Cablegate: Turkey's Economy: Is the Deal On Pamuk and Yapi

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A


Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: As details of the Banking Board's January
31 deal with Cukurova Group emerge, it looks like bail-out of
the group. The deal reschedules Cukurova's $5 billion debt
to two banks (Pamuk and Yapi Kredi) on favorable terms,
without requiring the group to put any cash upfront.
Furthermore, the two banks sell their 20 percent of Turkcell
(Turkey's largest cellphone operator) back to the group in
exchange for more debt. IMF management has complained about
the deal to the government. IMF staff is not yet addressing
whether this deal prevents them from completing the Fourth
Review, given other issues left to resolve (especially on the
budget), but this is a likely conclusion, per the IMF resrep.
End Summary.

Where's the Money?

2. (SBU) On January 31, the Banking Regulation and
Supervision Board (BRSA) signed an agreement with the
Cukurova Group to resolve Cukurova's $5 billion debt to two
banks previously owned by Cukurova - Pamuk and Yapi Kredi.
These two banks together represent about 20 percent of
Turkish bank assets.

3. (SBU) On February 2, BRSA released the broad outlines of
the deal to the public, which we reported last week (reftel):
Cukurova will repay a $3 billion debt to Pamukbank over 15
years, with 3 years grace period on principal, at LIBOR plus
0.5 percent; Cukurova will repay a $2 billion debt to Yapi
Kredi over 9 years, 3 years grace on principal, at LIBOR plus
3.5 percent. Cukurova will pledge as collateral other group
assets, most importantly its shares in Turkcell (Turkey's
largest cellphone operator). Cukurova will not give cash up
front, but will give Yapi Kredi Bank 50 percent of the shares
of ATEL (a prepaid phone card business) in exchange for
forgiving about $300 million of its debt to Yapi (bringing
that debt down to $2 billion). Finally, Cukurova drops its
legal challenge to BRSA's take-over of the insolvent
Pamukbank, and agrees to sell its 45 percent stake in Yapi
Kredi in two years (down from an initial three years under
the draft protocol agreement in reftel).

4. (SBU) On February 3, BRSA Vice President Ceyla
Pazarbasioglu provided us additional information about the

-- The payment schedule for the $5 billion debt: Cukurova
will make payments twice a year, with annual payments of only
$145 million in the first two years (during the grace period
on principal payments), rising to $460 million in year 3 and
peaking at $887 million in year 8.

-- Collateral pledged to secure the $5 billion debt, most
importantly Cukurova's 42 percent stake in Turkcell: This 42
percent of Turkcell includes nearly 20 percent that was owned
by the two bank subsidiaries of Cukurova Pamuk and Yapi
Kredi. (Note: Turkcell's market valuation is currently about
$4 billion, down from a high of about $17 billion in 2000.)
The two banks agreed as part of this rescheduling to sell
their shares back to Cukurova, and add the sales price to the
existing debt owed by the holding company. The theory is
that Cukurova is best situated to maximize the income stream
from Turkcell, and thus use this income to pay back its bank
debts. (Comment; In effect, this constitutes another loan
from the banks to Cukurova. End Comment.)

-- Yapi Kredi's cash position: Rescheduling the $2 billion
debt improves Yapi's balance sheet (from insolvent to nearly
13 percent capital adequacy), but doesn't change its cash
position. Giving Yapi non-marketable shares in ATEL also
doesn't translate into cash. If Yapi's capital adequacy
falls below 10 percent, the deal calls for BRSA to inject
capital into the bank and dilute Cukurova's 45 percent

-- Management of Yapi Kredi. Though Cukurova will continue
owning its Yapi Kredi shares for two years (down from an
initial three years in the draft protocol agreement), BRSA
will have complete management control, and will select a
consulting firm to recommend replacements to both Yapi's
board and senior management. The goal is to replace the
Cukurova people who approved the lending to the holding
-- Criminal prosecution option. BRSA waives its right to
take Cukurova to bankruptcy court, but doesn't waive its
rights to prosecute Cukurova or owner Karamehmet for criminal

-- Asked if BRSA had looked at the option of taking over
Yapi Kredi Bank, Pazarbasioglu made the point that Cukurova
would block such a move in court, just as he had with
Pamukbank. Noone would buy either bank with Cukurova's legal
claim outstanding. The weakness of Turkey's legal system
dictated this kind of negotiated deal with Cukurova,
according to Pazarbasioglu.

5. (SBU) Comment: Pazarbasioglu is right about the Turkish
legal system, but that still doesn't explain why Cukurova
wasn't required to put any money into either bank upfront
(and why it acquires the two banks' shares of Turkcell in a
new loan), while its existing loan is rescheduled on
favorable terms. The deal requires two leaps of faith:
first, that Cukurova will gain the capacity to service $450
million plus in debt service within two years (which assumes
its telecom and high tech businesses recover); second, that
Cukurova's owner Karamehmet has the intention to repaying
this debt even if he does gain the capacity to do so (he
hasn't shown this intention previously). End Comment.

The IMF Reaction, and Press Leak

6. (SBU) IMF resrep and resident banking expert tell us this
deal presents serious problems, but they need to see the
complete details before reaching a conclusion. Given the
lack of progress over other issues (agreement on the 2003
budget and draft amendments to the Public Procurement Law
which would gut this reform), the Fund staff are not yet
taking the position that this deal would prevent a completion
of the Fourth Review. But they might well reach this
conclusion, per IMF resrep. IMF Europe Director Deppler
called BRSA Chairman Akcakoca to warn the BRSA on January 30
not to sign the Cukurova deal until the Fund had the chance
to study the details. IMF Managing Director Koehler followed
up with a letter to PM Gul, also faxed to Treasury and BRSA,
and then an angry phone call to Gul, asking the GOT to tell
BRSA not to sign the agreement.

7. (SBU) The Koehler letter was leaked to the press, and AK
Chairman Erdogan commented to the press that the IMF was
finally agreeing with AK that there were problems with the
independent regulatory boards, and that they need more
central government supervision. (Comment: This exchange has
further reduced the credibility and independence of the
BRSA.) End Comment.


8. (SBU) The Pamuk and Yapi Kredi deal is signed. Unlike
the budget and Public Procurement Law amendment impasses, it
would be difficult if not impossible for the GOT to walk it
back. The deal at a minimum is highly favorable to Cukurova,
and looks like a partial bail-out of the group (injection of
$2.7 billion of GOT paper into Pamuk, regulatory forbearance
and possible future injection into Yapi Kredi).

© Scoop Media

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