One year loans provide little refuge in Turkey’s storm
Turkish banks have long enjoyed cheap one year loans from international banks but it is now more obvious than ever that the sector should have made hay while the sun shone.
Regular one year Turkish bank loans have been increasingly popular among lenders in recent months.
When banks want EM-lite, they lend to the Turkish banks. Lenders can make commitments in either euros or dollars as they prefer. Tenors are short, almost entirely one year, and deal flow is regular and predictable. It’s a well-trodden path.
As a sign of the growing popularity, this year Middle Eastern and Asian banks have increased their prominence in the loans. National Bank of Abu Dhabi took a coordinator role for the first time this year and has done so in three deals so far.
The loans command huge syndicates — in March, Akbank signed a $1.3bn-equivalent deal with a whopping group of 35 banks.
Following July 15’s failed military coup, however, support from those lenders could wane, especially from the newest faces on the scene.
Last month Moody’s put Turkey's investment grade sovereign rating on review for downgrade and S&P downgraded the country's rating to BB from BB+.
The banks are next in line for a ratings hit. Moody’s put the ratings of 17 Turkish banks on review for downgrade and S&P lowered its ratings on five banks.
“[It was a] decision driven by a potential weakening of the government's capacity and willingness to provide extraordinary support to the banks, as well as the potentially weaker operating environment following the coup,” was Moody’s description of its move on the bank ratings.
Since most of the loans for Turkish banks have only one year tenors, if appetite from lenders dwindles, a funding line is imminently at threat.
The reason why the borrowers have stuck to one year deals is the lure of cheap pricing. This year’s one year loans offered a margin of 45bp for euro commitments and 55bp for dollars, for BB/BBB rated banks.
The going was too good for Turkish banks to bother pushing out tenors.
Only two banks, Akbank and Garanti, had the foresight to secure three year loans in the past year.
In July 2015, Akbank landed Turkey’s first standalone three year term loan since 2006. The deal was small, just $275m, compared with the $2.4bn in one year loans the bank signed last year.
One year loans this year have offered a measly 10bp premium for dollar commitments in an attempt to encourage lenders to give more of the US currency. But given the far higher cost of dollar funding for non-US banks, 10bp is not enough to make a difference.
This weak attempt at attracting more dollars smacks of complacency. Instead of quibbling over a few basis points for a few more dollars, borrowers should have been securing long term funding to weather the unpredictable future.
Turkish banks will be aware of their predicament now, and could easily push to do longer term loans, but the tide of lender appetite may have already turned.