Following the entry into force of the Communiqué on Asset-Backed and Mortgage-Backed Securities which was previously published in the Official Gazette dated 9 January 2014 and numbered 28877 (the “ABMB”), a similar communiqué is now drafted by the Capital Markets Board (the “Board”) to introduce a new finance instrument namely, project-backed securities (the “PBS”). The PBS which can be considered as the alternative finance instrument to the ABMB, are issued by pooling assets in a project finance fund portfolio to be used for financing public services projects that require long-term and intensive capital, such as infrastructure, energy, industry, technology, communication or health investments. The PBS were the first introduced to the Capital Markets Law with the Law No. 7222 Amending the Banking Law and Certain Laws which was published in the Official Gazette dated 25 February 2020 and numbered 31050. Within the scope of such amendments, the Board has been authorized to determine the procedures and principles with regards to (i) assets and rights to be subject to project finance, (ii) establishment and founders of the PBS funds, (iii) terms of their activity, (iv) management and termination, and (v) issuance of the PBS. Accordingly, the Board has published the Draft Communiqué on Project-Backed Securities No. III-61/B.1 (the “Draft Communiqué”) and presented it to the public opinion on 24 July 2020 via its official website.
This Monthly Updates aims to provide a brief explanation on the Draft Communiqué and highlight the novelties introduced therein.
The Establishment of Project-Backed Funds and their Founders
Pursuant to the Draft Communiqué, a project-backed fund is a non-legal entity on the basis of fiduciary ownership that is established in Turkey with the aim of managing a portfolio constituted on the basis of assets subject to project finance by way of collecting money in exchange for the PBS and/or other assets on behalf of the PBS holders. (the “Fund”). Furthermore, the establishment of the Fund shall be subject to the approval of the Board. In line with the Draft Communiqué, the Fund shall be established only for the purpose of the issuance of the PBS for a limited period or indefinitely by a founder which can be (i) a bank granted permission by the Board to perform investment services and activities or (ii) a broadly authorized intermediary institution (the “Founder”). Within the scope of the Draft Communiqué, the Founder shall meet the following criteria: (i) the Founder shall have all necessary permits and authorizations in accordance with the relevant legislation as of the application date; (ii) no decision shall have been taken in order to continuously or temporarily limit or suspend the Founder’s activities for a month or more anytime during the year proceeding the application; and (iii) the Founder shall not have any due tax debt. Furthermore, if the Founder is a bank, the approval of the Banking Regulation and Supervision Agency (BRSA) is required before the issuance of the PBS.
Issuance of the PBS
The PBS shall be issued based on (i) project income and other rights arising from the financing of a project to be taken over from the institution sourcing the fund portfolio or; (ii) receivables arising from secured loans issued for financing different projects and those arising from refinancing of such, as collaterals.
As per the Draft Communiqué, the PBS shall be issued to qualified investors with or without public offering or provided that the unit nominal value is at least TL 100,000, via private placement or abroad. In line with the Draft Communiqué, the Fund portfolio shall be constituted within 10 business days following the issuance date. Accordingly, the payments to be made to investors within the scope of the PBS shall be covered by the cash flows generated from the assets in the Fund portfolio.
Principles Regarding the Fund’s Activity
As per the Draft Communiqué, the Fund shall be composed of four different organs namely, (i) the Fund board; (ii) the Fund internal control system; (iii) the Fund auditor; and (iv) the service provider. Firstly, the Fund board which shall consist of three members to be appointed with a board of directors’ decision of the Founder, is responsible for the drafting of PBS issuance documentation, and the Fund’s bylaws, the safekeeping of the assets in the Fund and the representation of the Fund. Secondly, the Fund internal control system is responsible for the compliance of the PBS issuance, the payments, and the obligations of the service provider with the applicable law. Thirdly, the Fund auditor is appointed by the Fund board and responsible for the preparation of a report indicating its audit results and whether any breach of applicable laws has occurred. Lastly, the service provider shall be authorized by the Fund Board to conduct the daily management of existing assets in the Fund portfolio.
The Assets to be Included in the Fund’s Portfolio
Provided that it is specified in the prospectus or issuance certificate, the following assets can be included in the Fund’s Portfolio: (i) receivables of banks with permission from the Board and broadly authorized intermediary institutions arising from secured loans issued for project financing and those arising from refinancing of such; (ii) incomes and other rights of the project subject to project finance; (iii) time deposits made for less than three months with the aim of utilizing the cash obtained from the assets in the Fund portfolio, participation accounts, reverse repo transactions, money market Fund shares, short-term debt instruments Fund participation shares, debt securities, lease certificates from which the Treasury is the source institution, Settlement and Custody Bank (Takasbank) money market and other domestic organized money market transactions, (iv) rights and obligations arising from derivative instruments; and (v) other assets approved by the Board.
Furthermore, the assets included in the Fund’s portfolio that are registered by a title deed or before a registry, the acquired assets shall be registered to the land registry or the relevant registry on behalf of the Fund.
Procedures and Principles regarding Delay or Failure of Projects
In line with the Draft Communiqué, if it is understood that the project cannot be finalized within the timeframe and in line with the principles specified in the prospectus or the issuance certificate, then a feasibility report shall be prepared by the legal entities, institutions and organizations which transferred their assets to the Fund’s portfolio within 15 days following occurrence of such a situation. Furthermore, an application can be made by such sourcing institutions to the Board in order to grant an extension of time to complete the project. Following such application, the extension time shall be announced on the Public Disclosure Platform. In the event that there is no request for additional time at the end of the initial deadline or the project is not realized (or it is deemed to be not realized) at the end of such extension period, then, the situation shall immediately be announced on the Public Disclosure Platform. Pursuant to the Draft Communiqué, the above-mentioned announcements shall be made via the Central Registry Agency in cases where the PBS have been sold via private placement or to qualified investors without being be traded on the stock exchange.
Once the final version of the Draft Communiqué enters into force, projects regarding public services will be able to be financed via the use of the PBS, which is an alternative investment opportunity for the investors. The issuance of the PBS, the activity of the Fund and the assets to be included into the Fund show similarities with the securities regulated under the ABMB. Nevertheless, certain matters remain ambiguous and still expected to be clarified for this financing method to gain a widespread usage.