The recent amendments to the Capital Market Law No. 6302 (“Law“) (which we have elaborated on in our legal alert dated August 10, 2020) introduced the long-awaited “Security Agent, Trust” institution, widely used in capital markets abroad, to the Turkish capital market and to introduce an additional guarantee mechanism for investors.
The Capital Markets Board (“CMB“) presented the Draft Communiqué on the Procedures and Principles Regarding the Issuance of Security Backed Capital Market Instruments (“Draft Communiqué“) on September 10, 2020 for public opinion.
The Draft Communiqué introduces the procedures and principles regarding the collaterals, collateral management agreements and collateral managers for the issuance of capital market instruments.
Within the scope of the Draft Communiqué, the CMB can require a specific capital market instrument to be secured. In this respect, the CMB will examine the qualifications of the issuer or issuance and decide whether they require collateralization.
The Draft Communiqué aims to secure the fulfillment of the obligations arising from the capital markets instruments by issuing security backed capital market instruments. In order to protect investors’ assets subject to collateral, the assets are transferred to the collateral manager in the manner stipulated in the Draft Communiqué.
In accordance with the Draft Communiqué, the sale of the collateralized capital market instrument will be dependent on the transfer of the ownership of the assets subject to collateral or the establishment of limited rights in rem (pledge, mortgage, etc. depending on the type of the asset subject to collateral) on assets subject to collateral must be established in favor of the collateral manager in order for it to maintain and manage the collateral.
Assets Subject to Collateral
The following assets will be eligible for collateralizing capital markets instruments:
- Cash (Turkish lira/convertible currencies)
- Debt instruments issued by banks
- Mutual fund participation shares
- Receivables of banks and financing companies arising from consumer loans and commercial loans
- Receivables arising from leasing agreements
- Mortgage backed commercial loans and receivables of banks, leasing companies and financing companies
- Rights arising from derivatives
- Public companies’ shares listed on Borsa Istanbul Star Market
- Insured real properties
When the assets subject to collateral are transferred to the collateral manager, these must be no transfer restrictions for these assets. Also, In order to protect investors, valuation institutions licensed by the CMB will calculate the market value of the asset subject to collateral.
Event of Default
The collateral manager is authorized and in charge of taking legal remedies regarding the assets subject to collateral; converting the collateral into cash in order to meet the receivables from the collateral; distribution of the proceeds to investors; repaying the receivables; returning the assets to collateral in case of redemption; and protecting investors’ rights and interests.
The collateral manager is authorized to transfer the ownership of the assets subject to collateral; establish limited real rights on these assets; and enter into transactions before third parties in its name and on account of investors in transactions that will be required in this regard.
The Draft Communiqué stipulates the rules regarding the independence of the collateral manager:
- The collateral manager and the issuer cannot be related parties.
Certain agreements and transactions cannot be conducted between a shareholder who has management control of the issuer / a shareholder who has the management control of the collateral manager / or the collateral manager.
Public Disclosure and Records
The Draft Communiqué imposes certain public disclosure obligations on the collateral manager in order to inform investors about the status of the collaterals. In this context, the collateral manager must make a public disclosure when (i) there is change in the collateral agreement; (ii) its independence is affected; (iii) there is a decrease of 10% or more occur in the value of the assets subject to the collateral; (iv) the issuer defaults or violates its obligations arising from the default or its non-payment obligations; (v) when the receivables are covered from the collaterals; and (vi) in other cases deemed necessary by the CMB.
A special collateral book will be maintained by the collateral manager for the assets subject to collateral.
The Draft Communiqué provides flesh to the bone of the concept of security agent/trustee that the Law has brought and clarifies the legal implications thereof.