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Exclusive: Turkey's restructuring stalls as banks, government wrestle with bad debt

By Can Sezer, Ebru Tuncay, Ceyda Caglayan and Jonathan Spicer

By Can Sezer, Ebru Tuncay, Ceyda Caglayan and Jonathan Spicer

ISTANBUL (Reuters) - Efforts to clean up Turkey's bad debt have stalled after bankers rejected or put on hold initial plans, according to people familiar with the matter, frustrating the country’s attempts to leave behind the worst of last year's currency crisis.

Interviews with more than a dozen bankers, companyexecutives and advisers show that there has been little progressover the past three months with plans to help lenders to Turkey’s construction, real-estate and energy companies that can no longer afford roughly $20 billion of debt.

"Everything is just at a standstill," said a banker involvedin discussions between lenders, companies and governmentofficials, who asked not to be named. "The government andeveryone is in wait-and-see mode before they take any furtheraction, and people are looking to next year."

A key obstacle has been a lack of appetite by both thedebt-laden companies and their lenders to take drastic measuresto restructure the debt, in part because of hope that theeconomy will soon rebound and improve business. There has alsobeen scant direction from Ankara, the people say.

How quickly and credibly Turkey can execute the bailoutcould determine whether the Middle East's largest economyreturns to growth later this year, or risks a protractedrecession and another crisis that again roils other emergingmarkets, banking and industry officials say.

Turkish President Tayyip Erdogan’s government in April announced that off-balance-sheet funds would be created to help restructure energy and real-estate loans, but it has not presented a detailed strategy.

In a statement to Reuters Wednesday, the Turkish Treasury said banks "have not yet reached agreement on a fund model" but that the restructuring efforts continue.

The Treasury said further that it is up to the banks to decide on which solution they choose but that the government supports a fund structure that "will transfer our banks' problem loans to investors, provide entry of fresh resources to our financial system, and allow our banks the opportunity to focus on their primary duties of provision and management of credits."

"The important thing is for the problem to be solved permanently without being pushed back, and for credit channels to be opened again," the Treasury added.

Loan restructuring allows a company facing cash flowproblems to renegotiate delinquent debts with lenders, enablingit to continue operations and avoid potential bankruptcy.

The government has said it will not directly fund a bailout,but it does have the authority to shape restructuringprocedures. Lenders and indebted companies are looking for the state’s assistance in areas such as reducing restructuring costs through tax breaks and making it easier for foreign investors to acquire bad debt, three sources say.

A draft law currently being debated in parliament removes some obstacles to dealing with the bad debt by introducing taxexemptions for loan restructuring and legal protection forbankers.

"A model where the state provides funding for restructuring is not on our agenda at the moment," the Treasury said in its statement to Reuters.

CONSTRUCTION DEBT

Turkey's large construction and energy sectors, which had for years indulged in cheap foreign credit, continue to struggle to service billions of dollars of debt after sharp declines in the lira last year. A recent rebound in the currency – albeit modest in comparison to last year’s 30% slide – has removed some of the urgency but the size of the bad debt remains significant, a restructuring consultant said.

According to official figures, non-performing loans in the construction industry totaled 15 billion liras ($2.63 billion) as of May, but some industry specialists say the totalcould be closer to $10 billion.

The problems for construction companies are particularly acute because unlike energy providers – which continue to earn revenues from customers – they face a lack of cash flow while building projects are stalled, industry specialists say.

One key reason for the lack of progress in restructuring the construction sector’s bad debt is sharp disagreement over the value of partly built or vacant condominiums, offices and shopping malls across the country, leaving banks and companies unwilling to buy or sell assets, several of the people Reuters interviewed said. That led to the rejection in May by private banks of aproposal by state lender Ziraat Bank, which isleading restructuring talks between construction borrowers andcreditor banks, according to two people familiar with thematter.

Ziraat had proposed a plan to enable banks to move bad debtfrom their books into an off-balance-sheet vehicle, guaranteeingthem interest income in the near term and repayment of the loanswithin 10 years. Under the proposal, construction andreal-estate companies could spread interest payments over alonger period of time to avoid bankruptcy and gain more time tocomplete or sell projects.

Ziraat, Turkey's biggest bank, told Reuters it continues to work on solutions that will ease the burden on both financialinstitutions and construction companies. Another banker told Reuters that lenders and Treasuryofficials reconvened in Ankara earlier this month to discuss anew plan on property and collateral valuation, but that those talks were inconclusive. STEP FORWARD, STEP BACK

There had been some progress in the energy sector, where there is some $12 billion in bad loans according to private lender Garanti Bank.

In early May, Garanti Bank publicly outlined a strategy fordealing with bad energy-sector debt that involved banks takingover energy plants with a view to selling them down the roadwhen they became profitable. While that plan remains under consideration, banks are nowexploring alternatives to the plan outlined by Garanti in part because of a lack of agreement on how it would work, according to a senior banker involved in the talks.

Lenders involved in the talks now are zeroing in on aconsensus that some $2 billion to $3 billion of the bad energydebt will need to be converted to equity, meaning lenders willtake ownership of energy companies that owe them, two of thebankers told Reuters. Garanti officials told Reuters that work on the energy fund continues and a statement would be issued if progress was made. For now, there are few willing investors to buyenergy-company loans from the banks and the potential buyersthat do exist are looking for steep discounts – in someinstances looking to pay as little as 50 cents on the dollar,according to a banker involved in the talks.

As a result, most banks and companies would rather wait forgovernment guidance on any further regulatory changes orindications for improved terms "because the assumption is thatit’s going to be a better deal," another banker said.


($1 = 5.7044 liras)


(Writing by Jonathan Spicer; Editing by Cassell Bryan-Low)