Investment grade Turkey tested in bumpy year

In spite of the pressures exerted on emerging market borrowers as concerns over US Federal Reserve tapering mounted over the summer, Turkey had another highly successful year in the international capital market in 2013. As well as completing its borrowing programme for the year at very competitive levels and further diversifying its sources of funding, the Turkish Treasury was able to pre-fund some of its requirement for 2014. In this interview, undersecretary of the Treasury İbrahim H Çanakcı discusses Turkey’s funding strategy with EuroWeek’s Phil Moore.

  • By Gerald Hayes
  • 07 Jan 2014
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EUROWEEK: What is your total annual funding requirement, and how does this divide up between the domestic and international markets? 

According to the financing programme for 2014, which we announced last October, our total borrowing requirement is projected at TL149.3bn ($73.6bn). Of course this is the gross figure. Our net borrowing will be much lower, at about TL20bn. 

Of the gross total, TL134.6bn, or about 90%, will be raised in the domestic market, with the remaining TL14.8bn raised in external markets. So in 2014 the ratio between external and domestic borrowing will remain in line with previous years, at approximately one to 10. 

Over the last 10 years, we have made significant progress in terms of decreasing the level of FX-denominated debt in our total debt stock. The share of FX- denominated debt was 58% in 2002. As of October 2013, the figure had come down to 29%. 

We are no longer issuing any new FX-denominated debt in the domestic market, all of which has been repaid. We think our current mix of FX versus domestic currency debt is reasonable and prudent and we’re not expecting significant change in the balance in the foreseeable future.

EUROWEEK: Looking back at your international funding in 2013, you had a very successful start to the year in the dollar market, and an equally successful end to the year in euros. But  how did you manage during the summer months, when Turkey faced the triple whammy of domestic unrest, war on its border and the threat of tapering in the US? How disruptive were all of these factors to your funding programme?

As you know, up until May 22, the environment was very positive. As Treasury, we tried to make the most of that period and we were able to complete the key strategic dollar trades we had planned during that period. 

In January, we issued a $1.5bn 10 year benchmark, and in April we came back to the market with a $1.5bn 30 year transaction. Both were very successful and cost-wise marked our lowest ever 10 and 30 year bonds. And if you also take into account the $1bn tap of our 2041 issue that we did back in December 2012 to pre-fund our 2013 programme and the small yen private placement of $200m equivalent in February, when the volatility began on May 22, we were well advanced in terms of reaching our target for 2013 of $6.5bn. This front-loading strategy on the external side allowed us to ride out the volatile summer months without any pressure whatsoever. 

The return of stability to the market allowed us to issue our second international sukuk in early October, which also went very well. And after an absence of three years, we issued in euros in early November, which enabled us to finalise our 2013 programme. We were even able to do some pre-funding for 2014.

So all in all, despite the significant volatility after May, 2013 was pretty smooth for us in terms of reaching our external funding targets. 

EUROWEEK: On the subject of your key benchmark transactions of 2013, in dollars and euros, how pleased were you with the pricing and distribution of those deals? How much did these deals help you to achieve the dual objectives of extending the maturity profile of your debt and further diversifying your investor base?

On the dollar side, both our 10 year trade in January and the 30 year trade in April were very important for us. Around those dates, all our dollar bonds on the curve were trading at significantly high cash prices. These new trades had the potential to play an important role in terms of establishing a new curve with current coupons and on-the-run securities. And with both transactions, we achieved that goal. The coupon on the 10 year was 3.25% and on the 30 year it was 4.875%. Both were the lowest we have ever achieved in those maturities.

These trades also coincided with the upgrade of Turkey to investment grade, first by Fitch in November 2012, and subsequently by Moody’s in May 2013. Obviously, these upgrades helped us to place these bonds with some new investors who had previously not been allowed to invest in Turkey due to rating restrictions. Both transactions attracted very high quality order books, which enabled us to price $1.5bn on each tenor at very competitive levels.

Issuing a euro-denominated benchmark was also a strategic objective for us last year. Our last euro transaction had been back in November 2010 — fully three years ago — and we were very keen to revive that investor base, but for a number of reasons we were unable to return to the market until late last year. 

We always keep a close eye on our relative cost with respect to dollars when we contemplate a transaction in any given currency. This is because as it is the deepest and most liquid market, dollars provide us with the best pricing. Mainly because of the unfavourable basis between dollars and euros, a euro trade did not make economic sense to us for some time. But when the basis came in significantly last year, we decided to seize the opportunity and tap the market in November. Investor interest was encouraging and we saw very good interest from high quality institutional investors in Europe. This was also reflected in pricing, which came slightly inside our secondary levels.

EUROWEEK: On the subject of pricing, Turkey has consistently managed to issue in international markets at low or even negative new issue premiums. Is it fair to say that Turkey drives a hard bargain?

As a frequent issuer, we have a long-term perspective on our relationship with investors. We attach a great deal of importance to getting our transactions right in terms of not only pricing but also size. Obviously every deal has its own dynamics and coming up with a price and size that works for everyone is more an art than a science. As an issuer, we always have a very open and intense dialogue with our lead managers and value their advice. We also make it very clear to them that what our investors think is very important for us. And because secondary market performance also matters to us, we always size and price our transactions according to real investor demand.

So all in all, with the help of our partnering banks, we do our best to come with the best price and size that will make both us and our investors happy. 

EUROWEEK: What are your plans for international funding in 2014? Do you have any targets in terms of currency mix and duration?

Similar to 2013, we plan to raise $6.5bn from the international capital markets in 2014. Our latest euro trade means we have already pre-funded $640m, so the remaining portion is approximately $6bn.

Although we don’t have any hard duration and currency targets in place, we will try to diversify and issue longer tenors as much as we can. 

Diversification has been an important priority for us for some time. In 2011 we returned to the yen market after a 10 year absence and in 2012 we introduced sukuk as a new instrument.

EUROWEEK: Do you plan to be a regular issuer in the sukuk market?

Yes. We are keen to issue sukuk both internationally and domestically as part of our annual financing programme going forward. In our 2014 financing programme, we announced that two domestic sukuk issuances will be executed in February and October. On the external side, we will be looking at opportunities to do the third deal in 2014. The Treasury is also planning to expand the use of sukuk beyond the widespread ijara model, particularly in project financing. 

Sovereign sukuk issuance has helped the Republic to diversify its toolkit of funding instruments, gain access to new markets and a new group of investors. To give you an example: our allocation of conventional bonds is roughly one-third to Europe, one-third to the US and one-third to Turkey and other regions. When we did our first sukuk last year, more than 60% went to the Middle East and Asia, which shows how important the market is in terms of diversification of our investor base.

The sukuk market has allowed us to reduce overall funding costs, and to set a pricing benchmark for corporate sukuk issuance. It has also underpinned the development of the insurance sector and the market for private pension funds by broadening the range of alternative investment instruments available to domestic institutional investors.

The sukuk market is also an important part of Turkey’s action plan to position Istanbul as a leading international financial centre. One of the pillars of this plan is strengthening the market for interest-free financing in Turkey and increasing the diversity of financial products and services available to borrowers and investors. Developing the sukuk market with the involvement of private sector is an integral feature of this plan. 

EUROWEEK: What is your strategy in non-core markets? What was the rationale behind your latest Samurai deal, and do you plan to return to that market on an unguaranteed basis? 

We have issued two JBIC-guaranteed transactions in the yen market. The first, in 2011, was a ¥180bn ($2.3bn) issue, which was the largest deal in the Japanese market by an emerging economy. We followed this up in 2012 with a ¥90bn ($1.1bn) trade which was the tightest-priced issue ever in the JBIC-guaranteed market. Last year, we did a small 20 year private placement for ¥18.4bn ($200m) without a JBIC guarantee. 

The yen market is one of the deepest in the world and Japanese institutions have ample liquidity. The market is also a very good diversification play as there is almost zero overlap with our conventional investor base in US and Europe. Between 1992 and 2000, we were very active in this market and raised significant amounts from Japan annually. 

The GATE programme has been very helpful and allowed us to reach Japanese investors much more easily at a time they weren’t ready to take the exposure outright. The private placement we did last year was a clear reflection of the revival of the investor interest towards us in Japan and we hope to nurture that interest going forward. Our aim is to re-establish our presence in the Samurai market and ultimately to issue in our own name.

We always keep a close eye on opportunities on alternative currencies as well. If we are convinced that there are continuous opportunities with meaningful sizes and competitive pricings, we might consider them too.

EUROWEEK: You’ve already mentioned the significance of the upgrades from Fitch and Moody’s. How much of a disadvantage is the absence of a third investment grade rating from Standard & Poor’s?

Obviously, reaching investment grade status is important. The so-called cliff effect between investment grade and non-investment grade ratings means that you become eligible for a much larger group of investors and you enter into investment grade indices that are closely tracked by some investors. All these factors generate added technical liquidity and a broader investor bid that has the potential to support you in the long run. 

In our case, this effect was masked to some extent by the volatility that began days after we were assigned our full investment grade status in May. But as stability returns to global markets and volatility declines, we expect to see more positive results arising from our investment grade status.

As full investment grade is technically defined as having two investment grade ratings from the big three agencies for many investors, we don’t think that lack of an investment grade rating from a third agency is very important at this stage. In fact, we also have an investment grade rating from DBRS, JCR and the Islamic International Rating Agency, so we are rated investment grade by five agencies.

EUROWEEK: In your discussions with overseas investors, how concerned are they about the current account deficit, and what do you tell them to reassure them about this?

Our main economic priority is to prevent the current account deficit becoming a source of a prolonged imbalance. The double-digit growth in domestic demand in 2010 and 2011 led the deficit to reach around 10% of GDP in 2011, which is quite high for Turkey. As soon as we saw the current account deficit heading towards 10% of GDP, we introduced tighter policies, especially on the monetary and macro prudential side, aimed mainly at containing rapid credit growth. All this helped reduce the current account deficit to 6% in 2012. 

The adjustment process on the external balance continued in 2013, especially if you look at the non-gold current account deficit. The headline figure for 2013 is expected to be around 7.1%. Although this is a pick-up on the headline figure compared to 2012, when you adjust it to reflect very volatile gold imports and exports over the last two years, actually the consolidation is continuing. We are targeting a gradual decrease in the current account deficit starting from 2014 and stabilisation at around the 5.5% area by the end of 2016. 

In order to support this target we have introduced a number of new macro-prudential measures, particularly on consumer and credit card loans. We’ve tightened borrowing limits on credit cards and increased risk weight of credit card loans. We’ve tightened rules on the non-payment of credit card balances and increased general provisioning ratios on consumer and credit card loans. We are also planning to introduce loan to value (LTV) ratios on certain types of consumer loans, which will also help to address the issue of the current account deficit.

Fiscal policy has always been very disciplined in Turkey. By 2016, our aim is to reduce the general government deficit to below 1% of GDP, to increase the primary surplus to 1.3% of GDP, and to reduce public debt to GDP to 30%. This will also help with external adjustment.

It is important to note that despite the relatively high level of the current account deficit, its financing of the deficit has not been a problem for us due to strong capital and FDI inflows and the solidity of the long term portion of the financing.

We have also been implementing important structural measures to address the challenges in our external balances. These are mainly focused on reducing our dependency on imported energy, bolstering competitiveness and increasing domestic savings. 

On the energy side, we have introduced measures to increase the share of renewable energy and encourage more energy efficiency, and we expect to see the positive impacts of these structural measures in external balance figures over the next few years.

In the area of private savings, we have already begun to see the positive impact of the new private pension scheme. In the first 47 weeks of 2013, there were 857,000 new participants in the scheme, compared with just 413,000 in the same period in 2012. 

We have also been taking steps to further diversify our exports in terms of products and markets. We’ve also introduced a number of measures to improve the investment environment in Turkey. So the necessary structural responses have been made to the challenges created by the current account deficit. 

All in all, the authorities in Turkey are fully aware of the current account deficit problem. What is even more important is that the necessary policy response has been given both to the cyclical and structural elements of the problem.

EUROWEEK: Foreign exchange debt has fallen sharply in recent years and is clearly regarded as a ratings positive. What is the outlook for a further decline? Is there a concern that extravagant infrastructure spending may increase debt?

It is now around 29% and we don’t expect any significant volatility over the next few years. The infrastructure projects that are in our agenda are mostly financed on a PPP basis, so they don’t put any immediate pressure on us. Some of them even generate license fees for the government. 

EUROWEEK: You’ve already touched on government initiatives in the local pension fund industry. What are the prospects for more institutional demand at the longer end of the domestic yield curve, and how will this support the domestic component of the government’s debt management programme?

We have already extended the average maturity of our new borrowings in the domestic market from nine months in 2002 to 74 months, which now allows us to issue 10 year bonds. Since the government introduced the matching state contribution in the private pension system, the total assets in the funds had risen to TL26.1bn as of November 22, 2013, an increase of approximately 34% from November 2012. 

Given these developments, we expect an increase in institutional demand at the longer end of the domestic yield curve going forward, which will increase liquidity at the long end and maybe allow us to further extend maturities.    

  • By Gerald Hayes
  • 07 Jan 2014

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 317,793.98 1355 8.72%
2 Citi 301,114.13 1092 8.26%
3 Barclays 259,580.63 846 7.12%
4 Bank of America Merrill Lynch 258,842.43 934 7.10%
5 HSBC 224,273.23 905 6.15%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 29,669.98 55 6.95%
2 UniCredit 28,692.62 136 6.73%
3 BNP Paribas 28,431.90 139 6.66%
4 HSBC 22,935.49 112 5.38%
5 ING 18,645.88 118 4.37%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 JPMorgan 14,593.71 79 10.38%
2 Goldman Sachs 11,713.19 63 8.33%
3 Morgan Stanley 9,435.23 48 6.71%
4 Bank of America Merrill Lynch 9,019.27 40 6.41%
5 UBS 8,763.73 42 6.23%