board shall be authorized to deem other assets as Collaterals and/or request a certain issuer to diversify or change its Collaterals and evaluate the status of its current Collaterals. At the date of the transfer of Collaterals to Managers, (i) except for as otherwise provided in the Draft Communiqué, Collaterals must be located in Turkey or in the event that such Collaterals are receivables, such receivables must be from a person residing in Turkey; and (ii) there shall be no liabilities over Collaterals restricting their transferability.
Collaterals shall be kept and monitored separately from the other assets of the Manager and cannot be confiscated, pledged, included in the bankruptcy estate or subject to any injunctive relief due to the debt of the Manager.
However, in the event that the Collaterals are lost, pledged or otherwise left the possession of the Manager without any fault attributable to the Manager, the issuer or the third party shall be obliged to provide to the Manager new assets at the same value of such Collaterals.
Collateral Management Agreements and Liabilities of Managers
The collateral management agreement (the “Agreement”) is a written agreement that shall be signed by and between the Manager and the issuer to regulate the transfer of Collaterals to the Manager or establishment of a right over such Collaterals for the benefit of the Manager in order to guarantee the due fulfilment of the liabilities of the issuer arising from the capital markets instruments in compliance with the prospectus or the issuance certificate. The Draft Communiqué further stipulates the minimum topics to be regulated under the Agreement.
The Agreement shall be submitted to the Board together with the documents regarding the issuance ceiling of the instruments. After the issuance, in order to make changes in the Agreement that may affect fulfilment of the investors’ receivables arising from the relevant capital markets instruments, such change must be approved by the debt instrument holders’ board. The issuer shall also be obliged to register the relevant information regarding the Manager and its authorities as per the Agreement before the relevant commercial registry and announce such in the Trade Registry Gazette before the initial sale of the capital markets instruments.
As per the Agreement, the Manager shall (i) evaluate whether Collaterals carry the necessary requirements stipulated under the Draft Communiqué and the respective prospectus or issuance certificate before their transfers; (ii) ensure the management, protection and preservation of Collaterals and seek legal remedies thereof; (iii) in case events of default or other reasons stipulated in the applicable law or the Agreement occur, when any receivables are to be compensated from such Collaterals, liquidate them and distribute the liquidation proceeds among the investors and if there is any residual amount after the investors’ receivables are covered return such amount to the issuer; (iv) in case the capital markets instruments are redeemed, return Collaterals to the issuer; and (v) perform all kinds of transactions with respect to Collaterals, including protecting the rights and interests of the investors.
Event of Default and Consequences
As per the Draft Communiqué, it has been determined that failure to pay principal, interest or similar amounts of the capital markets instruments within the period stipulated in the respective prospectus or the issuance certificate shall be deemed as an event of default. In addition, the Draft Communiqué stipulates that the parties may agree on other events of default under the Agreement and in such case, such events shall also lead to the same results as the only default event stipulated in the Draft Communiqué, i.e. non-payment of principial, interest and other amounts. In case an event of default occurs, corresponding part of the Collaterals to meet the payment obligations of the issuer shall be cashed out by the Manager.
In case Collaterals are to be liquidated due to an event of default, the Manager shall be authorized to sell the Collaterals and distribute the liquidation proceeds among the investors, without being obliged to give any notice or warning, grant any extensional time to the issuer nor does the Manager is obliged to obtain permission or approval from any judicial or administrative authority or fulfil any preconditions.
Payment periods of the amounts to be covered from Collaterals have been further determined by the Draft Communiqué according to their types. Furthermore, it is stipulated that if the liquidation proceeds are not sufficient to cover the receivables of all investors, the Manager shall make a proportional payment to the investors using the calculation method specified in the Draft Communiqué.
Conclusion
Once the final version of the Draft Communiqué enters into force, the “collateral manager” institution will be introduced to the Turkish legislation. As the institution provides a safer, less risky opportunity of investment for prospective investors, it is expected to have a wide application in the Turkish capital markets attracting more investors.