Turkish bankers, officials discuss easing foreign purchases of bad debt

* Tens of billions of dollars of bad debt lingers from crisis

* Adjustment could remove last barrier to foreign sales

* Reluctant Turkish banks under pressure before year end

* Distressed debt traders, funds eager to buy NPLs

By Ebru Tuncay, Can Sezer and Jonathan Spicer

ISTANBUL, Nov 4 (Reuters) - Turkish regulators and bankers are meeting this week to try to hammer out a regulatory tweak that would make it easier for foreign investors to buy some of the tens of billions of dollars worth of soured loans left over from last year’s crisis.

According to five people familiar with the effort, the BDDK banking watchdog and Capital Markets Board aim to draft changes that could remove the last hurdle to Turkish banks selling non-performing loans (NPLs) to hungry foreign buyers.

The European Bank for Reconstruction and Development (EBRD) told Reuters it is hosting workshops in Istanbul this week for bankers and regulators to help identify what needs to be done to get closer to finally resolving the lingering NPL problem.

The effort to free up sales comes as a year-end government deadline approaches for Turkey’s big banks to reclassify as NPLs 46 billion lira ($8 billion) worth of debt, and to set aside loss reserves.

That has put pressure on reluctant banks to sell to foreign investors who have pressed for changes that would put them on a more equal footing with domestic firms, said the sources, many of whom requested anonymity to discuss the sensitive topic.

“The regulatory framework is very narrow and does not provide the room for free manoeuvre that deals such as this require,” said one of the people familiar with the matter. “The Capital Market Board and banking watchdog are currently working on a draft on this.”

The BDDK regulator and the Capital Markets Board were not immediately available to comment.

A tweak to ownership or insolvency regulations could bring a wave of pent-up demand from international funds that have expressed interest in the debt since last year’s crisis sliced 30% off the Turkish lira and tipped the economy into recession.

Banks, saddled with some $20 billion in loans that construction and energy companies could no longer service, have so far rebuffed outside buyers.

But the BDDK’s directive in September to recognise the NPLs could bring Turkish lenders to the table with distressed debt traders and others in a secondary loan market long dormant in the Middle East’s largest economy.

Some buyers could demand discounts, or haircuts, of up to 50% on some of the loans. Some say the market could be based on as much as $50 billion in distressed debt on Turkish banks’ balance sheets.

SC Lowy and Houlihan Lokey are among prospective foreign players scouting for business opportunities including debt purchases, Reuters reported on Friday.


Before any sales are done, Turkish regulations would need to be adjusted to allow firms that are headquartered outside of the country and have no prior shareholding to buy loans directly from Turkish banks, said two of the sources.

One said existing regulations “are far from satisfying the demands of distressed-asset investors,” some of whom want to more easily buy individual loans rather than bundles.

The EBRD is organising the series of meetings later this week “to present the findings of an analysis on how Turkey can ensure further resolution of NPLs,” said Olga Rosca, spokesperson for the region.

The aim of the workshops is to “agree an action plan for tweaking the regulation,” said a separate person familiar with them.

Any tweak would build on legislation in July that allowed banks to offload bad loans to outside funds or other vehicles and to log discounts, or haircuts, on their value.

“Turkey’s insolvency law still needs an overhaul beyond what was done in July, and it is in the process of being clarified so that it applies evenly to both foreign and domestic banks,” said a foreign banker.

Some banks could face tough decisions in the next two months over whether to sell or restructure the loans, which centre on Turkey’s construction sector that for years enjoyed cheap foreign credit and drove the country’s economic boom.

Various plans floated throughout the year to deal with the bad debt - including moving it to a separate fund-of-funds - were shelved, so the problem has lingered as one of the worst hangovers from the crisis.

Reuters reported in September that Ankara forced the banks to take losses on the $8 billion in NPLs to kick-start lending after losing patience with them, leaving bankers scrambling ahead of the year-end deadline.

Still, one person familiar with the legal obstacles to selling the NPLs said the government has hesitated to solve them because the arrival of foreign investors would diminish Turkish control over the debt.

Additional reporting by Tom Arnold in London Editing by Peter Graff