Patience has indeed been a virtue for any Turks hopeful their country will become part of the EU. It is a virtue that will prove useful for both issuers and investors wanting a settled Turkish lira bond market.
Market conditions at the start of the year encouraged many to believe that a stable market might be closer than expected. But the political turmoil of May put the dampeners on hopes of achieving quick stability.
"As a relatively immature market, Turkey has come a long way in the past year," says Petra Wehlert, co-head of funding at KfW in Frankfurt. "After the currency sell-off in May 2006, I thought the market would go very quiet. But in the past year both the currency and interest rates have recovered and the Turkish market has stabilised a lot." KfW has issued nearly TL1bn worth of lira Eurobonds so far in 2007.
These strong fundamentals have led to some important deals this year. In fact, the market couldnt have wished for a better start to 2007.
The European Investment Bank kicked off the year in January with the biggest Turkish lira bond to date, as the TL1bn ($693m) note, due March 2009, dwarfed any previous lira issue. The bond, underwritten by ABN Amro and Banco Profilo, carried a coupon of 18.5%. Investors couldnt help but notice a yield to maturity of 19.15% with triple-A risk.
According to David Fry, global head of local markets Eurobonds at ABN Amro, the deal was driven by demand for bigger sized deals and more liquidity, which allowed them to bring together institutional and retail investors.
The deal believed to be the biggest ever deal in any local currency was followed in April by the World Bank bringing the first ever Turkish lira benchmark in global format. The TL500m deal was the largest ever 10 year bond to be printed. It was also the first time US investors had access to a benchmark deal in the currency.
"International investors have a strong appetite for triple-A credit with exposure to this currency," says Doris Herrera-Pol, director, capital markets, at the World Bank in Washington.
"In most retail markets, investor interest starts between the one and five year points on the curve. That is how Turkey started. However, since the start of the year, we have seen strong institutional investor demand at longer maturities that enabled us to bring our 10 year benchmark bond in April."
Demand from investors has been the crucial factor in the evolution of the Turkish lira market.
"This is a Eurobond marketplace with the domestic market not being opened so far," says Wehlert. "Therefore our issuance has followed demand from international institutional and retail investors."
Political brouhaha checks local market
In April, economic prospects in Turkey were looking rosy. But by the end of the month things changed for the worse when political turmoil engulfed the country.The markets uncertainty following the presidential rumpus, initially placated by Prime Minister Erdoğan's decision not to nominate himself for the candidacy, returned when worries arose about the decision of his replacement, former Islamist foreign minister Abdullah Gül, to run for president. The armys threats of military intervention to protect Turkeys secular status, public demonstrations and a constitutional court decision against the AKPs nominee inflamed the situation. In response, the lira dropped 2.4% against the dollar while the national share index, the ISE National 100, fell 8% at one point. Only Erdoğans decision to bring forward parliamentary elections to the end of July helped to calm the situation.
However, local bond issuance has been static with only a trickle of deals in recent weeks, none of which has reflected issues of the size seen earlier in the year. That trend supports the criticism leveled at issuers and investors who failed so foresee mounting problems after the positive economic signs of previous months. That shock brought about a reassessment of the market.
"Both the market and, I think, the world were quite surprised by the political developments," said Fry at the time. "Perception has changed. People have realised this is not a one-way market, that it does have risk."
Wehlert concurred at the time: "Our last issue was in April and since then there has been some volatility in the market," she said.
"The political turmoil in May meant there was an oversupply of SSA paper as investors took a step back. But the situation has settled down now and that paper has been taken up. Those who did invest in May have done well out of it."
However, the dust from the political fall-out has not fully settled. Parliamentary elections will be held on July 22 and the presidency is still up for grabs. There could still be troubled times ahead for this maturing market, although most commentators predict stability in financial markets following the elections.
According to Herrera-Pol, in other niche currency markets investor demand has tended to drive longer deals and meant that corporate issuers have become involved. The stability and depth that have come to characterise these markets may be a sign of things to come in Turkey."The Australian dollar Euromarket started about 20 years ago and it has withstood the test of time, evolving into the thriving Kangaroo market that we have today. The South African rand market is now a decade old and has been resilient and experienced robust growth. The Turkish lira market could evolve in the same way."