New Communiqué on Project-Based Securities
Article 61/B of the Capital Market Law No. 6362 ("CML"), which outlines the legal framework for project finance funding and project-based securities ("PBS"), entered into force on February 20, 2020 by way of the amendments to CML. Further, the Communiqué on Project Based Securities No. III-61/B.1 ("Communiqué") has been published in the Official Gazette dated July 17, 2021 as part of the economic reform package of Turkey for the diversifying the tools for the financing of infrastructure projects through capital market instruments.
The Communiqué aims to address to the need for issuance of securities for funding the project finance funds established to realize long-term and capital-intensive projects such as transportation, infrastructure, energy, industry, technology, communication or health for the rendering of public services.
In general, the Communiqué regulates the establishment of a project finance fund, issuance of PBS, qualifications of the assets that can be included in the fund portfolio, functioning and permitted activities of the fund and usage of the proceeds acquired from the issuance of project-based securities.
The Fund and Founders
The establishment of the project finance funds is subject to the approval of the Capital Markets Board (“CMB”) and founder of the fund can be banks or broadly authorized intermediary institutions. Moreover, the project finance funds can only be established in Turkey and only for the purpose of issuing PBS. It is also mandatory that the title of the funds shall include the wording of “project finance fund” (proje finansman fonu).
The assets of the funds are separate from the assets of the founder, service provider and source institution (project company developing, constructing and operating the project). In addition, the assets and rights of the fund cannot be disposed of other than for the purposes of providing collateral, be subject to attachment, be included in a bankrupt’s estate or be subject to an interim injunction and interim attachment under no condition.
The Communiqué also sets forth various methods for improving the quality of the fund portfolio which includes the guaranties to be provided by founders or fund board in order to protect the rights of PBS holders.
It is regulated that the board of directors of the Fund will be appointed by the Founder. The board shall be composed of at least three directors and at least one of the directors is required to meet the independence criteria of CMB. The fund may also appoint a fund operations manager which can be a bank or a broadly authorized intermediary institution.
The bylaws of the funds are regulated as a contract between PBS holders, founder and the fund’s board, relating to the management and safekeeping of the fund portfolio on behalf of PBS holders on the basis of the principles of fiduciary ownership and in accordance with provisions applicable to proxy agreements.
Following the registration of the project finance fund, it is required to apply to CMB for the approval of the prospectus and issuance document relating to the issuance of PBS within six months, however, this duration may be extended by the CMB for another six months if there are reasonable grounds.
PBS may be issued in exchange of:
Income and other rights arising out of the project, to be taken over from the source institution into the fund portfolio, and/or
Receivables of banks and broadly authorized intermediary institutions arising from loans extended to finance projects.
It is possible to issue PBS (i) by way of public offering in Turkey, (ii) to qualified investors without public offering, (iii) through private placement provided that nominal value of a security is at least TRY 100,000 for private placement, as well as, (iv) in international markets. In case PBS will be subject to public offering, then, securities are required to be traded on stock exchange and relevant applications before the stock exchange shall be made.
PBS issued in Turkey are issued and kept in dematerialized form with the Central Registry Agency (Merkezi Kayıt Kuruluşu) (“CRA”) and information regarding the securities issued abroad and changes relating to the same shall be notified to CRA.
The income generated from the issuance of the PBS will be used for the financing of the project or repayment of the financing obtained as at the date of application for approval of the prospectus and issuance document. The proceeds will be transferred to the source institution for the financing of the project in multiple parts and according to the ratio of the project. The payments to the PBS holders, on the other hand, will be met from the cash inflows arising from the assets included in the fund portfolio.
The Communiqué also regulates that the registration fee payable during the application to the CMB will not be paid for the issuances to be made until 31 December 2022. This is also a clear indication that CMB aims to encourage the establishment of project funds and incentivizes PBS market.