The recent amendments to the Capital Market Law, within the scope of the Law No. 7222, which entered into force on 25 February 2020, enabled the issuance of secured capital markets instruments in order to ensure the fulfilment of the obligations arising from such capital market instruments. In this regard, the Capital Markets Board of Turkey (“CMB” or “Board”) was authorized to determine the procedures and principles regarding the assets that are allowed to be issued with collateral, the trustees and the security structures of such issuances.

The secondary regulation regulating these matters, namely the Communiqué on the Procedures and Principles on the Issuance of Secured Capital Market Instruments numbered II-31/B.1 (“Communiqué”) was published in the Official Gazette and entered into force on the same date. The Communiqué introduces the procedures and principles on the issuance of secured capital market instruments, filing process, assets that can be used as security and the general principles applicable thereon, trust management agreements and its minimum required content, rights and obligations of the trustee and liquidation of securities in an event of default.

You may find below a summary of the Communiqué.

Issuance of Secured Capital Market Instruments

As per the Communiqué, capital market instruments can be secured by assets, the details of which are specified in the Communiqué, to ensure the performance of the obligations arising from these instruments in due time and to protect investors. The secured issuance, in principle, is voluntary. Having said that, the Board is entitled to require the capital market instruments to be secured, depending on the qualifications of the issuer or the issuance.

For the issuance of secured capital market instruments, the ownership of the assets subject to security must be transferred to the trustee or a limited usage right must be established over such assets for the benefit of the trustee. The sale of the secured capital market instrument cannot commence until this requirement is completed. Within the scope of the Communiqué, the capital market instruments that can be issued with security are exclusively (i) debt instruments and (ii) other capital market instruments that would be deemed appropriate by the Board.

Assets Subject to Security

Pursuant to the Communiqué, assets listed therein and other assets that would be deemed appropriate by the Board, including cash, stocks traded in the BIST Star Market, debt instruments issued by banks, investment fund participation shares, mortgage-backed securities and asset-backed securities, certain bank guarantee letters, insured real properties and insured, if suitable, commercial enterprises and tradesmen enterprises, receivables, all kinds of earnings and revenues are eligible for being used as a security for issuance. However, the Board can request the issuers to diversify and/or alter the assets subject to security. The Board can also request the reassessment of these assets and/or determine the amount of security.

As per the Communiqué, assets subject to security are segregated from the assets of the trustee and will be kept and monitored separately. Therefore, such assets cannot be seized, pledged, included in the bankruptcy estate or subject to any injunctive relief due to any debt of the trustee. 

Trust Management Agreement

The Communiqué requires that certain basic topics will be determined by the trust management agreement to be executed in writing by the trustee and the issuer before the relevant issuance. In this respect, the agreement must determine issues such as rights and obligations of the parties, matters related to the issuance, coverage of the receivables from the securities, party that would have the possession of the assets, costs, expenses, fee and payment principles.

Trustee and Its Independence

Certain rights and obligations of the trustee are regulated by the Communiqué. In this respect, in the event of default, the trustee is authorized and in charge of taking legal actions with respect to the assets that are subject to security, liquidating such assets, distribution of the proceeds to investors and returning the assets to the issuer in case of repayment or redemption. In accordance with the Communiqué, failure to pay the principal, interest and similar amounts of the capital market instruments within the period stipulated in the relevant prospectus or issuance certificate is deemed as an event of default.

The trustee is allowed to transfer its obligations, in part or in whole, provided that it is specifically regulated in the trust management agreement. As such, the trustee must supervise whether the delegated powers are fulfilled in accordance with the Communiqué and the agreement; and must obtain and preserve copies of the information and documents related to the transactions.

The Communiqué requires the trustee be independent. In this respect, the trustee and the issuer cannot be related parties. Certain agreements and transactions cannot be executed by and between (a) the issuer/the shareholder who has the management control over the issuer and (b) the trustee/the shareholder who has the management control over the trustee.

Trust Report, Public Disclosure Obligation

The trustee will prepare a report (i) every six months (ii) in the event of default (iii) in case the security is converted into cash (iv) in other cases requested by the Board. The trust report will be disclosed to the public via the Public Disclosure Platform (“KAP”) on the next business day following the signing date of the said trust report. Pursuant to the Communiqué, the trustee is required to make a material event disclosure via KAP in the event:

• that the trust management agreement is amended,
• that the independence of the trustee is impaired,
• that there is a decrease of 25% or more in the value of the assets subject to the security,
• that the issuer violates its non-payment obligations,
• of default of the issuer or other cases having the same result as an event of default,
• that the payment obligations are fulfilled through liquidation of the security, and 
• of other cases deemed necessary by the CMB.