Yapi Kredi’s investor amity cannot be assumed in EM
Yapi Kredi chose to cancel a deal before settlement last week, following the attempt coup in Turkey, and a four point drop in the bond's price. The decision was wise and investor friendly, but it's not a new precedent in emerging markets.
Yapi Kredi's decision to cancel the bond benefitted both sides.
In relieving investors of their obligation to settle a bond which they may have no longer wanted, generating a loss on day one, the Turkish bank has won the respect and trust of its investor base. With growth in Turkey also now likely to slow, Yapi Kredi may also have less need for the funding, which was earmarked to back loan portfolio growth.
But even though Yapi Kredi is the second issuer to cancel a bond before settlement this year in the emerging markets, investors cannot count on all issuers behaving this way when the environment goes awry.
In February, Bahrain pulled a $750m deal after an unexpected downgrade from Standard & Poor’s pushed the bond’s spread 20bp wider.
Yapi Kredi said that a force majeure clause in the bonds was a “grey area” which may have resulted in the deal being forced to be cancelled anyway, though the bank was not definitive on this.
If the Yapi Kredi bonds had been allowed to settle, a legal battle may have ensued, but the outcome would not be certain.
Rightly so, some would argue. EM investors are paid for taking EM risk, and that includes political volatility.
While an attempted coup is very different to a downgrade, Poland in January kept its bonds outstanding despite S&P also slapping a ratings downgrade on the sovereign after pricing but before settlement.
There are many circumstances under which an issuer, especially one that had no imminent plans to return to the market, would see no benefit to pulling a bond that has priced before settlement.
Those situations would make it harder for a borrower to make the kind of investor friendly decision that Yapi Kredi — one of the more sophisticated borrowers in the CEEMEA universe — made last week.
Yapi Kredi was right to pull its bond, should be praised for a savvy move and rewarded with investor loyalty when it eventually returns to the market.
But EM investors would be wrong to assume that this is the new normal.