Turkish debt law provides high recovery in PPPs

Turkey’s plan to compensate private investors in P3 projects isn't a guarantee of private debt, but offers a high level of principal recovery.

The Turkish government’s plan to compensate private investors in some public-private partnership (PPP) infrastructure projects gives greater certainty on the recovery of debt if projects default, rating agency Fitch Ratings says in a note.

The pledge by the government does not constitute a guarantee of private sector debt, but it does provide a fairly high level (85 percent) of principal recovery, which would be at the higher end of recovery rates usually experienced in the event of project company defaults, Fitch says.

It is also consistent with other jurisdictions where early-stage projects have tended to receive greater support, it adds.

Most PPP projects have mechanisms to compensate private equity holders and lenders for the loss of future income if a concession is ended before its maturity, with compensation levels varying depending on the reason for termination, Fitch says in the note.

Under Turkey’s debt assumption law, when a PPP concession is terminated due to a project company default, creditors will still experience some principal loss since the government will assume the project’s debt up to 85 percent of outstanding principal (plus associated derivatives liabilities, up to a cap), it says.

Instead of a cash payment, creditors would receive a Turkish government security. 

This is consistent with a key aim of PPP projects – namely, transferring risk to the private sector, the ratings agency says.

Replacing project company debt with government securities would increase Turkish sovereign debt liabilities, but its long-term contractual liability would fall by a greater amount due to the debt principal loss involved – availability-based PPP projects, such as schools, hospitals or roads, receive all or the vast majority of their revenues from the public sector, Fitch says in the note.