Structured Finance RATINGS Rating ABSs to be issued by ...Kalkınma ve Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu” based on a protocol between the SPV and the originators

Copyright © 2007 by JCR Eurasia Rating. 19 Mayıs Mah., 19 Mayıs Cad., Nova Baran Plaza No:4 Kat: 12 Şişli-İSTANBUL Telephone: +90(212)352.56.73 Fax: +90 (212) 352.56.75 Reproduction is prohibited except by permission. All rights reserved. All information has been obtained from sources JCR Eurasia Rating believes to be reliable. However, JCR Eurasia Rating does not guarantee the truth, accuracy and adequacy of this information. JCR Eurasia Rating ratings are objective and independent opinions as to the creditworthiness of a security and issuer and not to be considered a recommendation to buy, hold or sell any security or to

issue a loan. This rating report has been composed within the methodologies registered with and certified by the SPK (CMB-Capital Markets Board of Turkey), BDDK (BRSA-Banking Regulation and Supervision Agency) and internationally accepted rating principles and guidelines but is not covered by NRSRO regulations. http://www.jcrer.com.tr

Structured Finance

Rating Asset-Backed Securities

(Preliminary Report)

☒New ☐Update

Publishing Date: Mar.5, 2019

Head of Group:

Zeki M COKTAN [email protected] Chief Analyst:

Orkun INAN

[email protected]

+90 212 352 56 73

Türkiye Kalkınma ve Yatırım Bankası A.Ş.

İkinci Varlık Finansmanı Fonu

Type of

Asset-

Backed

Securities

PTCs - Pay

Through

Certificates

Founder Türkiye Kalkınma ve

Yatırım Bankası A.Ş.

Originators

Türkiye İş Bankası A.Ş.,

Akbank T.A.Ş., Yapı ve

Kredi Bankası A.Ş.

Servicer Türkiye Kalkınma ve


Special Purpose

Vehicle

Türkiye Kalkınma ve


İkinci Varlık Finansmanı

Fonu

Transaction

Administrator



Issuer



İkinci Varlık Finansmanı

Fonu

Registration Merkezi Kayıt Kuruluşu

A.Ş.

Transferor Türkiye Kalkınma ve


Risk Retainers

(pro rata)

Türkiye İş Bankası A.Ş.,

Akbank T.A.Ş., Yapı ve

Kredi Bankası A.Ş.

Insurance

Agencies None

Issue

Nominal Size TRY 1 bn at par

Indicative

Interest Rate 17.65% APY

Payment

Frequency-

Principal

At maturity

Payment

Frequency-

Coupon

Quarterly (to be

calculated on 30/360 day-

count convention)

Tenor /Final

Maturity 60 months

Estimated Issue

Date 15.03.2019

Weighted

Average Life 1,434 Days

RATINGS

ABSs to be issued by “Türkiye Kalkınma ve Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu”

Long Term

Short Term

International Local Currency BBB- A-3

National Note AAA (Trk) A-1+ (Trk)

Sover

eign

*

Foreign Currency BBB- -

Local Currency BBB- -

Outlook FC Negative -

LC Negative -

*Assigned by Japan Credit Rating Agency, JCR on November 27, 2018

Overview

“Türkiye Kalkınma ve Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu” (hereinafter referred as Asset Finance Fund, the Fund or SPV) is established for an infinite term by Türkiye Kalkınma ve Yatırım Bankası A.Ş. to issue asset-backed securities.

Approved asset amount of the Fund is up to TRY 1 billion and its originators are Türkiye İş Bankası A.Ş., Akbank T.A.Ş. and Yapı ve Kredi Bankası A.Ş.. The Fund’s estate will be Covered Bonds to be issued by the originators. The underlying assets of the CBs are the cover pool consisting of installment-based residential mortgage loans extended by the originators for property purchases.

Planned to be issued at par by a pay-through mechanism and without any seniority thereamong, ABSs (asset-backed securities) will be sold on the nominal values to local qualified investors or investors domiciled abroad by invitation or private placement without any public offering.

Strengths Constraints • Dual recourse facilities within the covered bond

issuances

• Existence of numerous strict asset eligibility criteria strengthening appropriateness level of assets in cover pool of CBs and Fund’s estate

• High level of global integration of the originator banks in terms of liquidity, capital adequacy and management

• Status of the Founder as a state bank contributing to service quality and transparency

• Homogeneous and multitudinous profile of obligors in the cover pool

• Low level of cover pool delinquencies together with overcollateralization ratios well above & LtV ratios well below legal and contractual ones

• An immune and liquid portfolio of the CBs with matching terms and few conditionalities

• Facility of monthly replacement of cover pools to be provided by the originators

• Regulatory requirement of 5% risk retention mechanism serving as an additional support component for the ABS investors

• Current local regulations in Turkey affording for asset isolation and bankruptcy remoteness

• Fund’s initial assets not including CBs through any true sale or transfer of assets

• Limited excess spread level

• Symmetrical risk profiles across the issue impeding investor diversity regarding absence of waterfall structures

• Detailed risk assessment of the founder falling outside the scope of analyses

• Absence of any guarantor mechanisms

• Growing uncertainties through aggravating geopolitical tension & persisting adversities on debt-servicing

mailto:[email protected]

mailto:[email protected]

SPV-Special Purpose Vehicle

Türkiye Kalkınma ve Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu 2

I. Rating Rationale

This preliminary rating report has been based on the

information, documents and assumptions provided

by the founder of the Asset Finance Fund and the

originators prior to the issue and does not reflect

final ratings as it will become definitive as the final

rating report provided that the planned issue be

materialized in line with the ratiocinations in this

report. It should be noted by the investors that JCR

Eurasia Rating will reassess undergoing amendments

in the terms of the issue and to the agreements with

their effects thereon and final ratings to be assigned

will be conditional on the receipt of appropriate

documentation.

The primary documents having been analyzed during

this rating assignment process among the other ones

related to all of the parties to the issue were a draft of

intermediation agreement, service agreement, a draft

of asset transfer protocol, internal regulations of the

Fund, issue certificate, trade registry of the Fund,

cover pool procedures, past investor reports, past

statutory tests, and cover pool compositions.

The rating action by JCR Eurasia Rating has been

aimed at the asset-backed securities issue per se

within the framework of the structured finance

methodology. In addition to performance of analyses

by JCR-ER of transaction structure covering such

topics as credit enhancement mechanisms, payment

priority, triggers & thresholds, eligibility criteria,

additional covenants, legal structure, bankruptcy

remoteness, commingling level; collateral

composition and pool characteristics; historical

performance data; risk exposures and mitigants

therefor; cash flow mechanics and stressing risks

thereon, such macroeconomic risks as the general

outlook of the economy and market variables were

analyzed as well within the content of sovereign risks.

Within the counterparty risk analysis, analyses of all

parties, particularly of the originators, were

performed. Planned transaction structures and

documents regarding both ABSs and Covered Bonds

as well were also evaluated in terms of legal risks.

ABSs, of which “Türkiye Kalkınma ve Yatırım

Bankası A.Ş.” is founder and “Türkiye İş Bankası

A.Ş.”, “Akbank T.A.Ş.” and “Yapı ve Kredi Bankası

A.Ş.” are originators, to be issued with a pay-through

mechanism by “Türkiye Kalkınma ve Yatırım

Bankası A.Ş. İkinci Varlık Finansmanı Fonu” are the

securities secured by the assets in the Fund portfolio.

This issue is based on covered bonds issuances by

the 3 originator banks on cover pools consisting of

installments of mortgage loans.

The assets to be transformed into the Fund estate

through a protocol between the parties at repayment

dates will be isolated and bankruptcy-remote, to

which any future recourse action is limited. Assets of

“Türkiye Kalkınma ve Yatırım Bankası A.Ş. İkinci

Varlık Finansmanı Fonu” cannot be pledged,

collateralized, confiscated for the purpose of

collection of public receivables, subject to

preliminary injunction or included within bankruptcy

estate for any purpose whatsoever until the ABSs are

redeemed.

The probability of default risk for payments is

reduced mainly through dual recourse facilities

provided for holders of the prospective covered

bonds: (i) to the issuer irrespective of the

performance of the cover assets; and (ii) against the

cover assets upon the insolvency of the issuer as

referred in the definition in the Article 4 of the CMB Communiqué Serial: III, No: 59.1 named “Covered

Bonds”: “Covered Bond is a capital market instrument

qualified as a debt instrument, issued within the scope of the

issuer’s general liability and collateralized by cover assets”.

The whole ABS structure is further supported by the

homogeneous structure and multitudinous profile of

the mortgage loans which constitute the cover pool

content, the low level of risk concentrations, strict

eligibility criteria by the regulations and additional



ones by the originators, periodical verification of

immunity of cover pools through several statutory

tests and the high collectability through involvement

of several parties in the servicer statuses.

Homogeneity of the assets in the cover pool creates a

symmetry in the risks that CB repayments denote and

hence that of expected returns. Although assets of

the Fund ostensibly lack granularity regarding limited

numbers, structure of the assets per se mitigates this

adversity. On the other hand, symmetrical risk

profiles across the structure of the ABSs impede

investor diversity regarding absence of waterfall

structures.

Existence of such features within the cover pool

structure as: (i) low level of historical and expected

delinquencies, (ii) historical (and expected)

overcollateralization ratios well above legal coverage

and contractual O/C ratios, (iii) Loan-to-Value ratios

well below legal limits, (iv) support by substitute

assets, and (v) first lien mortgages is assessed to

additionally bolster the ABS structure and boost the

credit quality of the Fund’s estate as well.

The originator banks with strong market presence

have long business track records and operate in a

strictly regulated environment.

Delinquencies are expected to be reduced through

sufficiency of the originators and servicers in terms

of infrastructure and human resources together with

strict measures in the relevant regulations as well as

an effective internal structuring of the SPV to

contribute to the performance of its obligations

toward ABS investors. Based on these grounds, the

ABSs to be issued by “Türkiye Kalkınma ve Yatırım

Bankası A.Ş. İkinci Varlık Finansmanı Fonu” were

assessed within a low risk category, and were rated as

“AAA (Trk) on the National scale and “BBB-“ on

International Local Currency scale, currently as

capped at the country ceiling of the Turkish

sovereign and may remain susceptible to future rating

actions therein regarding the fact that the underlying

assets are domiciled in Turkey.

II. Type of Asset-Backed Securities to be Issued

& Transaction Structure

ABSs to be issued are of a type of pay-through

certificates. The originators will bear obligation for

covered bonds in the principal amount of TRY 1

billion. The mortgage loan installments will be

maintained within the assets of the originators and

the CBs will be transferred to the SPV “Türkiye

Kalkınma ve Yatırım Bankası A.Ş. İkinci Varlık

Finansmanı Fonu” based on a protocol between the

SPV and the originators at dates of the ABS

repayments. The outline of the ABS transaction

structure is shown in the diagram below:

As ownership of the assets in the portfolio belonging

to the investors, securities will be issued based on

assets with similar attributes in terms of maturity and

interest rate.

Asset-backed securities, based on the covered bonds

to be issued, are planned to be issued at par in the

nominal value of up to TRY 1 billion on March 15,

2019 and will be encashed by “Türkiye Kalkınma ve

Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu”

and quoted on the Borsa Istanbul (BIST), bearing an

indicative interest rate of 17.65% APY, whereby the

coupons are to be calculated on 30/360 day-count

convention. Details of the securities are shown in the

following table:



Estimated Date of Issue: 15.03.2019

Asset-Backed Securities to be Issued at Par

Cash Flow Item Date

Amount TRY

(coupons* based on indicative

interest rates) Days

Issue 15.03.2019 1,000,000,000 -

Coupon 15.06.2019 -41,472,922 92

Coupon 15.09.2019 -41,472,922 184

Coupon 15.12.2019 -41,472,922 275

Coupon 15.03.2020 -41,472,922 366

Coupon 15.06.2020 -41,472,922 458

Coupon 15.09.2020 -41,472,922 550

Coupon 15.12.2020 -41,472,922 641

Coupon 15.03.2021 -41,472,922 731

Coupon 15.06.2021 -41,472,922 823

Coupon 15.09.2021 -41,472,922 915

Coupon 15.12.2021 -41,472,922 1,006

Coupon 15.03.2022 -41,472,922 1,096

Coupon 15.06.2022 -41,472,922 1,188

Coupon 15.09.2022 -41,472,922 1,280

Coupon 15.12.2022 -41,472,922 1,371

Coupon 15.03.2023 -41,472,922 1,461

Coupon 15.06.2023 -41,472,922 1,553

Coupon 15.09.2023 -41,472,922 1,645

Coupon 15.12.2023 -41,472,922 1,736

Coupon+Redemption 15.03.2024 -1,041,472,922 1,827

* coupons to be calculated on 30/360 day-count convention

1,434

(WEIGHTED AVERAGE DAYS)

The weighted average maturity of the securities is

1,434 days. Cash flow matching of dates of the

covered bonds in the Fund’s estate and maturity

dates of nominal values of the ABSs to be disbursed

to investors is attained throughout the structure.

III. Main Parties of the Securitization

a) Originators

“Türkiye İş Bankası A.Ş.”, “Akbank T.A.Ş.” and

“Yapı ve Kredi Bankası A.Ş.” will be the originators

throughout this ABS process by transferring the CBs

to the Fund’s estate.

As the originators during this ABS process, the 3

banks will redeem the assets for substitution in the

event that the assets to be transferred to the SPV are

subsequently determined to violate appropriate

qualifications stated in the Fund Rules. Türkiye

Kalkınma ve Yatırım Bankası A.Ş. will not bear any

obligation for mortgage loan installments, which are

subject to the covered bond issuances by the

originators. The covered bonds will be transferred to

the SPV “Türkiye Kalkınma ve Yatırım Bankası A.Ş.

İkinci Varlık Finansmanı Fonu” at dates of the ABS

repayments based on a protocol between the SPV

and the originators.

b) Special Purpose Vehicle

SPVs in Turkey are identified under the name “Asset

Finance Fund” in the relevant legislation. Asset

finance fund is a separate property which is formed

with the proceeds of ABSs issued, in accordance with

the principle of fiduciary ownership. Funds must be

established within the borders of the Republic of

Turkey without any legal entity. Fund estate is

separate from those of the Founder, servicer and

other originators. In the ABS issue process based on

the assets of the originators, “Türkiye Kalkınma ve

Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu”

has a SPV status. The Fund’s establishment was

announced in the Trade Registry dated March 1,

2019 and no: 9778 for issuance of ABSs.

Sufficient location, technical facilities, organizational

structure and human resources have been designated

for the management of assets in the Fund portfolio

and ABS. In this respect, the founding bank

established a Fund board of 3 members. Mr. Erkan

KİLİMCİ, Mr. Metin ÇINAR and Mr. Hakan

KİLDOKUM were assigned as Fund board members

and Mr. Metin YILMAZ as Fund auditor. In

addition, Türkiye Kalkınma ve Yatırım Bankası A.Ş.

was determined as operations manager (transaction

administrator).

Board members meet conditions of university

graduation with at least five years of experience in

banking or capital markets fields and dignified

characteristics required to become a board member.



Additionally, at least one of them holds a “Capital

Market Activities Advanced Level License” and

“Derivative Instruments License” in accordance with

the Board licensing regulations.


Varlık Finansmanı Fonu”, as a SPV, set up internal

control system procedures, bookkeeping, the

organization for documentation and safekeeping of

the information and documents. In implementation

phase, JCR-ER has the opinion that these systems

will function effectively.

It is decided in the Fund regulations that “Türkiye


Finansmanı Fonu” can utilize loan only for cash

management purposes on behalf and account of the

Fund up to 1% of its total assets.

c) Risk Retainers

Within the content of the credit risk retention

mechanism required by the relevant current

regulations, the originators, in a risk retainer status,

will purchase 5% of the securities pro rata to be

issued by “Türkiye Kalkınma ve Yatırım Bankası A.Ş.

İkinci Varlık Finansmanı Fonu”.

It is believed that the originator banks have the

relevant and adequate financial strength and

reputation with respect to functionality and

performance of this mechanism.

d) Founder & Transaction Administrator &

Servicer

Cash flows and transfers of investors regarding the


Bankası A.Ş. İkinci Varlık Finansmanı Fonu” will be

implemented by Türkiye Kalkınma ve Yatırım

Bankası A.Ş.. Therefore, Türkiye Kalkınma ve

Yatırım Bankası A.Ş. becomes a transaction

administrator.

Türkiye Kalkınma ve Yatırım Bankası A.Ş. is also the

founder of the SPV. JCR Eurasia has not rated

Türkiye Kalkınma ve Yatırım Bankası A.Ş. yet and

detailed risk assessment of the founder falls outside

the scope of analyses.

Türkiye Kalkınma ve Yatırım Bankası A.Ş. was

established on 27 November 1975 as a related

institution of the Ministry of Trade and Technology

with the legal title of “Devlet Sanayi ve İşçi Yatırım

Bankası A.Ş.”. Some adjustments were made on the

status of the Bank on 14 November 1983.

On 15 July 1988, its legal title was changed to

Türkiye Kalkınma Bankası A.Ş. by being associated

to the Prime Ministry in parallel with the

developments in its activities. The Bank had become

a development and investment bank that provides

financing support to companies in tourism sector as

well as trade sector by taking over T.C. Turizm

Bankası A.Ş. with all of its assets and liabilities with

the decision of Supreme Planning Council dated 20

January 1989. Also, with the Decree Law dated 12

February 1990, some of the articles related to the

Bank status were changed.

With the Law dated 14 October 1999 and numbered

4456, Decree Law numbered 13, 165, 329 and 401

were revoked and the establishment and operating

principles of the Bank were rearranged.

The Law numbered 7147 on restructuring of the

Bank was published in the Official Gazette dated 24

October 2018 and no. 30575 and its legal title was

changed to Türkiye Kalkınma ve Yatırım Bankası

A.Ş..

99.08% of the Bank’s shares are owned by the Under

Secretariat of Treasury as of 31 December 2018.

The Bank provides loans to enterprises having the

status of “Incorporated Company” for the purposes

of profitability and productivity of the development

of Turkey, to finance and give operational support by



participating to enterprises, to direct domestic and

foreign savings into development investments, to

assist in the development of capital markets, to

finance domestic, foreign and international joint

ventures and carry out all kinds of development and

investment banking activities.

The Bank increased its total assets by 74.9% during

FY2018 over the previous year to TRY15,715 million

and its loan portfolio reached TRY13,642 million.

Its shareholders’ equity grew by 12.8% to reach

TRY1,417 million while exhibiting 9% SHE/Total

Assets and 14.2% Capital Adequacy ratio.

With regard to fulfilling its servicer status, Türkiye

Kalkınma ve Yatırım Bankası A.Ş. has the adequate

experience, human resources, and management and

information technologies to perform daily managerial

duties of the assets in the SPV’s portfolio.

With regard to the service agreement between the

Fund Board and Türkiye Kalkınma ve Yatırım

Bankası A.Ş., the latter will pursue repayments of the

covered bonds in due time and transfer these funds

to the accounts of the Fund, perform all

administrative duties including insurance, tax, etc.,

supervise and monitor the originators’ solvencies and

make the necessary notifications when required,

report all activities to the Fund Board, which might

pertain to the cash flows, offer services of IT, legal

advisory, accounting, operations, custody and in

other managerial fields to the Fund, invest the

balances in the Fund’s accounts in line with

instructions by the Fund, and perform other duties to

be assigned by capital market legislation and SPK

(CMB - Capital Markets Board of Turkey)

regulations.

e) Registration


Bankası A.Ş. İkinci Varlık Finansmanı Fonu” are to

be registered under MKK (Central Registry Agency).

IV. Type of Assets in the Receivable

Pool/Collateral

a) Credit Quality of the Securitized Assets

The covered bonds to be issued by the 3 originator

banks (“Türkiye İş Bankası A.Ş.”, “Akbank T.A.Ş.”

and “Yapı ve Kredi Bankası A.Ş.”) will constitute the

Fund’s estate – not initially but at dates of the ABS

repayments based on a protocol between the SPV

and the originators.

The estimated covered bond issuances together with

the estimated cover pools are shown in table below:

Breakdown of the CBs & Cover Pools

Originator Cover Pools

TRY *

CB Outstanding

TRY

CB to be

Issued TRY

Türkiye İş Bankası A.Ş. 8,094,029,779 - 400,000,000

Akbank T.A.Ş. 4,473,130,820 1,593,366,000 200,000,000

Yapı ve Kredi Bankası A.Ş.T.A.O.

6,960,730,127 1,167,800,000 400,000,000

TOTAL 19,527,890,726 2,761,166,000 1,000,000,000

Assets of the Fund cannot be pledged, collateralized,

confiscated even for the purpose of collection of

public receivables, subject to preliminary injunction

and included within bankruptcy estate for any

purpose whatsoever until the ABSs are redeemed.

In cases where the Fund experiences repayment

difficulties, the Capital Markets Board may request

that the members of the Fund board be changed. In

cases where repayment difficulties continue, the

board may decide for the Fund to be transferred to

another founder. In such cases, where the first

founder has provided the guarantee, the founder will

still be obliged to pay the portion of the ABS which

cannot be met by the Fund estate in a timely and

precise manner.

Regarding the fact that underlying assets of the

covered bonds (the latter constituting the assets of

the Fund) are mortgage loans for real estate located

in Turkey, certain conditions set out in the relevant

regulation has been assessed to form an integral part

of the asset quality evaluations.



The regulation defines: institutions entitled to issue

covered bonds; issuance limits; application process;

types of cover assets; eligibility criteria to be met by

cover assets; obligation to keep a cover register to

monitor the cover assets in separate special accounts;

protection of cover assets; cover matching principles;

appointment, duties and power of cover monitor

through a cover monitor agreement; and measures to

be taken in case of violation of cover matching

principles and failure of issuer to fulfil its obligations.

Apart from the strict eligibility criteria, the regulation

also sets out statutory tests under the heading of

cover matching principles: (i) Nominal Value

Matching Test; (ii) Cash Flow Matching Test; (iii)

Net Present Value Matching Test; and (iv) Stress

Test. Furthermore, the originators themselves may

specify additional criteria with a view to enhancing

the quality of the cover pool.

Moreover, holders of the prospective covered bonds

are provided with benefits from dual recourse

facilities: (i) to the issuer irrespective of the

performance of the cover assets; and (ii) against the

cover assets upon the insolvency of the issuer as

referred in the definition in the Article 4 of the CMB

Communiqué Serial: III, No: 59.1 named “Covered

Bonds”: “Covered Bond is a capital market instrument

qualified as a debt instrument, issued within the scope of the

issuer’s general liability and collateralized by cover assets”.

These legal regulations are assessed as components

which improve the payment safety and capability of

the Fund’s estate.

The qualities of the assets which constitute the cover

pools of the originators are substantially high and

these assets are assessed to be appropriate for

covered bonds issues and hence for transfer of the

CBs to the Fund portfolio for the following reasons:

▪ Homogeneous maturities,

▪ Multitudinous profile,

▪ Payments realized in identical installments,

▪ Similarity of creditworthiness of obligors,

▪ Large receivable portfolio,

▪ Determinate cash flows, consistency of the disbursements regarding securities and their high predictability level,

▪ Well defined repayment schedule,

▪ Low level of historical and expected delinquencies,

▪ Historical (and expected) overcollateralization ratios well above legal coverage and contractual O/C ratios,

▪ Loan-to-Value ratios well below legal limits,

▪ Support by substitute assets,

▪ First lien mortgages.

b) Collateral Analysis

The issue of the ABSs will be based on the covered

bonds providing its investors with dual recourse

facilities. The covered bonds are also secured by liens

and other collaterals.

In the event that parts of assets included as covered

bonds in the Fund’s estate are determined to be

inappropriate, the originators will redeem the assets

for substitution. This function of the originator was

assessed partly as support to the Fund’s estate

although defaults by the loan users are outside the

scope of this function.

The regulatory requirement that the originator(s) (or

the founder), in a risk retainer status, will purchase

5% of the securities pro rata to be issued by “Türkiye


Finansmanı Fonu” is another support component for

the ABS investors. However, this should not be

assessed as an equity tranche whereby the losses

might be initially absorbed.

V. Obligor Credit Quality in Cover Pool

The cover pools of all of the originator banks exhibit

homogeneous maturities and multitudinous profiles

of the obligors (residential mortgage loan users).

Average mortgage loan balance varies between



TRY63,781 and TRY74,972 while weighted average

term to maturity is between 53.6 and 68 months.

Weighted average current Loan-to-Value ratio is

between 32% and 49.4%.

The top1/top4 city concentration values are between

26%/52.8% and 34%/57%.

Shares of the NPLs in the overall mortgage

portfolios vary between 0.35% to 0.63% and the

delinquent ones (past due up to 30 days at most) are

between 1.66% to 2.70%.

All of these indicators are within the legal and

contractual limits and assessed to remain within

reference values with adequate buffers against

possible adversities.

VI. Risk Drivers & Mitigants

Market Risk:

As interests on the covered bonds and all loans in the

cover pool are fixed and principal and interest

amounts are denominated on the local currency

TRY, the ABS process does not include any

exchange risk.

However, the ABSs to be issued include interest risk

with regard to alternative profit or loss within their

maturities. The main features of this period through

which the ABSs will be issued are the upside risks on

interest rate levels and unpredictability, which are in

turn expected to generate alternative gains or losses

of interest earnings. This situation rouses the swell of

volatility and uncertainty throughout the term of this

ABS issue.

Transfer and Convertibility Risk:

Foreign exchange markets in Turkey are considerably

integrated with global markets and facilitate perfect

competition. However, foreign exchange trading

margins and their volatilities, the revaluation and

devaluation of the local currency against foreign

currencies, the amount of foreign currency reserves

of the country, the balance of payments and the

current account deficit/surplus structure are the

subcomponents of transfer and convertibility risks.

On the other hand, the convertibility of the TRY is

considerably high thanks to the absence of

government interventions or legal restrictions on

foreign exchange trading.

Consequently, the ABSs to be issued bear very low

transfer and convertibility risks regarding investors.

Redirection Risk:

Subject of redirection risks is nonfulfillment of

mutual obligations by the parties to the ABS issue

and redirection of these obligations to other

irrelevant organizations or parties through such

reasons as public enforcement or other. Within the

context of redirection risk, JCR-ER associates two

types of risk with the ABS issue: receivable diversion

risk and payment diversion risk. These risks may

occur rather in payments and receivables in foreign

currency denominations.

In recent years in Turkey, there has been no evidence

as to constitution of receivable diversion risk

elements through public enforcement based on

economic reasons for Turkish governments have not

been willing or urged by any economical exigency

necessitating redirection of assets in receivable pools

to Central Bank or to any other public institutions by

legal enforcement.

Moreover, it is not to be discussed in Turkey that

there is any economic necessity to redirect the

payments by the obligors to public institutions other

than the originator or servicers through public

enforcement. In this regard, payment diversion is a

negligible risk element for foreign investors in the

near future.



Inadequacy of the Cover Pool Value:

The issuers of the Covered Bonds have to comply

with certain cover matching principles by

implementing certain Statutory Tests required by the

regulations throughout the lives of the Covered

Bonds. In case of any breach of any of the tests, the

issuer is required to correct such non-compliance

within one month of its detection.

The issuer is obliged by the Communiqué on CBs to

ensure that the net present value of the Cover Pool

Assets exceeds at all times, by at least 2%, the net

present value of the total liabilities stemming from

the issued covered bonds. Furthermore, the issuer

has also to comply with some other

overcollateralization ratios (expected to be generally

much above the legal ones) through its contractual

obligations.

The cover monitor appointed pursuant to the said

regulation is entitled to sell cover pool assets,

purchase new assets, utilize loans or conduct

repurchase transactions even as well as resorting to

early redemption option as the needs arise to secure

the Covered Bondholders to receive their payments.

Downside Risks Regarding Mortgaged Property

Value:

Initially, the value of the individual loan obligation is

overcollateralized by the mortgage held by the issuer

regarding loan-to-value ratio limits imposed when a

mortgage asset is originated. However, the value of

the mortgaged property may decline over time

through falling property prices or for some other

various reasons. According to the regulation, the

issuer is obliged to monitor changes in the property

prices and determine the ratio of such change (the

Property Price Change Ratio) annually possibly based

upon the Property Price Index and must recalculate

whether the assets comply with the requirements.

JCR Eurasia has the assessment of very low risk level

in this regard considering the current loan-to-value

ratios in the cover pools submitted by the originators

much below the regulatory limits.

Default by Borrowers:

Borrowers may default depending on various reasons

and may face the inability to sell the property given as

security for a mortgage asset at a price sufficient to

repay the mortgage loan at the same time – thus

resulting in decline in value of the cover pool.

The historical and current delinquency rates of the

submitted cover pool assets are assessed to be very

low with regard to posing any significant risks.

Prepayment Risk:

The monthly installments of the mortgage loans in

the cover pool and their payment dates are fixed at

the loan utilization stage although prepayments

regarding the obligors are allowed. Although Turkish

residential mortgage loan agreements include a

prepayment charge of up to 2% of the outstanding

principal amount of the loan, loan users may not be

deterred by this charge in periods of rapidly declining

interest rates – ostensibly exerting pressure on the

lenders’ funding structure.

However, regarding relatively low share of residential

mortgage loans (<10%) within the total loans of the

Turkish banking sector in general and expected high

overcollateralization ratios in particular, this matter is

not expected to pose significant challenges on the

covered bonds.

VII. Credit Enhancement

The comparison of the interest rates of the covered

bonds and the ABSs implies that the Fund’s estate is

expected to generate limited excess spread over the

interest rate on the issue amount throughout the

term of the issue and may cause depletion therein.

On the other hand, the structure is not exposed to

any interest rate mismatch in terms of fixed vs.

floating rates.



On the other hand, yields of the covered bonds were

already included in the determination of the Fund

estate and have not been assessed as an enhancement

mechanism.

As for both internal and external credit enhancement

mechanisms, the following structures were also not

constituted for this issue:

✓ Senior Subordinated Structure/Waterfalls

✓ Reserve Account

✓ Letters of Credit / Liquidity Facilities

✓ Surety Bond

✓ Insurance

VIII. Issue details

The issue process has been designated as follows:

▪ ABSs representing the Fund amount to be sold

to local qualified investors or investors

domiciled abroad by invitation or private

placement without any public offering

▪ ABSs to be traded in Borsa Istanbul’s

Offerings Market for Qualified Investors

▪ Intermediary institution during the ABSs sales

to be determined

▪ ABSs not to be printed and delivered physically

and to be traced by MKK as dematerialized

securities on a customer basis

▪ ABSs to be sold at par on their nominal values

▪ Transfer of cash flows in the same day received

through covered bond repayments to the

accounts of “Türkiye Kalkınma ve Yatırım

Bankası A.Ş. İkinci Varlık Finansmanı Fonu”

without any suspension

▪ Transfer of ABS values by the Fund to the

accounts of investors at maturity dates

IX. Payment Structure and Cash Flow

Mechanics


Varlık Finansmanı Fonu” will transfer to the

originator banks the ABSs values (nominal: TRY 1

billion) to be issued at par by collecting the amounts

from investors in exchange for the covered bonds it

would acquire at repayment dates through a protocol

between the founder and the originators.

Cash Flow Item Date

Amount TRY

(coupons* based on indicative

interest rates) Days

Issue 15.03.2019 1,000,000,000 -

Coupon 15.06.2019 -41,472,922 92

Coupon 15.09.2019 -41,472,922 184

Coupon 15.12.2019 -41,472,922 275

Coupon 15.03.2020 -41,472,922 366

Coupon 15.06.2020 -41,472,922 458

Coupon 15.09.2020 -41,472,922 550

Coupon 15.12.2020 -41,472,922 641

Coupon 15.03.2021 -41,472,922 731

Coupon 15.06.2021 -41,472,922 823

Coupon 15.09.2021 -41,472,922 915

Coupon 15.12.2021 -41,472,922 1,006

Coupon 15.03.2022 -41,472,922 1,096

Coupon 15.06.2022 -41,472,922 1,188

Coupon 15.09.2022 -41,472,922 1,280

Coupon 15.12.2022 -41,472,922 1,371

Coupon 15.03.2023 -41,472,922 1,461

Coupon 15.06.2023 -41,472,922 1,553

Coupon 15.09.2023 -41,472,922 1,645

Coupon 15.12.2023 -41,472,922 1,736

Coupon+Redemption 15.03.2024 -1,041,472,922 1,827

* coupons to be calculated on 30/360 day-count convention

1,434


At the maturity dates of the ABSs, the amounts

accumulated through the collections of the covered

bond repayments in the Fund’s estate will be

disbursed to ABS investors on nominal values.

The SPV will also pay commissions and fees to: the

servicer and the operations manager, Türkiye

Kalkınma ve Yatırım Bankası A.Ş.; MKK (Central

Registry Agency); independent audit firm; rating

agency; and Borsa Istanbul for listing, total of which

must not exceed current market prices and be capped

at 0.5% whatsoever of the nominal value of the Fund

estate according to the current regulations.



X. Legal and Regulatory Risks and

Documentation Review

The Communiqué Serial: III, No: 58.1 named

“Principles Regarding Asset and Mortgage Backed

Securities” published in the Official Gazette dated

January 9, 2014 and no. 28877 and issued under the

Capital Markets Law dated December 6, 2012 and

no. 6362 forms the legal ground of the ABSs to be

issued. ABSs are securities issued as secured by the

assets in the fund portfolio. As a principle, payments

to ABS holders will be paid essentially from the cash

inflows from the assets in the fund portfolio.

However, such facilities as additional loans, resorting

to the guarantor, claims against insurance companies

and other existing collaterals can be utilized.

Assets of the Asset Finance Funds cannot be

pledged, collateralized, confiscated even for the

purpose of collection of public receivables, subject to

preliminary injunction and included within

bankruptcy estate for any purpose whatsoever until

the ABSs are redeemed.

Different than the case where debts and obligations

in the balance sheets of the companies arising

through security issues are not ranked in a high

priority level, payment delay risks that arise from the

arrangement of debts will not apply to this ABS

process due to the inclusion of the issued ABSs

within the obligations of the asset finance fund in a

SPV position and the fact that assets of the fund

cannot be deposited, pledged, collateralized,

confiscated even for the purpose of collection of

public receivables.

On the other hand, the Communiqué Serial: III, No:

59.1 named “Covered Bonds” published in the

Official Gazette dated January 21, 2014 and no.

28889 and issued under the Capital Markets Law

dated December 6, 2012 and no. 6362 forms the legal

ground of the Covered Bonds to be issued by the

originators.

Underlying assets of the covered bonds are mortgage

loans for real estate located within the borders of the

Republic of Turkey. The related Communiqué on

Covered bonds regulates mortgage covered bonds as

well as other asset-backed covered bonds and

principles and procedures regarding the qualities and

issuance of covered bonds as well as the cover

monitor, cover assets and cover matching.

It is believed that all of the agreements signed among

the parties to the ABS issue process as well as those

for the covered bonds issuances and internal

regulations of the SPV are arranged with compliance

to relevant legal regulations by SPK and other

institutions. Factors to generate additional risks

particularly with respect to the implementations of

the Law of Obligations and the Law of Bankruptcy

are eliminated.

The fact that each stage of the process and all of the

documents are subject to the permission and

approval by SPK reduces the risks to be incurred

with respect to legal documentation.





Estimated Date of Issue: 15.03.2019

Asset-Backed Securities to be Issued at Par

Cash Flow Item Date

Amount TRY

(coupons* based on indicative interest rates) Days

Issue 15.03.2019 1,000,000,000 -

Coupon 15.06.2019 -41,472,922 92

Coupon 15.09.2019 -41,472,922 184

Coupon 15.12.2019 -41,472,922 275

Coupon 15.03.2020 -41,472,922 366

Coupon 15.06.2020 -41,472,922 458

Coupon 15.09.2020 -41,472,922 550

Coupon 15.12.2020 -41,472,922 641

Coupon 15.03.2021 -41,472,922 731

Coupon 15.06.2021 -41,472,922 823

Coupon 15.09.2021 -41,472,922 915

Coupon 15.12.2021 -41,472,922 1,006

Coupon 15.03.2022 -41,472,922 1,096

Coupon 15.06.2022 -41,472,922 1,188

Coupon 15.09.2022 -41,472,922 1,280

Coupon 15.12.2022 -41,472,922 1,371

Coupon 15.03.2023 -41,472,922 1,461

Coupon 15.06.2023 -41,472,922 1,553

Coupon 15.09.2023 -41,472,922 1,645

Coupon 15.12.2023 -41,472,922 1,736

Coupon + Redemption 15.03.2024 -1,041,472,922 1,827

* coupons to be calculated on 30/360 day-count convention 1,434


Breakdown of the CBs & Cover Pools Originator Cover Pools TRY CB Outstanding TRY CB to be Issued TRY

Türkiye İş Bankası A.Ş. 8,094,029,779 - 400,000,000

Akbank T.A.Ş. 4,473,130,820 1,593,366,000 200,000,000

Yapı ve Kredi Bankası

A.Ş.T.A.O. 6,960,730,127 1,167,800,000 400,000,000

TOTAL 19,527,890,726 2,761,166,000 1,000,000,000

Documents

Structured Finance RATINGS Rating ABSs to be issued by ...Kalkınma ve Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu” based on a protocol between the SPV and the originators