Securitization of Financing for Wind Turbines in Turkey
By Onur Ulusakarya
ADMD Law Office, www.admdlaw.com Istanbul TURKEY
As demand for energy increases in Turkey, investments in this sector is boosting with the help of the government. Incentives focus on renewable energy resources for obvious efficiency and environmental considerations and specifically wind energy investments had been very popular due to vast resources of Turkish geography. Therefore the government is trying to optimize financing conditions to attract more investment in the field.
Although such target of the government is quite clear, the legal complexities are still experienced in the market since creditors are seeking better and less costly ways to secure their loans provided to energy investors in Turkey. The most commonly experienced financing model for wind energy investments is the financing of the wind turbines themselves of which securitization may be more complex then it seems.
Here I would like to summarize some available securitization alternatives for wind turbines that may be used for the purposes of a hypothetical where a wind turbine is financed by the creditor and the debtor will place such turbine in its energy production facilities.
Commercial Enterprise Pledges
Although there are certain and limited number of exceptions, regular pledge over movable properties such as machinery and equipment (that may include the turbines) is subject to a simple written agreement along with the delivery of the movable property (possession) to the borrower pledge right holder (creditor) as escrow (for safe keeping purposes). The only right that is obtained in return legally is the sale though legal execution methods and there is no way to keep the property as own for the borrower though the obligation to proof actual ownership shifts to the debtor if the property is re-sold. Regular movable pledges could be executed with minimum expenses, close to ignorable as effort to execute an agreement. However this pledge system is neither practical nor helpful in the targeted projects since it requires the transfer of the financed machinery, here wind turbines to the creditor as well. In order to find a solution for the delivery problem we refer to one of the exceptions of regular pledges above mentioned, thus called commercial enterprise pledge (‘CMP’).
A commercial enterprise is an organized work place registered in the Trade Registry on behalf of an individual or a commercial entity (company) where commercial or industrial activities are rendered. One company is entitled to have numerous commercial enterprises in different regions and accordingly may have more than one commercial enterprise. CMP is a pledge to be established with an agreement and registration of such agreement and the listed pledged property of the commercial enterprise to the Trade Registry. It has a specific law designating its details titled Commercial Enterprise Law No.1447 dated July 21, 1971 and also detailed regulations regarding CMP are also available. CMP’s could include the following properties of a commercial enterprise:
- Trade name and enterprise title;
- Machinery, equipment, tools and motorized vehicles currently available and designated for the purpose of the commercial enterprise;
- Patents, trademarks, models, designs and similar licenses which constitute industrial properties of the commercial enterprise.
The above is a restricted list and could not be widened to include any other properties of the commercial enterprises and a CMP could not exclude the trade name and enterprise title. Accordingly it is up to the parties’ discretion to include or exclude the other items listed and naturally wind turbines could be subjected to this regime. There could be more than one pledge registered on one commercial enterprise and for that reason they have a priority among each other subject to their date of registration.
In order to register a CMP to the Trade Registry, first a written agreement shall be finalized and be notarized at a Public Notary located at the district of the commercial enterprise. Following such stage, the notarized agreement shall be submitted to the Trade Registry and a CMP record is requested for registration. Only at the moment of registration, the CMP is deemed to be established. After the registration, the Trade Registry notifies any relevant institution, if necessary, such as the Turkish Patent Institute (for trademarks and patents) and to title registries, if the land and the building that the commercial enterprise is settled on is also owned by the owner of the commercial enterprise and since some machinery might also be subject to mortgage type collateral as well, as an extension of the real estate.
Accordingly a CMP provides the borrower a security right that could be executed through an execution procedure specifically designated for the purpose via Execution Offices of the Courts. Meaning that, once there is default, the CMP holder could apply to the Execution Offices for the sale of the assets included in the CMP and may recover its debt from the proceeds that are obtained by the Execution Offices after such public auction sales are realized. CMP holder also has the right to execute an additional immediate attachment (lien) over the properties of the commercial enterprise subject to CMP in order to create more pressure over the debtor before proceeding with the actual sales. However, any provision providing property rights over such pledged property in favor of the creditor are deemed invalid by law. Therefore, no forced assignment and/or transfer could be the issue either for CMP’s or for any other pledge or mortgage application in Turkey. This is a general ban over security rights established in Turkey, where the actual security right may not be enforced in a way to obtain property related rights (such as ownership or right of use) over the secured property.
It should also be noted that although there is no clear legal requirement, Energy Market Regulatory Authority (EMRA) requires a pre-notification of a CMP to be applicable to the assets of an energy facility.
Pledge of Movable Assets as Annexes of Real Estate
The movable properties such as machinery and equipment could also be made subject to a different type of real estate mortgage if they are deemed as annexed to the real estate (land or building subject to the type of real estate right registration) since their value is high and their attachment with the real estate is strong (perfectly easy to assume for a turbine in an electricity production facility).
This type of pledge is a very viable solution to the creditors since it provides collateral attached to the title registry which then provides 100% security over the movable property attached to the real estate and it is registered to the real estate’s title registration as a mortgage.
The main problem of a borrower for the purposes herein discussed regarding project financing for turbines is the ownership of the real estate property. If the land is owned by the treasury not the debtor (as experienced in the majority of the electricity production facilities) such transaction will not be possible to construct. It could only be realized for land and/or building registrations on behalf of the debtor which is rare to find.
A secondary obstacle for a mortgage-type pledge of a movable property is the cost and the execution difficulties. Cost is naturally higher since there is a title registry record in hand and the execution through sale of the real estate by Execution Offices with a public auction will again be the only enforcement method, which may even be harder and more costly to conclude, based on marketing considerations compared to a regular movable property pledge.
Pledge of Debtor’s Shares
Another available securitization method is the pledge over debtor company shares. This type of pledge provides the borrower again to execute sale through Execution Offices.
There are certain distinctions between two different types of capital company’s shares in Turkey. For joint stock companies (‘A.S.’) the company’s shares could be subjected to share certificates and the shares could be easily pledged either partially or totally with delivery of such certificates physically along with a written agreement. No specific registration is required and subject to the terms and conditions of the pledge arrangement the pledge may also be carried upon newly issued shares subject to capital increase.
For limited liable companies (‘LTD’) the share pledges have a different nature. There are no actual certificates representing the shares in LTD’s and any document that they are alleged to are only for simple but not legal representation. Accordingly, in order to pledge LTD shares, an actual registration of the pledge is required to be placed in the company share ledger along with the written and notarized agreement to be realized between the parties. Also for each partner of LTD, the pledge can not be divided into portions, meaning that the pledge for each partner’s shares shall be for all of those at once.
The pledge of company shares both in LTD and A.S. type companies do not provide the pledge holder any specific rights of vote for the company management unless it has any certain effect of minimizing the security collateral value of the shares.
Company share pledges are one of the most practical means of enforcing the debtor company to pay and might be one of the best methods of security with minimum costs. For pledges to be issued over company shares that hold EMRA issued licenses, EMRA requires prior written approval and therefore complicates the arrangement.
Pledges of Negotiable Instruments, Credits, & Bank Accounts
Pledges could be established as collateral to loans over the debtor’s any type of accrued or future credits from third parties and the negotiable instruments (such as checks, promissory notes, shares etc.) kept by the debtor.
This type of pledge is naturally dependent on the debtor’s actual financial status and may lose its practicality since the main credit of the electricity producer licensee is a government related credit from the State owned electricity conveyance or distribution companies and since such credits can not be made subject to any pledges without written consent from their State debtors’ therefore making it seemingly impractical for targeted projects.
A secondary type of claim or credit pledge is titled ‘account pledge’ and it could be established as collateral over the debtors’ bank accounts including the proceeds of such volume of assets kept in the bank by the debtor. This type of pledge is subject to an agreement between the borrower and the debtor and could be the easiest and less costly pledge as collateral. The down side is that it is also dependent on the current available accounts of the debtor and may only be subject to renewed deposits with renewed agreements.
Enforcement of License Transfer of Debtor
In order support the financing alternatives, the government also tried to regulate a very different method of securitization for energy deals. The second paragraph of the 5th Article of the Licensing Regulation for Electricity Market (‘Licensing Regulation’) published in the Official Gazette dated August 4, 2002 No.24836 issued by EMRA states that:
“The licenses can not be transferred under any circumstance. However, if the banks and/or finance institutions provide limited or irrevocable project financing to the licensee, as per the provisions of their loan agreements, the related banks and/or financial institutions may request from the Authority, together with their justification, that another legal entity be granted the related license provided that such legal entity assumes all obligations of the related licensee in line with the provisions of this Regulation. The legal entity proposed by such institutions shall be granted the related license on condition to comply with the obligations indicated herein.”
Theoretically, this paragraph of the Licensing Regulation is assuming that a loan agreement for a project financing to support the facilities of a license holder in Turkey shall include provisions of default and shall have a right constituted on behalf of the creditor to apply to EMRA with a new candidate to be provided a new license for the same site and facilities and accordingly to enforce a practical assignment of the project that is connected to the license and the loan to a new party that is to agree with the creditor. Therefore a sale-alike assignment of the project financing could be achieved to protect the creditors.
Unfortunately and although not impossible, this theoretical assumption has many legal obstacles concealed especially since there are different variations of energy investments that create facility related rights to licensees that may not be easily overthrown. Therefore if such securitization alternative is considered for an energy project, a more scrutinized legal assistance should be obtained beforehand.
Other than the above, Turkish legal system offers different types of other collateral securitization methods as well:
Sale of Movables by Reservation of Property Rights: This is a simple method that is not being executed commonly in Turkey due to its transactional costs. Mainly, this is a sale made with the reservation of the property rights of the movable property to a special registry in the Public Notary of the purchaser’s district. This registration allows the seller to claim for the property rights if the purchaser defaults. However, since the movable property could be easily sold to third parties with good will by the purchaser via simple possession assignment, thus the enforcement of the reserved property right becomes problematic for the seller, requiring a litigation action against the new owner and the purchaser. The cost exemptions are not applied since here the seller is not the creditor and if realized by the bank it may have certain implications closer to a leasing type financing. Therefore the registration cost may be higher than %0.12 per transaction due to tax, transaction fees and duties applicable.
Assignment of Credit: Although based on the idea of collateral that may be established with agreement, actually the assignment of a credit is not a pledge type transaction but a transfer of right in return of a consideration. However, it could be structured in a way that the debtor could arrange a credit (for instance from its’ parent company and may assign it to the borrower) thus without any direct effect on consolidated financial records of the debtor parties, the borrower may hold a certified right against the parent company. The credit to be assigned could be made subject to a promissory note or a similar negotiable instrument therefore making the execution less complicated and faster compared to any type of pledge.
Share Certificate Assignment (Escrow Type Transfer): This method is used by individual financers of the joint stock companies in Turkey. The share certificates of a joint stock company could be transferred by simple possession delivery and the transferee holder may execute a right of registration of the company ledger and/or may request voting rights based on the shares solely based on its discretion. This method might have been one of the best however, since transfers of shares of the companies with license is subject to the prior approval of EMRA, a reserve right based on a specific escrow type but actually enforceable transfer is not practical for energy related deals.
Others: Similar to any other system, Turkish legal environment allows for the establishment of collateral relationships to the most credible means of financing securities such as bank letter of guarantees, mortgages over valuable real estate, and co-signatories and/or third party commitments for loans (such as surety, guarantor, counter guarantees etc.). In addition all available security models may be duplicated for subsidiaries or parent companies of the borrowers.
Finally it could easily be stated that financing for energy investments could be secured by the use of various available methods. Naturally contacting diligent consultants locally may help to determine the best and less costly solution for the purposes.