Market Spotlight: Turkey Restructuring

By Suzy Bibko, Content Marketing Manager, EMEA

What will drive distressed M&A activity the most in 2021 in Turkey and what will be the most important factor for success in that activity? At our recent webinar in partnership with Debtwire, Elena Shutova posed these questions to Ahmet Can Yakar, Kaan Kiziroğlu, and John Komninakidis, to find out their thoughts on what lies ahead for Turkish M&A.

Restructuring a reality
“Restructurings and acquisitions of distressed or insolvent businesses, including NPL transactions in the region, is a reality,” says Komninakidis. “In Q1 2021 in Turkey, there were 29 deals, valued at $1.4 million and representing 0.27% of global volume. In Q1 2020, there were 15 deals worth $0.86 billion. Right now, we have a growing wave of commercial and small and medium enterprises, and there is more potential now compared to the much higher ratios of more mature countries like Italy or Spain. Moreover, restructurings are something we see almost every day right now in Turkey. At Datasite, 70% of the deals that we facilitate are on the restructuring side. I think that will remain the key driver going forward, as there is no other way around right now.”

“We have the lowest NPL ratio in the Turkish banking sector: 3.5% if I’m not mistaken,” explains Can Yakar. “So, when we look at the deals, we of course see that restructuring is required. But the important thing is the provision rate of Turkish banks, especially commercial banks, especially the leading banks in Turkey. From 2018, the state provision rates have been increasing. What this means is that the banks need some kind of internal comfort to give to the shareholders, to the other related parties that are responsible. If you can have an alignment of the banks, you can have a forecast for the future.”

Liquidity and experience
And what about NPLs specifically? Will their levels in loan books increase, as they historically have in other countries on the heels of a crisis?

Kiziroğlu isn’t so sure that will happen in Turkey. “When you look at the policy of Turkish loan portfolios, 85% of the loan book is lively, meaning that it is paying interest and installments in a timely manner, 10% of the loan book is under service, but only 5% are NPLs,” he explains. “Turkey has been in a restructuring landscape for the last three years. When it began back in 2018, NPLs were expected to reach 20 plus percent of the loan book, like they did in Italy and Greece, in the past. But now, when we look at the loan book quality in Turkey, I don't know whether it will reach the 20 plus percent or not.”

Why? Two big reasons: liquidity and experience.

“Turkish banks are liquid,” stresses Kiziroğlu. “And Turkish bankers are very experienced: there has been a crisis in 1998, 2001, 2008, 2015, 2018, and now 2020. My generation has been living this volatility for their whole careers. As long as the operations of the company are profitable, you should get your money back or maximize your recovery.”

Kiziroğlu also points to a culture shift as a force behind distressed activity in Turkey. Like elsewhere, such deals are no longer seen as negative, including by the banks. “NPL investors should realize that the culture at banks has changed. Banks have started to do debt-to-equity swaps, they have some companies in their portfolio that they want to sell them to increase their recovery, or to partner with a financial partner or operating partner to increase their recovery.”

But it’s not just on the sell-side, says Komninakidis. “I think the establishment of a liquid loan sale market will be crucial because we always consider the sell-side or the companies that are doing restructuring or selling NPLs. But we need to think of the buy-side as well, we need to think of the investors. I think there’s a common ground for both market players, and southern and eastern Europe can play a key role.”