Turkey, over the past year, has softened its reputation as a price-sensitive issuer with an over-reliance on local investors thanks to a stream of swift, trailblazing global benchmarks.
The Ba3/BB-/BB- rated sovereigns climax in the international markets this year came in July when it completed its annual borrowing needs with a blowout $1.25bn deal. At the time, the deal took new issue premiums for emerging market sovereigns to a new low for the year.
On July 24, Turkey mandated Barclays Capital, Deutsche Bank and Goldman Sachs and completed the deal within hours. The borrower re-opened its 7.5% 2017 notes to price at just 297.2bp over US Treasuries, a slim 9bp concession to outstanding paper and in line with the 6.5% yield guidance.
The deal was buoyed by the liquidity in Turkeys yield curve and subsequent relative stability in its outstanding bond prices. This allowed bankers to price off new risk and fast.
"Turkey has a very well developed secondary market curve, so pricing is always fairly uncontroversial," says Jonathan Brown, head of emerging market and European credit syndicate at Barclays Capital in London.
The issuers lightning speed in primary markets is the crucial factor for its success since the global credit crunch began.
"Although there is a significant improvement in the market conditions since the beginning of the year, we still believe that the windows of opportunities are likely to appear at short notice and are likely to be short lived going forward," says Memduh Aslan Akcay, director general of foreign economic relations at the Turkish treasury in Ankara, in an interview with EuroWeek. "We believe that flexibility and quick decision making would be the key elements of success in this market environment."
Once again thanks to astute execution and good timing, Turkey capitalised on the spirited resurgence of global risk appetite on April 30 with a new spot on its 10 year yield curve with a $1.5bn deal.
The transaction attracted more than $7bn of orders from 197 accounts, enabling bookrunners Bank of America-Merrill Lynch and JP Morgan to price with a yield of 7.6%, inside the initial price guidance of 7.75%.
The 7.75% price talk represented a 31bp concession to the outstanding 2019 bonds when the deal was announced but by the time of pricing, the concession was closer to sub-15bp. Not bad considering that before the global crisis, Turkey sovereign deals offered a 15bp-25bp premium to its existing secondary curve.
Its other venture in cross-border debt markets came in January when Turkey issued a quick $1bn deal. An eight year bond was chosen to appeal to investor demand for medium term exposure on Turkeys dollar curve while its existing 2019s and 2017s had sufficient liquidity. The bond was priced with a 7.50% yield with a modest 33bp concession, or 500bp over US Treasuries.
So far this year Turkey has issued $3.75bn of new paper to complete its annual 2009 international funding target of $3.5bn after falling $1.5bn short of its $5.5bn target in 2008.
Courting the US
Having relied on local bank investors for many of its deals before this year, Turkey has courted a band of faithful international investors this year, particularly fund managers in the US. Domestic investors made up around 70% of the books for Turkeys dollar bonds in 2008, but this years deals have enjoyed much higher international support. However, this is a double-edged sword.
Due to thick liquidity and the buy-and-hold nature of many of its domestic investors, Turkey has managed to outperform Russia and the CIS as well as Latin American sovereign peers in the crisis, whose greater foreign exposure caused price volatility in the flight-to-quality selloff at the end of last year. This volatility may have tempered the enthusiasm of issuers to diversify their investor base, said analysts at the time.
However, Akcay says Turkey recognizes the merits of global distribution of debt."We dont see the domestic market as the complete replacement of the international markets and continue pursuing the goal of increasing the appetite of foreign investors to Turkish assets."
He adds: "Although, we dont have a certain ratio for the distribution of bonds to domestic and international investors, it is certain that we are trying to maximize the non-resident allocation to the extent possible."
Thanks to the countrys underlevered banking system and the sovereigns unblemished debt servicing record there has been a remarkable outerperformance in rating and pricing performance for Turkeys sovereign debt. This modest credit rating is a now sore point for the country.
"We believe Turkey is currently underrated given the strength of the overall economy especially the financial sector so we are now focused on improving our dialogue with credit rating agencies and planning to conduct analysis to reflect the fair rating of the country," says Akcay.
Nevertheless, Turkey has demonstrated how emerging market borrowers can, to some extent, shield themselves from the twin obstacles of low credit ratings and the savage wave of risk repricing with astute debt management strategies.