Asking deal arrangers a year ago about the Turkish syndicated loan market, youd likely have heard a barrage of complaints about how underpriced it was.
The tight margins commanded by the countrys most prolific international borrowers its banks have often been a sore point among loan originators, with many blaming their relationship managers for encouraging low pricing levels.
Nine months after Lehman Brothers collapse shook lenders around the world, these grumblings have not entirely subsided but they have taken a back seat.
Turkeys banks have instead impressed by remaining among the precious few financial institutions across central and eastern Europe still able to fund themselves in the international markets.
While Russias traditionally busy financial institutions, for example, have been unable to bring a single syndicated loan to market almost six months into 2009, a swathe of refinancings for Turkeys top tier banks have already been completed.
Their success, according to the deal arrangers and the borrowers, can be pinpointed on one crucial element: ancillary business. The banks ability to deliver on it has long been the key to maintaining their access to the loan market and to swaying relationship managers on the pricing front.
The ancillary argument has now become all the more persuasive, as struggling lenders weigh up the pros and cons of their investments on the back of what profitable side business is on offer.
"Turkish banks enjoy a special relationship with their core group of banks due to the diversity and the volume of ancillary business that they are able to offer in the form of trade finance, treasury related business as well as debt capital markets activities," says David Pepper, head of CEEMEA syndicate at WestLB in London. "For this reason one is likely to see a continuation of the Turkish banks being able to access cheap one year funding via the loan market."
Swayed by ancillary
Lenders commitment to Turkeys banks in exchange for side business is a trade-off that has certainly paid off this year for the countrys borrowers.
Yapi Kredi was one of the first to tap the loan market for a big refinancing this year, when it signed 20 banks into a $410m-equivalent transaction at the end of April. After initially seeking to hit a target amount of $350m, the borrower was able at an all-in price of 250bp over Libor to attract enough lenders to increase the transaction.
Pinar Salci, head of financial institutions at Yapi Kredi in Istanbul, also puts down Turkish banks success this year to the strength their relationship pull, as well as to the banking sectors conservative stance and resilience.
"The Turkish syndicated loan market is quite unique when compared to other regions," she says. "The main reason for that is the ancillary business capacity that the Turkish banks are able to create for lender banks, as a return of their support in their syndicated loan transactions."
Lenders will tend to pick and choose which facilities they commit to, and at what level, according to the borrowers they have established relationships with and on whom they can count on for additional business.
However, according to loan arrangers, only about five to 10 main lender banks across the whole spectrum of participants in these deals are truly able to reap the benefits of this ancillary business.
And yet this years borrowers, while not always able to roll over their outstanding loans at 100%, have managed to reel vast numbers of commitments from an array of banks.
Famed for their long banks lists, comprising 30 or more mandated lead arrangers, this years deals has been no exception. After Yapi Kredis deal, which followed a smaller, $71m-equivalent facility for Alternatifbank in March, Garanti made its return to market with a Eu600m-equivalent club loan signed in May. Thirty-one lenders joined the facility, and the deal had stood out this year as the only one to hit a 100% rollover ratio. Isbank also signed a $570m-equivalent loan at the end of May, with 28 participants.
In a pickle over pricing
Turkeys banks have also been paying up to secure their transactions, and despite some residual complaints about the tight margins on offer compared to peers in other regions, pricing has more than doubled compared to the levels from two years ago.
Both Yapi Kredi and Garanti secured their deals at all-in margins of 250bp, which many believe is the level pricing appears to have settled at.
Most Turkish bank borrowers have reacted calmly to the hike in margins, accepting that their counterparts in western Europe and other regions now need to cover their own cost of funding.
"Pricing was less of a concern," says Batuhan Tufan, vice president in structured finance at Garanti in Istanbul. "In previous years, we used to negotiate more aggressively, but it was more important to have commitments from the banks this time."
Tufan concedes that 250bp all-in "just doesnt compare with similar credits elsewhere", but, he adds, "it was enough for the banks that committed".
And despite the constant grumblings among arrangers particularly two years ago, when Turkeys banks could fund themselves internationally at under 100bp all-in one remarkable feature of Turkish syndications has been that time and time again, these transactions have found more than enough support.
Any disgruntlement among originators has always been blamed on the relationship managers within the lending banks, keen to push the deals through to get the side business.
"We get quite a lot of ancillary business, but it still doesnt justify the pricing," says one origination banker in London. "Its down to the relationships that Turkish banks have developed, and we have no one to blame but ourselves. There are departments within banks that dont have a lot on and are happy to do this kind of business, which has worked in favour of the Turkish banks.
"But even if you add up the returns you get on the ancillary, to the equivalent of about 350bp all-in, thats still the kind of pricing you can get from double or triple-A rated sovereign level borrowers in the Middle East, for example."
No stopping the rollovers
However, loans bankers also concede that Turkeys banks probably deserve better ratings than theyve got both Garanti and Yapi Kredi are rated B1/BB-/BB which helps to justify their appeal to investors.
"Their ratings are always going to be somewhat capped by that of the sovereign," another official argues, referring to Turkeys Ba3/BB/BB rating. "And although Russia, for example, has a better credit rating, Turkey is more integrated with Europe, and the credit risk within the Turkish banking system is also widely perceived to be less worrying."
Others also argue that pricing on these types of loans in Turkey is finally reaching acceptable levels.
"If you look at Turkey CDS, at 180bp for one year, its now beginning to make sense," says another head of emerging market debt orgination based in London. "By the end of April it was closer to 350bp, but it has been tightening."
But whether or not 250bp all-in will end up as the price ceiling for this year, as some are predicting, it is unlikely to put the brakes on Turkish banks continued access to the loan market.
More regular bank borrowers, such as Akbank, are already lining up for refinancings, while Garanti and Yapi are set for returns.
The rollover ratios on these refinancings of 65% on average are also unlikely to put off borrowers. Many are, instead, happy to repay the portions which are not refinanced.
"Rollover commitments of 60%-70% dont mean theyre going to be desperate for the additional 30% or so," says one banker in London. "The banks are quite liquid and their deposit base is quite strong.
"They still want to roll over, and the reasons is that, for one, extra liquidity doesnt hurt, and secondly, that they want to keep bank limits open to new credit applications."
Garantis Batuhan agrees, adding that the rollover is "not a matter of life and death".
"Its important to maintain credit lines with existing lenders and maybe establish new ones," he says. "Its important in these markets, where you dont have the luxury of refusing this kind of liquidity."
Borrowers have shown they are willing and able to repay debt, another element which has helped their standing in the eyes of lenders. Akbank, for example, sent out requests for proposals on a Eu1bn refinancing at the end of May, for a deal due in two parts in August and September. But it also repaid a $500m facility maturing in June opting not to refinance as its own funding needs have contracted.
Slow corporate flow
But despite the abundance of transactions in the banking sector, corporate lending in Turkey continues to disappoint.
There have been some new deals this year perhaps more so than in the last 12 months and most of these rare transactions have been successful.
A $774m-equivalent loan for Koç Holding, one of Turkeys biggest conglomerates, has been highlighted by bankers as one of the standout deals of the year, after it was signed in January.
Meanwhile, several recent launches a $100m facility for glass and chemicals group Sisecam and a $200m-equivalent refinancing for Efes Breweries were being wrapped up at the time of going to press, and both were understood to have scored oversubscriptions.
But most loans bankers arent predicting a further flow of corporate deals this year. The lack of corporate facilities for international lenders to focus on is not a new phenomenon, however.
"In terms of corporate activity within the loan market this has always been thin as corporates have traditionally borrowed on a bilateral basis from either their domestic or core international relationship banks," says Pepper at WestLB, adding that the success of the three corporate loans launches this year is, however, showing that appetite for such risk remained buoyant.
But international banks have always struggled to break into a market dominated by the mighty domestic lenders another perpetual and persistent complaint about the Turkish syndications market, as foreign banks miss out on the more generous margins and fees available in corporate lending.
But as one banker points out, yields in the Turkish currency are a more attractive prospect for the countrys borrowers than paying 300bp over dollar Libor or more.
Demand for funding among Turkish companies this year is also likely to recede, and international lenders are set to get an even thinner piece of the corporate lending pie.
"There is a financing decline, as corporates dont necessarily need new money," says one banker. "30%-35% of GDP is reliant on exports, particularly as a partner of the European Union.
"But as the EU enters a recession, the Turkish export market is also contracting, which will restrict corporate growth. They will be keeping a lower profile until market appetite comes back."