Banking & Finance trends and developments
Turkey continues to be a pioneer in its region by achieving significant milestones in both project development and policy fronts to bring in landmark transportation, energy, healthcare and infrastructure projects, with particularly high deals in the fields of motorways, integrated health centres and airports.
The year 2020 saw a downturn in respect of the breadth and depth of the project numbers due to macroeconomic uncertainties arising from the global spread of COVID-19. However, despite all the global uncertainties, the local project financing market was still active with a number of large-scale refinancing and restructuring transactions, also with many local and international investors seeking to explore new liability management techniques and ways to tap liquidity into their projects from relatively less tested methods in the market.
The Turkish government also continued to take promising steps towards kicking off its long-awaited mega PPP projects in 2020, such as the first tender in respect of preliminary works for Canal Istanbul and other similar mega sovereign-backed projects on the agenda include capital intensive endeavours like the Grand Istanbul Tunnel Project, the Izmir Bay Crossing Bridge Project and the ongoing country-wide high-speed railway expansion and modernisation project.
Navigating through a variety of macroeconomic and geopolitical risks inevitably encouraged Turkish corporates to pursue interesting road maps with an increased appetite for exploring alternative funding methods such as structured bond issuances. Further, in line with the global trends that emerged as a result of COVID-19, there is also a significant increase in restructuring and refinancing deals concerning Turkish corporates' existing exposure under conventional loan facilities.
Current economic conditions and common hurdles on the road ahead
In 2020, Turkey has experienced a volatile economy with lots of ups and downs due to the country becoming increasingly susceptible to risks associated with its external vulnerabilities arising from a significant downfall in its hard currency reserves and a sharp depreciation in the value of the Turkish lira, which was further exacerbated with the external shocks brought by the COVID-19 crisis. However, with vaccination efforts gaining pace at a global scale and Turkey's adoption of prudent monetary and fiscal policies, there are still some silver linings appearing on the horizon indicating a soft landing for the Turkish economy.
Accordingly, the currency volatility risk (and if applicable, the accompanying hedging strategy) has been one of the key considerations of investors in respect of their new and ongoing investments in Turkey in 2020. Although some sectors offer attractive investment models that structurally minimise the local currency and consumer demand risk (through, for instance, minimum demand guarantees coupled with foreign currency exchange rate adjustment under motorway PPPs or availability payments in healthcare PPPs), the sharp weakening of the Turkish currency caused a build-up of the debt and borrowing costs for a notable number of projects that do not directly benefit from government guaranteed cash flow (such as standard residential real estate development projects), which visibly had an adverse effect on the bankability of those investments. In parallel with these developments, the prices of hedging with credit default swaps (CDS – an instrument to hedge the risk of default) against a default by a Turkish issuer, continue to see record highs according to recent market data, which invites most market players to explore liability management methods to various extents.
However, as is the case in other emerging markets, whilst it may take a while to recover from and remove social distancing measures and international travel bans, this is deemed unlikely to impact the positive effect on investor confidence from significantly lower mortality and hospitalisation figures by the end of 2020. Although there are non-negligible risks to this positive sentiment such as vaccine efficacy concerns, distribution bottlenecks or mutation risk, these do not appear to be likely to change the overall positive outlook for Turkish and other EM assets in 2021.
Highlights from legislative developments
Setting aside the pandemic-specific legislation which is adopted in a bid to mitigate the risks associated with the adverse impact of the COVID-19 crisis in various sectors, 2020 saw a number of interesting legislative developments, with a particular focus on banking and finance practice.
As a starting point, certain amendments were introduced to the Capital Market Law of Turkey (Law No. 6362) (the "CML") on 20 February 2020, which, amongst other things, allow investment institutions to establish special purpose PF Funds in order to provide long-term financing to projects that entail high capital costs in sectors such as infrastructure, public services, energy, industrials or high tech. Other important novelties brought by the amendment include significant improvements to the legal framework applicable to project bond issuances in Turkish capital markets and Turkish securitisation and debt funds, such as the introduction of a statutory regime concerning security agents acting in these sorts of transactions, which are expected to enable a wider investor base to provide financing directly to Turkish projects.
The Capital Markets Board (the "CMB") also took the first step in 2020 to follow the growing environmental social and governance ("ESG") trend among global regulators and adopted the Sustainability Principles Compliance Framework containing sustainability principles. While these principles are not of a binding nature, as of 2021 public companies will nonetheless need to disclose whether they choose to comply with them or not, and if not, the reasons for not doing so.
On 26 December 2020, some regulatory changes were adopted for easing the technical bankruptcy regime, aiming to bring a certain level of relief to Turkish corporates impacted by the uncertainty in the local and global markets.
Moreover, the new renewable energy resources support mechanism (Yenilenebilir Enerji Kaynakları Destekleme Mekanizması, commonly referred to as "YEKDEM") entered into force on 30 January 2021 which introduced the highly-anticipated feed-in tariff scheme that will apply to renewable energy power plants becoming operational between 1 July 2021 and 21 December 2025 (inclusive). The new YEKDEM scheme shifts the currency of previously US Dollar (USD)-denominated feed-in tariff and domestic components incentive premia payments to Turkish Lira (TRY), whilst still capping the price based on USD.
In addition, a draft omnibus law was submitted to the Turkish Parliament on 1 March 2021 (the "Draft Law") which proposes amendments to a number of laws, one significant amendment being in relation to the Law on the Realisation of Certain Investments and Services within the Framework of Build-Operate-Transfer Model (Law No. 3996) (the "BOT Law").
Banking & Finance outlook 2021
Turkey's medium-term economic and investment programmes include many plans for continuing the investments in large-scale infrastructure projects including motorway, railway and airport projects expected to be carried out in partnership with local and foreign private investors under a range of PPP, privatisation or concession models. Although the current political calendars do not foresee new tenders for healthcare PPP projects in the near term, active projects continue to attract attention from equity and debt investors around the world.
Due to COVID-19, the project financing market in Turkey was primarily busy with debt restructuring and refinancing transactions in 2020, and some tenders for large scale projects had to be postponed. Turkey's dynamic PPP market conditions also led to an increase in secondary debt market trading and securitisation transactions concerning PPP loan portfolios by banks and other debt investors. With vaccination efforts gaining pace at a global scale, social infrastructure projects (such as waste disposal PPPs) and innovative green energy projects are expected to continue to attract attention from investors in the near term in line with the global trend of incentivising sustainable finance solutions, along with many other mega projects like Canal Istanbul, reflecting the country's ambitious PPP targets.
In 2020, the Turkish loan market saw a trend of diversification of funding methods, increased appetite for liability management techniques and new debt restructuring tools – all aimed to bring a certain level of relief to Turkish corporates impacted by the uncertainty in the local and global markets.
On a side note, sustainable finance has been amongst the hot topics of the financial sector over the course of the 2020 and it is expected to be on the rise in line with the increasing willingness of the public and private sector players on adopting sustainable development goals. In this respect, the ongoing developments in sustainable finance in the global market may serve as a springboard for Turkey's early sustainability endeavours for putting in place a forward-looking regulatory environment driven by the ESG sustainability principles to increase the use of sustainable finance in the upcoming deals.