Republic of Turkey

Republic of Turkey

Rating:Ba3/BB-

Amount:Eu1.25bn

Maturity:April 2019

Issue/fixed re-offer price: 99.106

Coupon:5.875%

Spread at re-offer:168bp over mid-swaps

Launched:Wednesday 24 January

Payment date:2 February

Joint books: Credit Suisse, Lehman Brothers, UBS

 

Borrowers' comment:

Following our double tranche dollar deal earlier this month, we began to monitor the markets for a possible euro denominated bond issue as the second trade of the year.

Early this week, when we saw the market gathering momentum, we decided to take advantage of this window of opportunity.

Among several options, we decided to go ahead with a 2019 deal since our aim was to extend our euro curve with a benchmark sized transaction. In this respect, we believed that 12 years was the right maturity in terms of maximising the institutional demand and hence getting a sizeable transaction in euros, which is often difficult to attain.

Thanks to a two times oversubscribed book with exceptionally high quality orders, we were able to price the deal at the tight end of the range. Moreover, the size of the issue represents the largest deal achieved at one go in the euro market.

 

Bookrunners' comment:

We got the mandate at 9.30am on Wednesday morning and announced the trade at 10am. We went out with price talk of 170bp over mid-swaps area with the knowledge that if the deal got the momentum, we could slice a couple of basis points off the pricing.

The same day we revised tighter to 168bp-170bp, but we deliberately did not reveal the exact size of the issue until Wednesday afternoon when we priced the deal at the tight end.

It was critical for Turkey to do a large, successful deal this time and with Eu2.25bn in euro denominated bonds maturing this year, they needed to bring large euro trades to maintain their debt profile.

During the sovereign's non-deal roadshow through Europe earlier this month, investors mentioned that Turkey has been more focused on their dollar curve.

Turkey's euro curve is relatively illiquid compared with dollars and has ground tighter than dollars. At three to four years, it's as tight as 50bp over mid-swaps. The 12 year was chosen because the 10 year part of Turkey's curve is already populated and we were not convinced the market was ready for another long dated euro trade after Poland's 15 year.

The choice was therefore between the eight year and the 12 year. But at the shorter part of Turkey's euro curve, the notes trade so tight it would not have been possible to get traction from investors.

The 12 year was the right option. The night before we announced this deal, the 2017s were trading at 151bp over mid-swaps and the 2016s at 137bp over mid-swaps, implying a 14bp pick-up for a year's extension. The 7% 2016 dollar deal was at 142bp over mid-swaps.

The fact that the euro curve trades tighter than the dollar has another benefit — this deal set the euro wider by 2bp at the most — and the dollar curve didn't crumble. In the past when they've done cheaper deals, it has destroyed their whole curve.

There was some widening across the board on Wednesday but this week's deal outperformed the market. US Treasuries tanked over the week — 10 year Treasuries were yielding 4.86% at yesterday's close from 4.76% at last week's close. This week's Turkey issue closed on Thursday night at 98.875, down from the 99.106 re-offer.

We achieved a book of Eu2.5bn with 132 accounts allocated bonds. Turkish names bought 29%, UK 29%, Swiss 9%, Italy 9%, Netherlands 4%, US offshore 4%, Germany 3%, Scandinavia 3%, Asia 3% and others 7%.

By type, banks and retail intermediaries took 53%, funds 30%, insurance companies 14% and others 3%.

What was particularly noticeable was the number of accounts that hadn't played in Turkey before. Broadly, a third of the bonds went to Turkey, another third to emerging market accounts and the remainder to investment grade and non-traditional emerging market buyers. Some of these had bought Turkey before, but a lot hadn't.

Insurance companies bought 14% of the deal of which the majority were new to the Turkish credit. This deal has put Turkey back on track for 2007.

 

Market appraisal:

"...they played this second deal of the year very well, especially in light of their disastrous dollar trade. To come to the market with a well thought through euro deal has put them back on the right foot. And 170bp offered decent value but was not too cheap.

Euros are trading well against the dollar curve, so the whole thing made sense."

 

"...Turkey needed a success. This 12 year Eu1.25bn deal has pushed their curve out. They priced it for success and they got the result."

 

"...this is exactly the deal we were pitching to them, so not surprisingly, I agree entirely with the strategy. I liked this deal — it was sensible and realistic and was precisely the trade they needed.

In the normal course of business, they wouldn't have had to come quite so wide but they had to pay up a little after the complete débâcle that was their last trade.

In light of the circumstances, this was the a good deal."

 

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