First Turkish AT1 breaks ground but there's more to do
Albaraka Turk scored a solid first last week when it issued Turkey’s first Basel III compliant additional tier one bond, but while this marks progress, it will take one of the country’s larger banks to establish a true benchmark.
ABT placed a $205m perpetual non-call five sukuk at 10% to a “select investor base in the Middle East,” last week.
In marketing the deal as a private placement, through arrangers Standard Chartered, Bank ABC, Emirates NBD, Noor Bank and Q Invest, it avoided execution risk in a turbulent market, which led to higher premiums for public issues, and in the case of Russian transport leasing company GTLK, a pulled deal.
But the private format and limited distribution mean the deal cannot serve as a broader benchmark for the market.
Albaraka Turk’s AT1 debut largely flew under the radar of investors and international banks but the transaction was a long time in the making, with the structuring banks working on the deal since last July.
Turkey’s Banking Regulation and Supervisory Agency first adopted Basel III recommendations in 2013, and while tier two compliant capital bonds have become a widely adopted instrument, no tier one bonds have been issued, until now.
ABT and structuring bank Standard Chartered held long conversations with the regulator, as well as consulting the Turkish tax office to verify the implications of withholding tax on the instrument to create a structure which suited all parties.
The successful placement of the deal provides structure which other Turkish banks can use, and the issuer and StanChart should be applauded for forging a path through the regulatory thicket. Albaraka Turk’s deal comes with a temporary writedown at the point of non-viability, bringing the structure in line with AT1s from several Scandinavian and French banks.
But the deal’s privatel nature mean that it does not offer a relevant benchmark for the likes of Akbank, Garanti or Vakifbank, all of which may need to issue AT1 in the future.
Albaraka Turk’s bond was sold as a private placement to a small group of investors in the Middle East meaning that the deal was no real test of broader investor appetite for Turkish additional tier one debt.
It is also evident from the coupon (or profit rate, since it was structured as a sukuk) that there was no real price discovery process, and that the 10% paid was a price deemed appropriate by buyers with knowledge of the bank.
In fact the new AT1 came at the same level as Albaraka Turk’s existing tier two bonds, which were quoted around 10% as well.
Other EM banks with outstanding tier one and tier two debt pay a substantial spread — for Credit Bank of Moscow, there's around 140bp between the two capital instruments. Maybe this isn't the right differential, but some spread is surely appropriate.
The issuer's choice to go private is understandable. Avoiding execution risk by selling AT1 debt to a select group, in a difficult market, is a route many issuers would probably take if they could.
But it's a missed opportunity for the wider market. It's a big step forward — but there's a way to go before there's a viable Turkish AT1 market.