Cablegate: Cukurova Fails to Come Through Again

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.
This cable was coordinated with Embassy Ankara.

1. (SBU) Summary: Turkey's stock market was shaken Tuesday
as it absorbed news that the Cukurova Group had again missed
the deadline for completion of the first payment under its
early payment plan with the Turkish Savings Deposit Fund
(SDIF). The ISE-100 dropped 2.15 percent Tuesday as a
result, with Yapi Kredi Bank, which was slated to receive the
bulk of the 130 million USD payment, falling 9.5 percent
before trading in its shares was suspended. The apparent
failure of the high profile deal not only complicates the
future of Yapi Kredi Bank, which is owed 2 billion USD by the
group, but also that of Turkey's largest GSM operator,
Turkcell, whose shares are held in trust by the bank as
collateral for the loan. End Summary.

2. (SBU) Early Repayment: Pursuant to an early repayment
agreement concluded in July between the Cukurova group,
Banking Regulatory Board (BRSA), the SDIF, and Yapi Kredi
Bank, the group received a "haircut" of nearly 2 billion USD
in its outstanding debt to the bank and the SDIF (the latter
debt stems largely from the failure of Pamukbank, which the
group also owned) by shortening the repayment period from
2011 to 2006. From the outset much speculation surrounded
the identity of the mysterious foreign investors who were
providing the capital that would enable the Cukurova Group to
meet its 4 billion USD in outstanding obligations, with press
speculation earlier this month focusing on Central Asian and
other unspecified middlemen. Officially, the source of the
funds was the Northway Petroleum Corporation, an apparent
paper entity whose General Manager was added to the Turkcell
and Yapi Kredi boards earlier this fall.

3. (SBU) Jewel in the Crown: For Cukurova, the key enticement
to the deal was the ability to hold onto the 13 percent of
Turkcell shares that the bank holds in trust against the
group's outstanding debts. Under its original payment
protocol, the group can only hold onto the shares by paying 1
billion USD in cash by the end of January 2005. The new
protocol lengthened the deadline and provided for gradual
release of shares as Cukurova made its debt payments. The
company, which once made Mehmet Karamehmet(who controls
Cukurova) the wealthiest man in Turkey, is the group's
centerpiece, and with a leading position in Turkey and
growing interests throughout the region (including its recent
success in a GSM license tender in Iran, albeit one now
subject to review by the Iranian parliament), Turkcell
appears poised to maintain its market dominance and continue
to grow its overall valuation.

4. (SBU) Missed Deadline: Despite the doubts about the fund
providers, most brokerages hailed the deal this summer. One
typical comment, from HC Istanbul, characterized the outcome
as "positive for all the parties directly involved." Given
Cukurova's previously spotty record in loan repayment,
however, this endorsement came with the important caveat that
confidence in the plan would "gradually increase once
investors see a couple of regular monthly payments by
Cukurova." To date, however, no payments have been
registered. Instead, the payment deadline was first moved
from early September to late September, and ultimately to
October 11. The Group briefly claimed on October 11 that it
had made the necessary payment in the United States, but that
the Columbus Day holiday had prevented transfer of funds to
Turkey. That claim swiftly disappeared, however, as the
group proved unable to produce a deposit receipt and as the
funds failed to appear again on October 12.

5. (SBU) Next Steps: Still unclear is what the next step in
the process will be. The SDIF, which has less at stake, has
indicated that Cukurova can combine the first and second
payment, together with interest, and maintain the revised
protocol. Both Yapi Kredi Bank and the BRSA, however, have
said that failure to produce the money on October 12 rendered
the revised protocol null and void. Most critically for
Cukurova, that would enable Yapi Kredi to sell the Turkcell
shares it holds as early as the end of January. Already a
number of companies have expressed interest, including
Telia-Sonera, the company's minority Finnish partner, which
could assume majority control of the company by buying the
pledged shares.

6. (SBU) What Went Wrong: Cukurova Chairman Karamehmet is
notoriously tightlipped, but already there is speculation
that the group's unidentified fund providers balked at
contributing once they realized that the collateral they had
been promised fell short of the amount they were being asked
to provide. As evidence, some note that the fund providers
had asked that bank shares be provided to them as collateral
as well, something explicitly prohibited by the early
repayment agreement, since their eligibility to run a bank in
Turkey was open to question. In a statement late Thursday,
Cukurova claimed that the delay in payment was entirely the
fault of its lenders, as though this somehow absolved it of

7. (SBU) Yapi Kredi Still Healthy: Both the Chief Sworn
Auditor (bank inspector) of BRSA and Yapi Kredi executives
told econoffs that, despite the market concerns, Yapi Kredi
is still a sound institution. One YKB executive told us the
Turkcell shares held by YKB have appreciated in value from
$1.5 billion to $7-8 billion over the past 2.5 years.
Moreover, he opined that some groups such as Koc, Sabanci or
Telia Sonera would be very interested in paying a substantial
premium for these shares. The Sworn Auditor said YKB is
adequately capitalized and has a good image. A second YKB
executive worried about the effect of the uncertainty could
have on YKB's image, a concern similar to that voiced by BRSA
Chairman Bilgin in a meeting this summer.

8. (SBU) How the Cukurova-Yapi Kredi end game plays out is
important for several reasons. First and foremost, as BRSA
Chairman Bilgin has told us privately, Yapi Kredi is one of
Turkey's major banks, and problems at Yapi Kredi have
implications for the entire banking sector. YKB executives
have told us that BRSA stays in close, solicitous touch with
YKB management. This case is also important for the
credibility of the relatively new leadership of BRSA and
SDIF. Cukurova is only one of the owners of failed banks
that the regulators--backed by the GOT--have been pressuring
into finalizing deals to honor intervened banks' loans to
these owners' other companies. But Cukurova is the most
important of the remaining cases because of the large amounts
involved and Yapi Kredi's size and importance. If SDIF and
BRSA are perceived as insufficiently tough on Cukurova, this
could hamper the regulators' ability to enforce other deals
with failed bank owners. Finally, the Cukurova arrangement
raises questions about the source of the funds the group is
bringing in to make its payments. Though markets and even
regulators seem to be mainly focused on whether Cukurova can
come up with the money, if the source of the funding is not
clear, it would raise doubts about possible tax evasion or
money laundering. End Comment.

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