BRSA Incentivizing Energy Sector Debt Refinancing
Banking & Finance
The Turkish energy and banking sectors will receive a much needed bolster with the Banking Regulation and Supervision Authority’s (the “BRSA”) amendment to the loan performance criteria for loans extended to the energy sector by Turkish banks. The amendments to the Regulation on the Rules and Procedures for Banks to Determine Types of Loans and Other Receivables and Provisions to be Set Aside for Loans published in the Official Gazette No. 29677 on April 7, 2016 (the “Regulation”), introduced on August 5, 2016, parallel recent restructuring loan options offered to the tourism and maritime industries. The BRSA’s measure seeks to alleviate the energy sector’s ongoing struggle; the local weather conditions and global drop in energy prices has resulted in less available working capital and financing for energy companies. The energy sector is vital to the Turkish economy and key players in the sector have been drawing attention to the significant share of bank loans in their financing structure; the total debt of the energy sector to Turkish banks as of January 2016 is USD 50 billion.
What the regulation says
- Banks can restructure energy sector loans and other energy sector receivables (collectively “loan” “loans”) classified under Group 2 loans (Closely Monitored Loans and Other Receivables) at their own discretion up to two times before declaring them non-performing loans.
- Banks have discretion over determining the provisions to set aside, which may be lower than the ordinary rates of special provisions, for loans extended for the borrower’s general financing purposes (not directly related to energy investments) and classified under Group 3, Group 4 (Doubtful Loans and Other Receivables) and Group 5 (Loans and Other Receivables Considered Loss) loans. By setting aside lower provisions, banks can benefit from augmented reserves, which subsequently will be transformed into loans to further benefit from such fund.
- Moreover, if the financial distress of the energy sector borrower is due to a temporary lack of liquidity, banks can restructure Group 3, Group 4 and Group 5 loans extended for the borrower’s general financing purposes (not directly related to energy investments) at their own discretion up to three times (previously limited to two times), which further gives banks chance to reduce the default risk of the energy sector borrower.
- In order to reclassify the restructured Group 3, Group 4 and Group 5 loans, the banks must transfer these loans to the special account for loan facilities restructured and subject to amortization schedule, provided that repayment is not delayed and is adequately monitored in accordance with the regulations. Also, the loan facilities transferred to this special account may be reclassified under Group 2 loans, and subsequently Group 1 loans provided that such loans are duly repaid and have been monitored under Group 2 for six months, allowing banks to set less statutory provisions aside through reclassifying Group 3, Group 4, Group 5 loans under Group 2 or Group 1 loans.
- Information regarding the loan facilities restructured under these regulations must be publicly disclosed in the banks’ financial statements to meet the accountability and transparency criteria in the banking sector.
- The Regulation came into effect on August 5, 2016 and the banks can use the special classification options until December 31, 2016.
The BRSA has been active in balancing the exogenous shocks to the tourism and maritime sectors by amending the banks’ refinancing and non-performing loans rules, providing for decreasing costs for banks by enabling them to set aside special provisions at discretionary rates rather than the ordinary rates required by law. Given the current market conditions, the Turkish energy sector needed favorable financing options as well. With the introduction of refinancing options with diminished costs for banks, energy companies will have easier access to restructuring and refinancing tools which will help them balance their payment obligations.
Please contact us if you have questions about how these changes might affect your company.