In late 2020, the Ministry of Treasury and Finance adopted certain amendments to the Capital Movements Circular to introduce a more relaxed regime for project sponsors considering foreign currency denominated loans to fulfil the equity contribution obligations and financing needs of Turkish public-private partnership (PPP) projects.
In 2018 certain amendments were introduced to the applicable legislation, including the Capital Movements Circular, to reduce the domestic foreign exchange exposure of Turkish companies and individuals. Under the 2018 amended rules, among other things, legal entities are prohibited from accessing foreign currency indexed loans and the ability to obtain foreign currency denominated loans is, as a general rule, limited to legal entities with foreign currency income. Legal entities with no foreign currency income may borrow in foreign currency under certain limited circumstances, including if the borrower is a public authority or a financial institution, has a minimum foreign currency loan balance of US$ 15m (or its equivalent in another foreign currency) or if the loan relates to a PPP project.
The above-mentioned PPP project exemption was, however, applicable only to project finance loans extended directly to project companies for the financing of PPP projects. It did not include foreign currency denominated borrowing by project sponsors, e.g. the shareholders of the project company, to fulfil their capital contribution obligations, especially to meet back-ended and standby equity injection requirements or to provide subordinated debt to the project company. The current amendments introduce new exemptions for these two purposes.
Borrowings for equity commitments
The foreign currency income requirement for PPP project sponsors to be able to utilize foreign currency denominated loans to fulfil their equity commitment obligations was removed on December 8, 2020. Foreign currency denominated equity bridge loans are now allowed to be extended by both domestic and international financiers to project sponsors so long as the loan proceeds are injected as equity to the project company.
\Procedurally, loan proceeds will be held in a blocked account by the borrower’s intermediary bank until the borrower provides a trade registry certificate confirming registration of the project company’s share capital increase from the foreign currency denominated loan.
Borrowings for financing
The December 21, 2020 amendments remove the foreign currency income requirement for PPP project sponsors to finance the PPP project, which is generally achieved through subordinated shareholder loans.
Procedurally, the following documents will be required to be presented to the borrower’s intermediary bank to utilize foreign currency denominated loans:
- a copy of the Trade Registry Gazette evidencing the incorporation of the project company;
- the original or notarized copy of the relevant pages of the project agreement showing the parties, subject, contract price, date and signatures section;
- a letter of confirmation from the relevant granting authority evidencing the contract price; and
- a written undertaking from the project sponsor confirming that the entire loan amount is used, will be used, is transferred or will be transferred, as the case may be, depending on the utilization date, to the project company for the financing of the PPP project.
Further, a loan utilized by project sponsors to finance a PPP project cannot exceed the total contract price specified in the project agreement and the sponsors are required to provide relevant documents (e.g. SWIFT messages, correspondence with the project company, etc.) evidencing that the loan is used solely for the purposes of financing the relevant PPP project.
We believe that these amendments will enable project sponsors to be able to tap into a broader financing market to finance PPP projects and fulfil their equity commitment obligations.