Turkish Banks Propose Rules to Accelerate Loan Restructuring

(Bloomberg) -- Turkish banks have proposed rules to speed up the restructuring of company debt and allow lenders to avoid booking problematic credit as non-performing loans, a move that may help avoid defaults from piling up.

The program would apply to loans that exceed 50 million lira ($10.2 million) for borrowers going through temporary repayment difficulties, that are willing to repay their debts and would benefit from a restructuring, according to a framework of principles proposed by a bank industry group.

The proposal by the Banks Association of Turkey, seen by Bloomberg News, was dated July 24 and members had until July 30 to provide feedback. Regulators would have to approve the recommendation. TBB, as the industry group is known, represents 46 institutions, including some of the country's biggest local and international institutions.

The recommendations come as a 23 percent slide in the country's currency against the dollar hammers the ability of companies to repay their foreign debt to banks. Interest rate increases that have taken local borrowing costs to their highest level in almost a decade to contain a jump in inflation are also hindering debt repayments.

TBB declined to comment on what would be the first such codified rules.

Debt Resolution

TBB is suggesting that a loan be restructured if lenders with exposure to at least 75 percent of the total owed agree to do so. A committee of lenders could then order measures such as changes to shareholder structure and management, asset sales, spinoffs and capital injections, the proposals show. Restructurings would be resolved within 150 days of an agreement being reached, according to the document.

“We are skeptical if such a proposal would be in line with any commercial code and think that it would be unlikely to be accepted by regulators as is,” said Cagdas Dogan, a banking analyst with BGC Partners in Istanbul. The rationale for the initiative was understandable, given that restructurings tend to take longer than lenders like, forcing them to book loans as non-performing, he said.

In its quarterly inflation report published Tuesday, the Ankara-based central bank warned of a possible drop in loan supply in view of “the likelihood of financial difficulties that may be experienced by firms using foreign-exchange loans, due to fluctuations in financial markets.”

The increase in the number of “insolvent firms may affect the country's risk premium negatively,” it added.

Debt Pile

Companies have been renegotiating more than $20 billion in loans as the Turkish lira heads for its longest streak of monthly losses since an International Monetary Fund bailout in 2001.

The country's largest syndicated-loan default shows how restructurings can be delayed in Turkey. It took two years of talks before lenders that originally provided $4.75 billion to Otas, the majority owner of Turk Telekomunikasyon AS, agreed to set up a special purpose vehicle to resolve the matter.

Bereket Energy Group, an energy producer and distributor, is restructuring its foreign-currency loans with plans to sell some hydro power assets to prop up the plan, people with knowledge of the matter said July 5. Yildiz Holding AS, the producer of Godiva chocolates and McVitie's biscuits, has restructured outstanding short-term loans totaling $6.5 billion in two separate deals with almost a dozen of lenders in May.

“While corporates fully hedge their short-term foreign-exchange position, the long-term portion still poses a substantial risk, as is evident from recent big ticket restructurings,” JPMorgan Chase & Co. analysts Vishal Iyer and Konstantin Rozantsev said in a report July 24. International operations of large companies act as natural hedges against foreign-currency fluctuations and they “have strong pricing power, enabling them to pass through FX devaluation to consumers.”

Fitch Ratings, in a report on Turkish banks on Monday, said lenders' asset quality is at risk from exchange- and interest-rate pressures, “high restructured loans, single-name risks and exposure to risky sectors, for example, construction, energy and project finance.”