Av. Ali Yurtsever L.L.M
Corporate Bonds as a Method of Raising Funds
Within the complex structure of capital market instruments, issuing corporate bonds stands out as an efficient method to raise new funds for companies. Allowing companies swift access to new funds can support new hiring practices and benefit the economy, so the practice of issuing corporate bonds may allow the companies to make new investments to grow the company, which in turn can have a positive impact on supporting the employment market.
Although not as developed as it is in the EU or USA, an increasing number of companies are opting to issue corporate bonds in Turkey for the same purpose. However, the complex legal framework applicable to corporate bonds in Turkey can sometimes make this task quite difficult.
Legal Framework Applicable to Corporate Bonds
The main legislation applicable to corporate bonds in Turkey is the Capital Markets Law No. 6362 (CML). Although the CML does not directly reference “bonds” or “corporate bonds”, Article 3.1-o/2 of the CML defines “securities” as “debt instruments or debt instruments based on securitized assets and revenues as well as depository receipts related to these securities”.
The key term here is “debt instruments”, as a secondary regulation defines corporate bonds as types of debt instrument. Article 31 of the CML further establishes limits and restrictions on the issuance of debt instruments by stating the Capital Markets Board (the Board) is authorized to determine the threshold limits for debt instrument issuing.
Although Article 31 of the CML sets forth that issuing of debt instruments shall be subject to certain limits, it does not define the actual thresholds of these issue limits, but rather refers them to the Board. Prior to 2013, these issue limits were set forth by Board decisions, subject to Article 11 of Communique No. II-5.2. However, this Communique No. II-5.2 was annulled with the implementation of the Debt Instruments Communique No. VII-128.8 (‘the Communique’) in 2013, which established new rules for issue limits and new principles for debt instruments.
As briefly noted above, Article 3.1-c of the Communique sets an expansive definition for “debt instruments”, which includes “bonds” within the definition. This definition subsequently classifies bonds as debt instruments and allows for Article 31 of the CML to govern the issuance of corporate bonds.
Corporate Bond Issue Limits
Since corporate bonds are classified as debt instruments, and by virtue as capital markets instruments, they are heavily regulated in Turkey. Main regulations and restrictions are imposed by the provisions of the Communique and the Board acts as the regulator ensuring legal entities maintain compliance with the rules.
Considering the globalized economy and the accessibility of international markets, the Communique made sure to define the parameters of its applicability and enforceability to different types of bond issuance, both local and international.
Accordingly, the CML and the Communique set forth several restrictions and requirements for legal entities to issue corporate bonds. The main requirement is that any legal entity, either publicly traded or non-public, that wishes to issue a corporate bond, either locally or internationally, must first apply to the Board to obtain a bond issuance ceiling.
This issuance ceiling is also subject to separate rules, where a limit threshold is set, depending on the equity of the issuer, as mentioned above, which consequently means that the entity will be limited with the issue limit thresholds set forth at Article 9 of the Communique. This Article 9 states that the issue limit for corporate bonds of publicly traded partnerships cannot exceed five times its equity amount, whereas this limit is determined as three times the equity amount for non-public partnerships.
Exceptions to Issue Limits
Although the restriction on issue limits and issuance ceilings are quite strict, the Communique does provide exceptions to certain entities, allowing them to issue bonds without being subject to these issue limits. However, these exceptions are highly situational and quite narrow in scope, and as such, diligent care is required in determining whether a proposed issuer would qualify for any one of the exceptions and/or exemptions provided for within the legislation.
Corporate bonds issued by private companies/legal entities are classified as debt instruments and are therefore subject to the rules and regulations set forth at the Capital Markets Law and its secondary regulations. Since it is a regulated market, there are strict procedures and requirements for private companies in Turkey to be able to issue corporate bonds.
Considering these rules and regulations, as also briefly noted above, companies incorporated in Turkey will need to satisfy the equity requirements to be able to issue bonds, meaning that a company can only issue bonds within the issue limits, so either five times or three times its equity (for public and non-public companies respectively), unless it can benefit from one of the exceptions and/or exemptions provided for within the legislation.