Türkiye’s Project Finance Reset: How Higher Equity and DSCR Standards Are Reshaping Deals

Introduction

Türkiye’s project finance landscape remains one of the most dynamic among emerging markets, particularly across the energy, transport, and industrial infrastructure sectors. Driven by strategic government initiatives, international climate funding, and a robust pipeline of public-private partnership (PPP) projects, the market continues to attract global sponsors, development finance institutions, and local banking syndicates.

At the same time, recent shifts in Türkiye’s macroeconomic framework—including sustained monetary tightening and a recalibration of sovereign risk assessments—are reshaping the way large-scale greenfield financings are structured. International and Turkish lenders alike are now placing renewed emphasis on strengthened equity contributions and more conservative debt service coverage ratios (DSCRs), reflecting a broader trend towards de-risking project cash flows and fortifying covenant structures.

This evolving landscape demands that sponsors, lenders, and their counsel carefully align equity arrangements, cash waterfall mechanics, and security packages at the outset. In the sections that follow, we explore how these tightening market expectations on equity cushions and minimum DSCR requirements are playing out in current project financings in Türkiye—and what this means for structuring transactions in the years ahead.

Rising Equity Cushions

Historically, equity contributions in Türkiye’s project finance market typically ranged between 20% and 25% of total project costs, with lenders often willing to accommodate relatively aggressive leverage levels supported by completion guarantees and strong sponsor covenants. However, in today’s environment, these norms are undergoing a pronounced shift.

Recent transactions—particularly in renewables, industrial manufacturing, and transport infrastructure—are increasingly structured around minimum equity thresholds of 30% to 40%, reflecting both heightened lender caution and evolving international risk standards. Syndicated facilities involving multiple Turkish banks or participation by development finance institutions frequently require sponsors to pre-fund their equity contributions into blocked escrow accounts, or to back their obligations with unconditional standby letters of credit issued by first-tier banks.

These enhanced equity cushions serve multiple objectives: they ensure that sponsors maintain a substantial financial commitment throughout construction and ramp-up; they provide a direct buffer against cost overruns and operational shortfalls; and they align with stricter capital adequacy and provisioning norms being applied by Turkish lenders under prevailing regulatory guidance. From a legal structuring perspective, this necessitates robust shareholder funding undertakings, precise equity injection milestones tied to engineering, procurement and construction (EPC) progress, and watertight provisions governing the release and application of equity capital prior to debt drawdowns.

Tightening DSCR Covenants

Alongside higher equity contributions, lenders active in Türkiye’s project finance market are now imposing more rigorous debt service coverage ratio (DSCR) requirements, both at financial close and throughout the life of the facility. While it was once common to see DSCR floors as low as 1.10 to 1.15—particularly in single-bank structures relying on broad sponsor support undertakings—recent multi-lender and DFI-backed transactions increasingly adopt minimum DSCR thresholds of 1.25 to 1.40, depending on the sector, offtake structure, and reliability of projected cash flows.

These tighter DSCR requirements are typically incorporated both as financial covenants and sizing benchmarks. During the debt sizing phase, lenders apply these ratios against conservative cash flow projections (often P90 cases for renewables, with additional stress scenarios for demand-based or availability-linked concessions) to establish maximum debt capacity. Thereafter, the loan agreements embed these minimum DSCR levels as maintenance covenants, tested on a semi-annual or quarterly basis.

Breaches of these DSCR thresholds generally trigger a cascade of lender protections, which may include mandatory cash sweeps of excess cash flow, accelerated principal repayments, or requirements for sponsors to inject additional equity to restore coverage levels. In more robustly structured facilities—especially where multilaterals or export credit agencies are participants—repeated DSCR breaches without cure can escalate to events of default, enabling lenders to enforce security or exercise step-in rights.

For legal counsel, this means negotiating precise definitions of “Debt Service,” “Cash Available for Debt Service,” and “Operating Expenses,” ensuring predictable covenant calculations while preserving operational flexibility for the borrower. It also demands careful drafting of cure rights and the interplay with reserve account replenishments, so that temporary fluctuations do not disproportionately jeopardize project stability.

Structuring Mechanics: Equity Funding & Cash Waterfalls

The emphasis on robust equity contributions and elevated DSCR minimums has directly influenced the mechanics by which equity is funded and managed, as well as the design of cash waterfall structures that govern project revenues throughout construction and operation.

Equity funding: pre-injection and security undertakings

In today’s Turkish project finance market, lenders commonly insist that the sponsor’s equity be fully funded before or concurrently with the first debt drawdown, rather than injected progressively alongside construction milestones. This approach often requires sponsors to deposit their equity contributions into blocked accounts, controlled by the lenders through account pledge agreements under the Turkish Commercial Code (TTK) and secured receivables frameworks under the Turkish Obligations Code (BK).

Alternatively, equity obligations may be backed by unconditional, irrevocable standby letters of credit issued by internationally recognized banks, enabling lenders to draw funds directly if sponsors fail to timely inject capital. Loan agreements and intercreditor deeds typically integrate these instruments with strict milestone-linked equity release schedules, preventing dilution of the equity cushion ahead of substantial EPC progress.

Cash waterfall design: prioritizing lender recoveries

Once operational, projects are governed by detailed cash waterfall provisions embedded in the facility agreements, which prioritize application of project revenues in a prescribed sequence. The typical order of priority is:

1. Payment of operational expenses, including maintenance, insurances, and statutory costs;
2. Servicing of senior debt (interest and scheduled principal);
3. Replenishment of debt service reserve accounts and other contingency reserves;
4. Distributions to sponsors by way of dividends or shareholder loan repayments.

These waterfalls are reinforced by receivables assignments (alacak temlikleri) under Turkish law, covering revenues from power purchase agreements, availability payments, or other long-term offtake contracts. Such assignments are registered with the relevant authorities to secure priority, and are often combined with direct agreements granting lenders the right to cure defaults or step in to preserve project cash flows.

Legal drafting considerations

For legal teams, this translates to crafting rigorous equity funding undertakings in shareholder support agreements, clear disbursement conditions precedent tied to EPC and technical advisor certifications, and robust cash sweep provisions. Particular attention is paid to ensuring that the waterfall cannot be circumvented by management fees, affiliate transactions, or unapproved capex that could erode the cash available for debt service.

Enforcement & Risk Controls

The recent recalibration of risk appetites in Türkiye’s project finance market has also produced sharper enforcement mechanics and borrower operating restrictions, designed to safeguard lenders’ exposure well before any formal payment default occurs.

Early repayment triggers tied to covenant breaches

Modern Turkish project finance facilities increasingly incorporate automatic cash sweep and mandatory prepayment provisions linked directly to financial covenant performance, especially the DSCR. Should the DSCR fall below the minimum threshold—often tested quarterly on a rolling historical and projected basis—any excess cash flow above operational needs and reserve replenishments is required to be applied towards early principal amortization.

In certain structures, persistent covenant breaches, or breaches that push DSCR ratios substantially below agreed warning levels (for example below 1.10 where minimum is set at 1.25), can lead to acceleration of the facility even if scheduled payments are still current. This places significant discipline on sponsors to monitor performance metrics closely and to maintain sufficient liquidity buffers.

Borrower restrictions on indebtedness, asset sales & distributions

Alongside financial covenants, facility agreements typically impose strict negative covenants prohibiting additional indebtedness, asset disposals, or granting of security interests without lender consent. Any capital expenditure beyond what is explicitly budgeted in the base case model also generally requires prior approval.

Dividend distributions are usually blocked entirely during construction and ramp-up periods, and thereafter conditioned on certification that DSCR and reserve funding requirements continue to be satisfied. In more conservative deals, lenders also restrict the borrower’s ability to amend or terminate key contracts—such as EPC, O&M or offtake agreements—without their prior written consent.

Enhanced step-in and direct agreements

Another prominent trend is the broadening of direct agreements between lenders and project counterparties. These agreements increasingly go beyond traditional step-in rights on default to include direct cure rights, allowing lenders to remedy defaults under key contracts to prevent project termination, or even to temporarily take operational control.

Under Turkish law, these arrangements are typically formalized through assignment of contractual rights (alacak ve borç ilişkileri temliki), supplemented by lender consents in the main project agreements. The structure ensures that lenders maintain a clear path to preserve or maximize the value of the secured assets and cash flows in distress scenarios.

Market & Policy Drivers

The tightening of equity requirements, DSCR thresholds, and enforcement mechanics in Türkiye’s project finance market is underpinned by a combination of macroeconomic realities, evolving banking supervision policies, and global lending norms, all of which shape the risk calculus for both local and international financiers.

Macroeconomic context & interest rate environment

Türkiye’s sharp monetary policy adjustments—driven by efforts to combat inflation and stabilize the lira—have resulted in benchmark interest rates exceeding 45% as of early 2025. This has significantly increased local borrowing costs, prompting lenders to seek additional credit enhancements, whether through higher upfront equity or stricter cash flow controls, to maintain the viability of debt service under elevated cost-of-capital conditions.

In parallel, currency volatility remains a persistent feature of the market. Given that many project revenues (particularly in energy and infrastructure) are denominated in Turkish lira while large portions of the debt are euro- or dollar-based, lenders often insist on enhanced equity buffers to absorb exchange rate impacts. Facility agreements also typically include comprehensive hedging undertakings, obliging sponsors to mitigate currency mismatches through swaps or forwards.

Regulatory supervision & local banking discipline

Türkiye’s Banking Regulation and Supervision Agency (BDDK) has maintained a strong focus on sectoral exposure controls, provisioning standards, and capital adequacy requirements, especially in lending to large infrastructure and energy projects. This supervisory stance encourages Turkish banks—often major participants or arrangers in project finance syndicates—to insist on conservative leverage and robust covenant structures, aligning their portfolios with regulatory expectations.

In transactions where Turkish development or participation banks are involved, or where Treasury-backed guarantees interface with private financing, additional compliance layers often further tighten equity and DSCR requirements, reflecting the public sector’s heightened sensitivity to contingent liabilities.

Global lender and DFI influence

The international dimension is equally influential. Multilateral development banks, European DFIs, and export credit agencies (ECAs) active in Türkiye bring with them lending standards that emphasize higher equity cushions and more conservative debt sizing, especially under ESG-linked or climate finance mandates. Their involvement effectively sets a higher baseline that even purely commercial Turkish and international lenders frequently adopt to harmonize documentation and syndicate risk.

Outlook & Legal Observations

Looking ahead, the trajectory of equity cushions and DSCR expectations in Türkiye’s project finance market will largely depend on the interplay between macroeconomic stabilization efforts and evolving global risk pricing standards.

Should monetary tightening succeed in containing inflation and restoring more predictable interest rate dynamics, there is potential for moderate easing of leverage constraints, particularly for sponsors with proven operational track records or projects backed by robust offtake frameworks. However, international lenders and DFIs—who continue to anchor many of Türkiye’s largest infrastructure and renewable financings—are expected to maintain their more rigorous approaches to equity participation and cash flow resilience, both to protect against revenue volatility and to satisfy internal ESG and prudential mandates.

From a legal structuring perspective, this environment underscores the critical need for early integration of financing requirements into sponsor models and project contracts. Ensuring that shareholder agreements, EPC contracts, O&M frameworks, and concession documents are aligned with lender expectations on equity injection milestones, debt service waterfalls, and security interests is essential to avoid costly renegotiations or regulatory delays.

Counsel must also remain vigilant in drafting and harmonizing covenant regimes—particularly those governing DSCR maintenance, restricted payments, additional indebtedness, and change-of-control scenarios—so that projects remain bankable across shifting risk appetites and can accommodate both Turkish and international lender standards. Additionally, with the growing prevalence of multi-currency hedging and direct agreements with key contractors, careful coordination is required to ensure enforceability under Turkish law and compatibility with cross-border collateral structures.

Ultimately, Türkiye’s evolving project finance market continues to offer compelling opportunities for both sponsors and financiers. However, success increasingly depends on the ability to navigate heightened equity and covenant demands with disciplined structuring and proactive legal risk allocation, positioning projects to withstand financial stress while delivering stable, long-term value.