ABSs to be issued by Türkiye Kalkınma ve. *Assigned by Japan Credit Rating Agency, JCR on November 27, 2018

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1 Sovereign* Structured Finance Rating Asset-Backed Securities (Preliminary Report) New Update Publishing Date: Mar.5, 2019 Head of Group: Zeki M COKTAN zeki.coktan@jcrer.com.tr Chief Analyst: Orkun INAN orkun.inan@jcrer.com.tr İkinci Varlık Finansmanı Fonu Type of Asset- Backed Securities Founder Originators Servicer Special Purpose Vehicle Transaction Administrator Issuer Registration Transferor Risk Retainers (pro rata) Insurance Agencies Issue Nominal Size Indicative Interest Rate Payment Frequency- Principal Payment Frequency- Coupon Tenor /Final Maturity Estimated Issue Date Weighted Average Life PTCs - Pay Through Certificates Türkiye İş Bankası A.Ş., Akbank T.A.Ş., Yapı ve Kredi Bankası A.Ş. İkinci Varlık Finansmanı Fonu İkinci Varlık Finansmanı Fonu Merkezi Kayıt Kuruluşu A.Ş. Türkiye İş Bankası A.Ş., Akbank T.A.Ş., Yapı ve Kredi Bankası A.Ş. None TRY 1 bn at par 17.65% APY At maturity Quarterly (to be calculated on 30/360 daycount convention) 60 months ,434 Days RATINGS ABSs to be issued by İkinci Varlık Finansmanı Fonu Long Term Short Term International Local Currency BBB- A-3 National Note AAA (Trk) A-1+ (Trk) Foreign Currency BBB- - Local Currency BBB- - Outlook FC Negative - LC Negative - *Assigned by Japan Credit Rating Agency, JCR on November 27, 2018 Overview İkinci Varlık Finansmanı Fonu (hereinafter referred as Asset Finance Fund, the Fund or SPV) is established for an infinite term by 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 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 Constraints 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 Copyright 2007 by JCR Eurasia Rating. 19 Mayıs Mah., 19 Mayıs Cad., Nova Baran Plaza No:4 Kat: 12 Şişli-İSTANBUL Telephone: +90(212) Fax: +90 (212) 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.

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 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 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 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 İkinci Varlık Finansmanı Fonu 2

3 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. 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 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: 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 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. 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 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: İkinci Varlık Finansmanı Fonu 3

4 Estimated Date of Issue: Asset-Backed Securities to be Issued at Par Cash Flow Item Date Amount TRY (coupons* based on indicative interest rates) Days Issue ,000,000,000 - Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472,922 1,006 Coupon ,472,922 1,096 Coupon ,472,922 1,188 Coupon ,472,922 1,280 Coupon ,472,922 1,371 Coupon ,472,922 1,461 Coupon ,472,922 1,553 Coupon ,472,922 1,645 Coupon ,472,922 1,736 Coupon+Redemption ,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 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 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, 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, 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. İkinci Varlık Finansmanı Fonu 4

5 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. İkinci 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 Kalkınma ve İkinci Varlık 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 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 ABSs to be issued by Yatırım Bankası A.Ş. İkinci Varlık Finansmanı Fonu will be implemented by Yatırım Bankası A.Ş.. Therefore, becomes a transaction administrator. is also the founder of the SPV. JCR Eurasia has not rated yet and detailed risk assessment of the founder falls outside the scope of analyses. 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 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 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 and its legal title was changed to Yatırım Bankası A.Ş % of the Bank s shares are owned by the Under Secretariat of Treasury as of 31 December 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 İkinci Varlık Finansmanı Fonu 5

6 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 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 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 ABSs to be issued by Yatırım 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: Originator Breakdown of the CBs & Cover Pools Cover Pools TRY * CB Outstanding TRY CB to be Issued TRY Türkiye İş Bankası A.Ş. 8,094,029, ,000,000 Akbank T.A.Ş. 4,473,130,820 1,593,366, ,000,000 Yapı ve Kredi Bankası 6,960,730,127 1,167,800, ,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. İkinci Varlık Finansmanı Fonu 6

7 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 Kalkınma ve İkinci Varlık 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 İkinci Varlık Finansmanı Fonu 7

8 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. İkinci Varlık Finansmanı Fonu 8

9 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. İkinci Varlık Finansmanı Fonu 9

10 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 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 İkinci 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 ,000,000,000 - Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472,922 1,006 Coupon ,472,922 1,096 Coupon ,472,922 1,188 Coupon ,472,922 1,280 Coupon ,472,922 1,371 Coupon ,472,922 1,461 Coupon ,472,922 1,553 Coupon ,472,922 1,645 Coupon ,472,922 1,736 Coupon+Redemption ,041,472,922 1,827 * coupons to be calculated 1,434 on 30/360 day-count convention (WEIGHTED AVERAGE DAYS) 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 ; 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. İkinci Varlık Finansmanı Fonu 10

11 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 and issued under the Capital Markets Law dated December 6, 2012 and no 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. 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. 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 and issued under the Capital Markets Law dated December 6, 2012 and no forms the legal ground of the Covered Bonds to be issued by the originators. İkinci Varlık Finansmanı Fonu 11

12 İkinci Varlık Finansmanı Fonu 12

13 Estimated Date of Issue: Asset-Backed Securities to be Issued at Par Amount TRY Cash Flow Item Date (coupons* based on indicative interest rates) Days Issue ,000,000,000 - Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472, Coupon ,472,922 1,006 Coupon ,472,922 1,096 Coupon ,472,922 1,188 Coupon ,472,922 1,280 Coupon ,472,922 1,371 Coupon ,472,922 1,461 Coupon ,472,922 1,553 Coupon ,472,922 1,645 Coupon ,472,922 1,736 Coupon + Redemption ,041,472,922 1,827 * coupons to be calculated on 30/360 day-count convention 1,434 (WEIGHTED AVERAGE DAYS) 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, ,000,000 Akbank T.A.Ş. 4,473,130,820 1,593,366, ,000,000 Yapı ve Kredi Bankası 6,960,730,127 1,167,800, ,000,000 TOTAL 19,527,890,726 2,761,166,000 1,000,000,000 İkinci Varlık Finansmanı Fonu 13