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Managing Liability in Turkey’s currency crisis: exploring alternative techniques
September 2018
The sharp weakening of the Turkish currency caused a build-up of the debt and borrowing costs of a notable number of Turkish corporates, including bond issuers. Considering Turkey’s reliance on offshore financing, the ongoing currency crisis may well turn into a debt crisis, especially for those issuers that are highly leveraged and particularly sensitive to depreciation of the Turkish Lira. Since early 2017, the Capital Markets Board of Turkey (the “CMB”) offers an investor-friendly environment by allowing a wide range of liability management practices, as well as alternative cost-efficient debt restructuring methods for issuers to adjust their capital structures by using balanced solutions.
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Issues such as changing economic and financial conditions, volatility in the emerging markets, or structural changes in the local market, may place a bond issuer under operational and financial stress. In such circumstances, the bonds being traded at significant discounts in the secondary market, or the redemption of outstanding bonds maturing in the near future, are possible outcomes. In addition, covenants under the terms and conditions of existing bonds may also become burdensome for an issuer. Liability management techniques provide a valuable tool for issuers who wish to mitigate their risk by restructuring balance sheet liabilities.
This note provides an overview of (i) liability management techniques used in international markets, (ii) the legal framework applicable to liability management activities under Turkish law, and (iii) potential tax issues that may arise in connection with liability management transactions under Turkish law.