Expert Spotlight on Turkey: Investors Expect Spike in Turkish Distressed NPL Activity After Dust Settles

by Dan Anghelache and Elena Shutova, Debtwire

The coronavirus pandemic has set the stage for a spike in activity relating to non-performing assets, according to market participants present at the recent Turkish Banking Sector webinar.

As of March 2021, only a minority of loans held by Turkish banks were classified as stage three, or non-performing loans. "Stage one loans represent around 85% of the aggregate value of loans, whilst stages two and three represent around 10% and 5%, respectively," said Ahmet Can Yakar, managing director of project finance at ICBC Turkey.

However, rules which came into effect during the COVID-19 pandemic have blurred the boundaries between the different stages.

"The methodology for assessing whether a loan is categorized as a non-performing loan (NPL) has changed, only catching loans which have been in default for over 180 days [compared to the previous rule of 90 days]," Kaan Kiziroğlu, managing partner at Servo Capital said.

The general sentiment is that the actual volume of non-performing assets is higher than public records recognize. "Everyone knows 5% is too low," added Kiziroğlu.

The effect of the forbearance measure (which allows banks to recognize stage three loans if 180 days have passed since default) was extended in December 2020 until 30 June 2021, while the BDDK (Turkey's Banking Regulation and Supervision Agency) mentioned the possibility of a further extension until September or possibly even until the end of 2021, according to reports.

Despite the change that this purportedly entails, some investors do not expect it to have a significant impact on the markets. "We will see a spike, however this will not be big," noted Kiziroğlu. The transition of loans from one classification to the other is highlighted as another trend likely to occur in the near future.

"There will definitely be migration from shopping, retail and hotel sectors, overall however, it won't be as high as everyone expects," Kiziroğlu continued. "There might be some loans migrating to NPLs but I'm not sure if it will reach the 20% mark," he added.

Kiziroğlu conceded however that the volume of migration towards stage three could be much higher should an external shock affect the Turkish market. Although there is still some debate over how loans are recognized on a bank's balance sheet, from a liquidity perspective banks are in a good position.

"Capital adequacy is one of the positive distinguishing features. When we look at the Basel standard minimum, it is set at 10%, and in Turkey it is 18% [as of March 2021]," noted Ahmet Can Yakar.

Some put the relative sturdiness of the Turkish banking system on its exposure to wider markets during the COVID-19 pandemic. "It was bad in the first six months, but after that Turkish commerce did well. China was closed but Turkey remained open," said Kiziroğlu.

NPL ratios
The introduction of new asset-ratio calculation rules in 2020 has had a significant effect on Turkish lenders' NPL ratios. Although the rules for calculating a bank's asset ratio were revised a number of times during 2020, as they last stood before being repealed later that year, deposit banks were required to lend at least 95 cents of each dollar deposited.

"Banks were incentivized to lend more, so loan portfolios increased to such an extent that NPL ratios went down," said Kiziroğlu.

However, even that requirement did not stop certain banks from curbing their lending activities. "In order to not lend to potentially distressed companies banks preferred to not take deposits. This was even the case if they were penalized by the banking authority," noted Kiziroğlu.

Going forward

Looking ahead, there is an expectation that NPL transaction volumes will step up.

"Based on market diligence we expect NPL activity to skyrocket in 2H21," said John Komninakidis, vice president of sales for the Middle East, Turkey, and Greece at Datasite.

"Shareholders are scared," added Kiziroğlu. "They don't want to be caught with 6x-10x net debt to EBITDA, so they are fine to sell non-operating assets or ask shareholders to diversify risks," he continued.

Banks have already taken a lead on exploiting these opportunities. "[Lenders] have already established their own private equity funds," noted Kiziroğlu. Companies may also view this moment as an opportunity to lower their net-debt-to-EBITDA ratios.

According to a poll taken during the webinar, an 80% majority believe that corporate carve-outs and divestitures will be a key driver in 2021 for distressed M&A activity. "Businesses have invested in non-core assets such as energy or real estate and now want to divest these assets," Kiziroğlu noted.