New changes to Turkish decree limits FX loans and bans FX indexed loans

On 25 January 2018, the Turkish government announced amendments to the Decree No. 32 on the Protection of the Value of Turkish Currency (“Decree No. 32”), which severely limits the ability of legal entity residents in Turkey (“Turkish Entities”) to borrow money in foreign currency from abroad or within Turkey.

After going into effect on 2 May 2018, Decree No. 32 forbids residents in Turkey (whether individual or legal entity) from taking out foreign-currency indexed loans.

Foreign-currency denominated loans

As from 2 May 2018, Turkish Entities will be subject to restrictions and limitations on FX loans from abroad or from banks and financial institutions in Turkey. Individuals residing in Turkey will no longer be able to borrow money in foreign currency from banks and financial institutions in Turkey and previous restriction on obtaining FX loans by individuals residing in Turkey from abroad is still in place.

Once in force, Decree No. 32 will require that “no FX loans can be extended to a Turkish Entity unless such entity has foreign currency income or meet certain exceptions provided by the decree”. This is the decree’s general rule, and applies whether the FX loan is obtained from abroad or from a Turkish bank or financial institution. Decree No.32 defines foreign currency income as “income generated from export, transit trade and trade considered as export, foreign currency earning services and transactions as determined by the relevant legislation”.

As for exceptions to the general rule under Decree No. 32, it is possible to obtain an FX loan without having a foreign currency income if:

1. the borrower is public authority and institution, bank and financial leasing company, factoring company or financing company;
2. the loan balance of the borrowing Turkish Entity is USD 15 million or more at the time of the utilisation. In this case, loan balance is “the total unpaid portion of cash loans denominated in foreign currency utilised from abroad or in Turkey…”;
3. the FX loans are extended to finance an internationally announced domestic tender or a public private partnership project, to undertake a defence industry project approved by the Undersecretariat for Defence Industries, to acquire certain machines and devices (the details are in the decree) or for a transaction within the scope of an investment incentive certificate; or
4. the FX loan does not exceed the expected foreign exchange income of the Turkish Entity, as certified by such entity.

The relevant Ministry may further introduce new exceptions to the general rule.

Where the loan balance is below USD 15 million at the time of utilisation, a Turkish Entity can only obtain a new FX loan if the aggregate of the new loan and the existing loan balance does not exceed its foreign currency income for the last three financial years. A Turkish bank or financial institution (either acting as a lender or intermediary) must obtain a certified accountant’s report proving the foreign currency income of the borrowing Turkish Entity for the last three financial years.

If a Turkish bank or financial institution finds out that this threshold has been exceeded, it can either recall the excess FX loan (i.e. the amount exceeding the foreign currency income for the last three financial years), or convert the excess into a Turkish Lira-denominated loan.

In addition to the above exceptions, Turkish Entities can obtain an FX loan within Turkey if:

1. it is used to acquire certain machines and devices through a foreign currency denominated financial leasing transaction undertaken by a Turkish financial institution;
2. the amount of the FX loan to be extended by a Turkish bank or financial institution does not exceed the foreign currency deposits and/or the value of government or central bank securities issued by or under the surety of the members of the Organization for Economic Cooperation and Development (OECD), held as collateral by the branches of a Turkish bank.

Decree No.32 still requires any FX loan extended from abroad be utilised, and that payments (including the principal amount, interest, and fees and expenses) be made through banks in Turkey.

Foreign-currency indexed loans

Prior to the amendment, Turkish Entities were allowed to obtain foreign-currency indexed loans, if extended for commercial or professional purposes. Foreign-currency indexed loans were also allowed for individuals residing in Turkey, but under specific circumstances as they were provided under the Decree No.32.
The amendment completely restricts Turkish Entities, and individuals residing in Turkey from obtaining foreign-currency indexed loans from abroad or within Turkey.

Existing FX loans and foreign-currency indexed loans

As from 2 May 2018, any existing FX loans with a loan balance of less than USD 15 million:

1. cannot be renewed as an FX loan unless the reason for renewal falls within any of the exceptions listed above and
2. can only be renewed if the aggregate of the renewed FX loan and the existing loan balance does not exceed the foreign currency income of the borrowing Turkish Entity for the last three financial years.

Also, it will not be possible to renew foreign currency indexed loans. Such loans may be renewed as an FX loan, provided that the reason for renewal falls within any of the above exceptions, or the balance between the aggregate of the renewed FX loan and the existing loan balance, and the foreign currency income is met.
Lastly, we assume the “renewal” language used in Decree No. 32 refers to any re-financing of an existing loan or an amendment thereto, however, there is no clarity on this subject as of the date hereof.