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Banks and corporates size up 2014 opportunities

By Gerald Hayes
08 Jan 2014

Turkey’s bank and corporate yields are still recovering from having been punched upwards over the summer months by a combination of US Treasury volatility and investor caution around political protests in the country.

But despite the mid-year shock to yields, 2013 was an exceptionally impressive year for Turkey’s corporates and banks in the capital markets.

More corporates from the country than ever before set sail in the Eurobond market to enthusiastic investor reception.

Banks, meanwhile, built on their arsenal of funding tools. The last year saw Turkish borrowers issuing in their local currency internationally for the first time. And all five of the biggest Turkish banks set up MTN programmes, allowing them to regularly issue in a variety of currencies in small private placements. 

But the banks also maintained appetite for their existing products. In the syndicated loan market they crunched pricing even tighter, leaving lenders worried they would attempt even more aggressive pricing in the coming 12 months.

Though many of the borrowers have ambitious plans for 2014 — the financial institution borrowers even have their eye on structured funding and covered bonds — some wonder if Turkey’s borrowers can keep up the same pace of development in the face of QE tapering and the ensuing volatility. 

Some of Turkey’s most experienced financial institution and corporate borrowers gathered on December 9 in Istanbul to discuss the attractiveness of the array of funding tools available to them and how they will combat the risks that they will surely face over the next 12 months.

Participants in the roundtable were:

Bora Böcügöz, executive vice-president in the treasury, FI and private banking group, DenizBank

Mert Öncü, assistant general manager, treasury department, Yapı Kredi

Levent Cem Eğritağ, foreign borrowings vice-president, international banking business unit, Akbank

Levent Çelebioğlu, corporate banking and financial institution, assistant general manager, Türk Ekonomi Bankası

Mustafa Turan, senior vice-president, international banking and investor relations, VakıfBank

Rajiv Shah, vice-president, Debt Capital Markets, CEEMEA, BNP Paribas

Müge Ekşi, managing director, head of capital markets advisory, UniCredit Turkey

Moderator: Francesca Young, emerging markets editor, EuroWeek

Çiçek Uşaklıgil Özgüneş, corporate finance and treasury manager, Anadolu Efes

Çiğdem Güres Erden, corporate treasury director, Coca-Cola İçecek

EUROWEEK: Turkey’s issuers had an extraordinary start to the year and broke new ground with Eurolira bonds. But there was much turmoil in the country’s paper over the summer, caused by reasons both internal and external. How attractive is the dollar bond market now for Turkish issuers? 

Çiğdem Güres Erden, Coca-Cola İçecek: We were caught up in the tapering and Gezi Park events as we picked banks for our Eurobond process in May. You’re right, the market wasn’t the same after these events — there was a complete turnaround over the next two to three weeks. And it has affected investor appetite ever since in that they have become more selective. 

But if you look at our issuance, today we are trading inside the Turkish sovereign. That is because we are a blue-chip corporate with an investment grade rating — BBB from Fitch and Baa3 from Moody’s — and we have a good story going forward with free cashflow generation positive and debt leverage ratios under control. Because of that, we benefit from reliable appetite from US investors because they still have lots of money to put to work.

Currently, European investors are more selective than US investors. They look at all the benchmarks in Turkey more than US investors do, and they focus on the relative returns more.

EUROWEEK: With yield volatility almost impossible to avoid in 2014 are you now more focused on spreads than yield?

Güres Erden, Coca-Cola İçecek: You need to look at the spread over benchmarks first and then the total yield. You can fix Libor/benchmark rates and manage the rates volatility separately, so comparing the alternatives spreadwise makes more sense. The increase in benchmark rates — US Treasuries in our case — caused a sudden jump in spreads this summer, increasing the total yield as a result.  

Investors were distinguishing Turkish corporates and banks from everyone else out there. The Turkish sovereign, banks and corporates were the worst performers of the emerging markets — the spreads moved up to 450bp-500bp, they were at high yield bond levels.  We waited and found a good time to go to market but right now, rates and spreads are still in the process of normalising. Spreads may go down and normalise further.

2014 isn’t going to be like this. It’s not going to be as easy as 2012 — the borrowers who chose 2012 to issue were the lucky ones. I don’t expect it to be as bad as we saw last summer, as that was the first shock seen in the market and markets overeacted. 

Rajiv Shah, BNP Paribas: That’s completely true. The dollar market is always going to be the major funding base for growth market issuers such as Turkey. Investors are being more selective though.  They’re not buying indiscriminately as they almost were in April. Levels are wider, and issuers will need to pay up to get deals done, particularly I think in the FIG space, where there are several issuers now and it is a very developed market. On the corporate side, issuers still benefit from rarity value in certain sectors. 

Looking to next year, the strategy will be to open up new markets for Turkey. If you look at where Brazil and Russia are today, they have access to Swiss francs and euros, for example. Diversification away from dollars will be the key theme for 2014, in my view.

EUROWEEK: The banks have started to embrace new markets already to diversify funding sources. Is there a focus on further diversification, perhaps to euros? And is there a need for the corporate sector to do the same?

Levent Çelebioğlu, Türk Ekonomi Bankası: It’s not a case of whether we see value in diversifying, it’s a demand issue. The demand is all in dollars.

The euro liquidity is not there for us. You can see from outstanding market issuances that except for the sovereign, nobody issues euros. That is because the liquidity is in dollars both for banks and corporates. 

I was pessimistic as to the outlook for Turkish credit markets after quantitative easing tapering was declared in May and that resulted in only two bonds from Turkey printed over July, August and September. But now I’m optimistic. You don’t see bonds that are 18 times oversubscribed now. But they are six times oversubscribed. That isn’t too bad. 

In terms of liquidity, the demand for bonds is in dollars. But strangely, when you look at the book breakdowns, Europe and London are the key buyers rather than the US. Europe accounts for around 30% of demand for each deal.

Çiçek Uşaklıgil Özgüneş, Anadolu Efes: There are a lot of redemptions in 2015 in dollars. Nobody wants to take the risk of issuing in another currency to refinance maturing loans. That will keep dollars as the preferred currency.

Bora Böcügöz, DenizBank: But it is a good thing to consider because from a trading perspective euro rates are expected to stay lower than dollar rates. Also, US investors may be more worried about tapering issues. So from an issuer perspective, euro denominated Eurobonds may look attractive. 

However, demand and supply have to meet each other.

Turkish corporates and banks want to print benchmark issues. But it’s not easy to do that with a Reg S only euro denominated Eurobond.

If we see a pessimistic US investor base and more bullish euro investors, then the issuers may look more seriously at doing euro deals. Those kind of trades may have to begin with a sub-benchmark sizes though.

Müge Ekşi, UniCredit: I’m more optimistic about the euro market. The Turkish sovereign, after waiting for three years, decided to tap the market a few weeks ago — it was a highly successful transaction and they were able to achieve pricing inside their secondary curve, which is quite illiquid. 

One of the stumbling blocks for other Turkish borrowers in issuing in euros has been that there was no liquid benchmark curve. Investors found not having a pricing reference point difficult. But now the sovereign is back in the euro market, that exists.

It’s harder for corporates to make the decision to diversify, because corporate trips to the bond market are often one-off transactions where financing needs are addressed in one shot. But for banks who have ongoing financing needs and are looking to diversify, euro trades make a lot of sense. A lot of EM peers are doing so — there has recently been a lot of Russian issuance, for example, in dollars and in euros.

Levent Cem Eğritağ, Akbank: I agree with Müge. There are reasons to be more optimistic about euro trades. Firstly, precisely because there is no euro denominated issuance by any Turkish corporate or financial institution, there is a scarcity value to this paper that will help issuers tighten pricing. Secondly, it’s a natural move — the European market is the second deepest debt market in the world. 

In 2012, Turkish FIs and corporates placed $10bn of international bonds. In 2013, that number reached $8.5bn. I started to question whether the supply is more than the market can absorb. If we see the same kind of volumes of issuance in 2014, we would be wise to start diversifying into new products and new currencies.

Third, we should also note that the basis swap has been tightening substantially since September. It was around 25bp previously, but since September it’s come down to 15bp, which makes euro notes much more attractive in terms of dollar equivalent costs after swapping.

Finally, it’s a debatable point, but the euro is expected to depreciate against the dollar in the near future, which if true will create a cost advantage.

Definitely dollars will continue to be the main funding currency for Turkish issuers, as is the case for other EM issuers. But it won’t be a surprise to me to see euro issuance by a Turkish bank emerging as complementary, not competitive, to dollar issuance.

Böcügöz, DenizBank: I understand that diversification could become valuable, but there are still question marks over euro issuance. Why do you think the market isn’t focusing more on Turkish lira and other currencies such as Japanese yen?

Çelebioğlu, Türk Ekonomi Bankası: There is certainly huge appetite from the corporate side for long term Turkish lira loans or bonds rather than foreign currency borrowing because of the volatility in the Turkish lira foreign exchange rate. They need long-term Turkish lira funding. But is there really a demand for Turkish lira bonds in the international market?

Shah, BNP Paribas: Offshore local currency bonds from emerging market issuers have always been a fairly niche area. Investors tend to not like to take currency risk as well as credit risk at the same time. We saw Garanti Bank and Akbank come to the market with Eurolira transactions in 2013, but those trades have widened out considerably. That makes it difficult going forward because investors will see those as benchmarks, even for the corporate sector. It’s also difficult when you consider that one of the major concerns that investors bring up on a regular basis is Turkey’s short-term capital inflows and the exchange rate. So printing Eurolira bonds is going to be difficult in the near term. Looking further out though, it is certainly something that may come back.

Ekşi, UniCredit: I agree. The liquidity has been quite low in those trades, and those transactions happened at the peak of the market. They were very well timed. But it seems like they’ll be difficult to follow.

Mert Öncü, Yapı Kredi: I am positive on the prospect of euro issuance. Basel III is coming and we think that euro market investors are more prepared to invest in tier one and tier two bonds after the introduction of Basel III than the US investor base. 

If a Turkish bank or a corporate in the future needs to issue subordinated debt, it would probably be easier to convince the euro investor base to start with senior issuance and then move to subordinated.

The dollar market knows us — our names, the country, the banks. They know us much better than in the euro market. In the euro market we need to do what we did in the dollar market three or four years ago to introduce ourselves — roadshows etc — so we can pass our information to them and also take their comments onboard.

Uşaklıgil Özgüneş, Anadolu Efes: It also depends on the maturity you need. In dollars, you can issue in much longer maturities. In euros or other currencies, it makes more sense if you are planning to issue for relatively short terms.

Öncü, Yapı Kredi: Euro issuance will start with five year senior bonds. Similarly to when the dollar market started — we started with five years first, then seven, then 10. In the medium term, we will build up to issuing tier one and tier two 10 year notes.

EUROWEEK: What about the possibility of issuing in Japanese yen?

Böcügöz, DenizBank: This issue has been discussed from time to time with counterparties. But at the moment even the Turkey Treasury borrows through the JBIC guarantee structure when it issues in yen, which is demonstrative of Japanese investors’ expectations with respect to the rating and credit quality of deals.

For the time being, Japanese investors seem unwilling to invest in credit risk and currency risk at the same time. But from a macro perspective, the two countries fit each other. One has a saving deficit and the other has a saving excess! But that market looks like it will take some time to develop.

Cem Eğritağ, Akbank: It is likely that activity will start with private placements rather than benchmark deals.

Mustafa Turan, VakıfBank: Turkey is entering into a phase where funding needs are also changing. You will start seeing Turkish issuers looking at the capital space more in 2014, despite the regulatory capital buffers for Basel III implementation. This doesn’t change the medium term view that Turkish banks will also need to raise capital from the debt capital markets. 

Initially, we will have to use the dollar market rather than the other currencies for capital transactions. But if you don’t touch other currencies and focus on just dollars for your senior as well as for your capital, that creates a big flood of issuance, and it won’t help you in terms of pricing. 

Issuers need to start using the availabilities elsewhere for the senior market — whether that be euros, renminbi or something else — and plan accordingly for the increase in bond supply.

Turkish banks are entering a phase where the planning is more important than the immediate tapping of the markets.

EUROWEEK: Would you say most Turkish banks are looking at doing a subordinated bond deal this year together with senior?

Çelebioğlu, Türk Ekonomi Bankası: Turkish banks have been, in general, well capitalised with capital ratios over 17%-18%, but that has come down recently to around levels of 15%. After the BRSA’s new regulations, especially on capital consumption and the rates of consumer loans to slow down consumer loan growth, in the near future, all Turkish banks will need to go to the capital markets for subordinated bond issuance.

Up until now, all the subordinated bonds Turkish banks have done are in the old style of subordinated debt, which will be subject to amortisation of capital treatment under Basel III. There will be a new market in the near future of such issuances.

Shah, BNP Paribas: The first Turkish bank that comes out to issue Basel III complaint debt is going to have to do a lot of work with investors. It was the same in Russia — for the first Basel III compliant issue last year for Sberbank we had to do a lot of investor education.

But there’s other work to be done as well in terms of banks spending time with the BRSA to fine tune the language around point of non-viability, for example.

EUROWEEK: How much of the new subordinated debt regulation is still under discussion?

Turan, VakıfBank: It’s pretty much done. The first communiqué from the BRSA has been sent for both tier one and tier two, but for tier one issuance there is still some debate around taxation. A second communiqué regarding tier one structures is expected, though there is no timeline yet for that.

The first communiqué was out in September for Basel III structures and those regulations will kick in from January.

EUROWEEK: Diversification of currencies is one strategy for coping with the potential volatility of 2014. Are there other strategies planned?

Böcügöz, DenizBank: With regards to the Turkish banking sector, you have to consider the expectations on the asset side this year — mainly in terms of loan growth — and then the liability side and then wholesale funding. 

In 2014, the authorities are indicating that the Turkish banking sector is likely to have loan growth of 15%, which is less than 2013 but still significant compared to the global banking sector.

But from another perspective, this is to a great extent a rollover of the existing portfolio because, on average, a Turkish lira loan portfolio yields around 13%-14%.

If you put expected projected GDP growth at 4% on top of that, that makes over 15%.

So then it looks like moderate loan growth that will not be hard to achieve.

On the liability side up until now, deposits have always grown less than loans, which increases the loan to deposit ratio in the banking sector. That ratio is at 110% at the moment and, in 2014, we don’t expect it to deteriorate significantly from these levels.

The Turkish banking sector has a very diversified wholesale funding base. What we’ve only discussed so far is the international DCM activity, which only started in 2010. Those bonds only amount to around $20bn, including the bonds placed via MTN programmes. That is only around 15% of the banks’ total wholesale funding.

Apart from Eurobonds, we also have good syndicated loan facilities, done as relationship lending.

Even in a year like 2013, when Turkish CDS increased to higher levels, the banks managed to roll over these loans at even tighter levels. The rollover ratio with newcomers like Halkbank and Ziraat included was over 120%, which was very influential in such a year.

Other important parts of our funding are trade related financing, DPRs and lending from supranationals. DPRs and supranational funding together amounts to around $15bn. And the banking sector is also diversifying into covered bonds — SME covered bonds have been successfully launched and there is work being done on mortgage backed covered bonds.

These other forms of funding support us significantly enough that there is no need to go to the market and borrow if things develop badly this year.

Moreover, Turkish banks keep approximately TL180bn worth of reserve requirements in the Central Bank of Turkey, most of which is in hard currency. There is a reserve option mechanism that applies where if you keep the reserves in hard currency, you have to hold up to 2.5 times more than if you keep it in Turkish lira. But because FX liquidity is so good, Turkish banks have chosen to keep FX in the central banks to fill their reserve requirement.

Of course 2014 will be a tough year but, from a funding perspective, I’m not worried at all.

EUROWEEK: Just to pick up on the topic of syndicated loans — why is it that the corporate sector does not often use the syndicated loan market and is that expected to change?

Uşaklıgil Özgüneş, Anadolu Efes: For the last couple of years, the syndicated loan market lost its attractiveness because the yields in the debt capital markets decreased significantly. To get long maturities pricing was cheaper in the bond market. Also, for Turkish issuers, the debt capital markets were untapped and issuers opted for this source of funding for diversification purposes. 

But I’m sure that the loan market will regain some of its allure now, especially with the rises in bond yields that are expected because of Fed tapering.

EUROWEEK: Do you think corporate issuers could look to loans in the next couple of years to avoid volatility in the Eurobond market?

Uşaklıgil Özgüneş, Anadolu Efes: Of course. As we don’t have an MTN programme, if we were to borrow from debt capital markets, we feel it has to be at least benchmark size and sometimes you don’t actually want $500m of funding. For amounts lower than that, the private placement or syndicated loan markets make more sense than the Eurobond market.

Güres Erden, Coca-Cola İçecek: For us, we’ve never really done syndicated loans in a real sense, ours were club deals working on relationships. But in the future, as the banks become stronger via Basel III and Europe recovers, it follows that this will become a sensible form of funding. The US banks are already out there with lots of liquidity.

There was a time when the Eurobond market provided longer term, cheaper funding but we seem to have moved past that now. We’re not in need of funding this year as per our plans, but if we were, depending on the amount, the syndicated debt market would be a serious alternative for us, as the Eurobond market is expected to be volatile and windows of opportunities are short term. Bank loans are a safer form of funding under current market conditions. To print bonds, you need to have an MTN programme to be able to tap the market very quickly otherwise you have to invest four months’ worth of time to get the documentation in order and hope that the market isn’t volatile when you are ready.

I don’t think that in Turkey corporate issuers will become like eastern Europe corporate issuers where the Eurobond market accounts for 80% of total funding.

EUROWEEK: But with more issuers in the syndicated loan market can lenders be more choosy with regards to pricing? Will Turkish issuers be able to continue their trend of crunching pricing ever tighter in the loan market?

Cem Eğritağ, Akbank: It will depend on market conditions.

EUROWEEK: In other words, yes, but you don’t want to scare the banks?

Böcügöz, DenizBank: There are market makers and price takers in the syndicated loan market. The rates offered to the big sized banks set the prices for the rest of the sector. But my opinion is that we won’t see a tightening again.

Çelebioğlu, Türk Ekonomi Bankası: Yes, it’s already quite tight!

Turan,  VakıfBank: VakıfBank used to be the ones that initiated the pricing, but Akbank has started coming to the market two weeks earlier than we do. It’s always hard to be the price initiator.

Syndication pricing is driven on the basis of reciprocity. As long as Turkish banks continue to create side business for the international banks you will never see secondary bond levels in the primary syndicated loan market.

Over the next 12 months, I don’t see a major decrease in terms of the side business generated through Turkish banks, so the loans next year will be granted at the same tight price.

Sometimes loan market pricing can be cut even while the bond market widens, but I believe that is not going to be the case in 2014. It will again be a concessionary price — a much tighter price than the rating indicates — but I don’t foresee further tightening this year from the last levels of 75bp all-in.

EUROWEEK: Could the tenors of loans be increased?

Çelebioğlu, Türk Ekonomi Bankası: There are about 25 real Turkey-committed players lending in the syndicated loan market and another 10 or 15 that participate more irregularly. Because it’s about the reciprocity of business you can get from the banks, not just the risk of the credit, the pricing for financial institutions would therefore be much tighter than the corporates, which have less other business to offer lenders.

There is only one potential game changer with regards to the bank borrowing prices — and that is the large size of funding that needs to be done in 2014 for the financing of large infrastructure investments such as the third bridge and third airport in Istanbul or the Gebze-Izmir highway.

It would be better that, like Mersin Port did last year, those issuers that require long term funding get it through project bonds or infrastructure bonds. There could be an indirect funding of these large transactions through the banks though, especially if the market is volatile. Otherwise, these borrowers may go to the banks instead for direct lending.

Shah, BNP Paribas: Everything that’s been said about the ancillary business is true, but there are also a lot of new banks coming in to the syndicates which are keeping the established international players on their toes in terms of pricing. 

I’m always amazed when I see the pricing on the syndicated loans but a lot of it is to do with competitive pressures. You have Middle Eastern and Asian banks now coming in as well in quite a big way.

Güres Erden, Coca-Cola İçecek: We should differentiate between the Turkish banks and the international banks with regards to this pricing dynamic — I’ve never seen the Turkish banks start price competition. So we always have one or two Turkish banks at most involved and the rest international as the Turkish banks just aren’t as competitive on cost.

EUROWEEK: Which are the most aggressive new lenders in the market? Are they other emerging market banks?

Güres Erden, Coca-Cola İçecek: US banks mostly and some Japanese. Russians are also active while being more yield oriented but we don’t see Chinese much.

EUROWEEK: We’ve touched on this briefly earlier, but using MTN programmes has been a much wider trend for Turkish banks recently. Why is this and how is this form of funding used?

Öncü, Yapı Kredi: It’s mainly diversification. For Turkish issuers, including sukuk the total Eurobond market is around $23bn. The MTN market is around $2bn-$2.5bn, so only accounts for about 10% of the market — though admittedly the product for Turkey is very new. Mainly they are short term bonds, at three to six months or a year, but slowly it’s going up to three years.

Already though it has increased our investor base and allows us to issue in a wide range of currencies. It’s also a self documentation product — any time you see a window in the market you can execute easily. So these programmes can be used not just for private placements but also for benchmark issues — the programme gives us a creativity and speed.

EUROWEEK: Are all currencies considered for private placements? And are the banks willing to also issue structured products?

Öncü, Yapı Kredi: We’ve already issued a puttable deal and I believe we will do further structured products and a broader variety of these. There is interest in floating rate coupon notes with barriers and knock-ins, for example. The majority of the demand is still for plain vanilla. Next year, we’re expecting around 90% of our issues to be plain vanilla and 5%-10% will be structured.

Cem Eğritağ, Akbank: With the GMTN programme we expect to substantially enlarge our investor base because, first of all, buyers who cannot invest in benchmark deals, which are longer term, are investing through the GMTN programmes in the shorter term private placements.

Secondly, we can issue in any currency to satisfy those who cannot invest in dollar paper. Currency diversification is an important advantage of private placements.

All benchmark Eurobonds from Turkey’s banks and corporates are in dollars, but in the private placement market only 70% is in dollars and the remaining 30% is in a variety of different currencies including soft currencies as well. Issuers hedge the soft currency risk with the arrangers of the bonds.

We should remember that GMTNs are a new product for Turkish banks so GMTN performance under stress scenarios has not been tested yet. We need to keep an eye on the short-term nature of the issues from the programmes and the rollover risk attached to that.

Shah, BNP Paribas: The programmes have been a new theme throughout the year but we’ve seen more development in this market even over the last six months. At the moment, around 75% of these issues are one year or below, but the investors that were buying three month paper are now more comfortable with six month bonds and are starting to look longer. You’re seeing five year private placements, for example, so I think the market is developing. It is a specialist investor base and those buyers do gradually need to get more comfortable with this paper, but it has been impressive how nimble and flexible the Turkish issuers are. MTN dealers have largely been surprised by the variation in private placements that were possible. It’s a market that’s going to grow.

Çelebioğlu, Türk Ekonomi Bankası: MTNs are also quite treasurer friendly instruments. After the introduction of these liquidity ratios in the banking system, treasurers would like to more actively manage their balance sheets. These short term quick issuances are very good for maintaining those ratios.

EUROWEEK: With the success that the banks have had with this product, are the corporates interested in setting up similar programmes?

Uşaklıgil Özgüneş, Anadolu Efes: In the next five years, perhaps. It’s a very attractive product and we actually receive reverse enquires all the time since the banks started placing these notes, but for our funding needs and the amounts you can raise in each issue, it just isn’t worth the effort. The beverage business is a cash-generative business so we don’t have the continuous need for funding.

EUROWEEK: Can private placements be used to gauge appetite for demand for larger benchmark issuances in terms of currencies?

Turan, VakıfBank: Not really because the typical short-dated private placement investors are different to benchmark investors. They may sit within the same investment company but because probably they book these private placements into different funds, the pockets of interest are quite different, as is reflected by the maturities at the short end of the curve rather than five to 10 years.

The availability of short dated private placements at relatively low cost was an additional gain after setting up the programmes but it was not our primary target — the primary target was diversification.

The upgrade to investment grade last year by Moody’s in May was the biggest boost for this market as investors typically demand products rated investment grade by at least two rating agencies.

We see the MTN programme as part of our long term product offering and want to build a reliable investor base for it so that we can typically rollover the deals easily when they mature.

Böcügöz, DenizBank: Are the short durations available in the MTN market a result of the high volatility of last year or are these typically the main investors?

Turan, VakıfBank: No the investor type is different. It’s similar to our Turkish money market funds — you can’t sell paper over six months. There are specialised funds looking for the short end of the curve as their investment mandate is limited. It’s great to see Turkish banks attract this kind of funding which was not on the table just two years ago.

EUROWEEK: Has the sovereign upgrade to investment grade also made a difference to the appetite for covered bonds?

Ekşi, UniCredit: The three covered bond programmes that have been set up were all rated the same even though the underlying issuer ratings were different because they are capped by an A3 Moody’s rating and they were only rated by one agency. This is because these were private placements, not planned for the public market.

Going forward, we’re very optimistic on public market covered bond deals. Several banks are preparing to do their first mortgage backed covered bond transactions.

The ratings of those are again expected to be high. They’ll be public transactions so they might have two ratings and we expect the reception to be good. The investment grade rating of Turkey helps that because it expands the community of investors willing to analyse this asset class. In Europe, there’s been a net reduction in supply of mortgage covered bonds so we believe that this longer term investor base will want to look at Turkey.

The legislation for Turkish covered bonds is very advanced because the capital markets board published its covered bond legislation much later compared to other countries. In doing so it adopted and developed the best of different legislations out there so, for example, when the first SME deals were done in Turkey they were actually the first in the world because many countries didn’t include SME assets in their legislation.

We’re as optimistic on the public covered bond market for Turkey as we are on the euro market.

EUROWEEK: What’s your estimation for how many public covered bonds will be printed in 2014?

Ekşi, UniCredit: One or two. As is always the case, there will be some frontrunners that open the market. Those transactions could come as early as the first quarter. As they are programmes rather than one-off transactions, once they are in place frequent tranches can be done to appeal to different investor bases, private or public.

Some people criticise the SME covered bonds because they were IFI led deals — that’s true but they secured long term or medium term financing including in Turkish lira at times when the market wasn’t open. We believe it’s prudent for banks to include this product in their arsenal. It’s essentially another form of diversification.

Shah, BNP Paribas: Covered bonds are hardly present from banks in the growth markets. In dollars, you only have really one issuer from Korea and their covered bonds trade around the same level as senior secured paper for similar credits so there’s not much value. In euros it’s going to be interesting — the banks are going to have to do a lot of work with investors to get them comfortable on the jurisdiction risk because, so far, it’s been predominantly a western European bank product, but we do see potential demand there.

Çelebioğlu, Türk Ekonomi Bankası: On the covered bond side there needs to be a strong sweetener for issuers by way of a substantial spread difference between senior unsecured and covered bond pricing levels. If not we have the senior unsecured market we can easily issue in so why would I want to give up the collateral to issue a covered bond?

Today our concern is not FX liquidity, it’s capital so I would be more keen on RMBS. In covered bonds there is no capital relief, whereas in the RMBS market there is. If I give up my assets for a structure, I would obviously prefer to get that capital relief.

Ekşi, UniCredit: There’s no point in putting together a covered bond programme if you don’t believe that you’ll get better funding than your senior curve, but the reality is that in developed markets there are substantial savings. Once the jurisdiction risk is understood and the asset class has been established the cost saving should be evident even with the first transactions. There’s a spread differential between sovereign trading levels and the senior paper of the banks. With a covered bond, pricing should end up somewhere in the middle.

One day we will likely see RMBS trades but, from the point of view of legislation for first time transactions and putting the infrastructure in place, we lean towards covered bonds. Investors appreciate the dual recourse aspect of these — to the pool of assets as well as the issuer. As a next step we might see RMBS deals, but I don’t expect it in the very near future.

EUROWEEK: What opportunities are available in the domestic market? Could this market grow in importance over the coming few years?

Böcügöz, DenizBank: Yes. The local debt market — corporate and bank bonds — started in 2008 and has now reached up to TL50bn of outstanding debt. It’s grown with more than 300 issues having been placed. There are 18 banks issuing, 35 non-bank financial institutions and 27 corporates. That is huge growth. However, there’s a long way to go — it’s coming from a low base but has a lot of potential when you look at the corporate to sovereign debt ratios in other emerging markets. In Turkey that ratio is at 6%. In Brazil it is 35%, in South Africa it is 36%, Hungary 37%, Russia 53%, China 66% and South Korea, 67%.

The public debt to GDP ratio is being reduced and the projection for 2016 is 31%. So there’s no pressure at all from the public side to issue more which has incentivised the private sector to further grow its activities in the domestic market.

There are also government policies to encourage the institutional investor base and expand that, in particular the pension funds. The pension fund sector was around TL12bn three years ago, now it’s TL27bn so there’s already been a 125% increase in this area.

Also, the new investment grade rating is another supportive factor in encouraging foreign investors. We don’t have many foreign investors in this market.

But for local investors, local DCM is becoming more attractive because inflation is lower now and there is low public debt. High net worth individuals and other local investors are searching for high yield and diversified investments in their asset portfolio mix.

EUROWEEK: What level of pricing is available in the local bond market compared to the international market?

Böcügöz, DenizBank: Long term international DCM funding is not really comparable with mainly short term local Turkish loan funding. In general, the Turkish banks offer a 50bp-60bp spread over the sovereign for a six month maturity. But they are very different investor bases.

Uşaklıgil Özgüneş, Anadolu Efes: From a corporate perspective, especially if you’re a large corporate, securing Turkish lira funding in the domestic market can be cheaper than bilateral bank borrowing. One reason being the tax regime in Turkey. But because it’s a short term market there is a high rollover risk especially for smaller corporates. In the domestic bond market, corporates can only print paper with a maximum tenor of two years.

Güres Erden, Coca-Cola İçecek: The local market pricing makes sense up to two years. For funding of three years or more, doing a Turkish lira Eurobond transaction like Akbank, Garanti Bank and Sberbank did is preferable.

Within Turkey the pricing methodology is very different to internationally. For example, right now our Eurobond trades inside the sovereign but that would be impossible to achieve on the local bond market.

Turan, VakıfBank: However, the two corporates we have here today are not representative of the whole universe of Turkish corporates because they are much bigger and more highly rated than most in Turkey. A typical Turkish corporate doesn’t have a rating and doesn’t have the sophistication to be active in the bond markets. They are also spoilt by the Turkish banks in terms of pricing. Even unrated mid-size corporates receive concessional pricing, especially for short term borrowings. That’s why they are not motivated to come to the local currency bond market.

The ones who have come to the market are actually the higher risk companies — high leverage factoring companies, for example — so that is why the market is not functioning. The other side of it is the investor base. Overall private pension funds have accumulated and are growing fast. But at the moment they are less than 2% of the Turkish banking system asset size, so that speaks volumes about why we don’t have a long tenor local currency bond market. It’s because of the low savings rate.

Uşaklıgil Özgüneş, Anadolu Efes: Do you think it would help to develop the sector if international banks were allowed to be intermediaries for domestic issuances?

Böcügöz, DenizBank: I don’t think so. At the moment there are institutional investors such as pension funds and Turkish bond funds, which themselves are invested in by high net worth individuals. If you have a deep private banking investor base, then the development of the market is easier but that is not there.

The other difficulty at the moment is the balance between the expectations of the investors and of the issuers. They just don’t match. Existing corporate issues typically pay 350bp-400bp over the sovereign for two year local bond issues.

There is room for more inclusion of the pension funds in the corporate bond market. So far the authorities do not really incentivise pension funds to invest in longer term corporate bonds. They can invest in bank deposits and bank bonds easily, so it’s easy not to look at the corporate bond market.

Ekşi, UniCredit: The statistics about distribution of local bonds are actually public. International investors account for less than 5% of all the issues that have been done. For the larger corporate deals — in Turkey, large means anything over TL150m —those public offerings really need the large banks’ distribution networks. The high net worth individuals play a very important role but so can retail investors.

Güres Erden, Coca-Cola Içecek: If the local corporate issuers in domestic market are paying 400bp over the sovereign, that’s much wider than for a Eurobond issue. What’s the main factor that stops international investors coming to Turkey to pick up that high return?

Ekşi, UniCredit: It’s the different credit profile of the issuers and the relatively smaller size of issuance. As Bora said, if you look at the issuers in this market, up to last year they were largely factoring companies, consumer finance companies and recently some new corporates. Although these can be top tier names, these transactions are really not on the radars of international investors. International investors also look for liquidity so they are hesitant to invest in TL50m-TL75m transactions.

Turkey’s capital markets board has taken many steps to improve transparency and liquidity though. For example, they encourage ratings — if you are a financial institution and have a rating, you have a higher issuance limit. Liquidity is also facilitated by the ability of companies to list on Borsa Istanbul either through public offerings or through the option of listing private placements in an offering market for qualified investors. But still, the notes are fairly illiquid. Those are the major deterrents.

Güres Erden, Coca-Cola İçecek: What about clearance issues? Is it easy for international investors to invest in Turkish local bonds on a practical level?

Ekşi, UniCredit: If investors already buy government Turkish lira bonds, they already have the systems in place, the main custody bank arrangements. Those are easily transferable, but to go from buying government bonds to buying a consumer finance company or a factoring company is a big step. It’s only recently that there’s been diversification into the big holding companies, and some new corporate names but names like Coca-Cola or Anadolu Efes have yet to print in the local market.

Böcügöz, DenizBank: My advice to corporates is to try a taste of this market. The main thing to look at is whether you would pay a reasonable spread over bank deposits. Bank deposits are an easy, comfortable short term product for investors so they would need to be tempted away by a higher spread.

In previous years it’s not been easy to pay a higher spread than bank deposits, but thanks to the new Central Bank monetary policy this is now possible.

It’s also a case of education. You might start with printing relatively low amounts at the beginning, but you could be surprised by the demand and in consecutive issues print much larger amounts.

EUROWEEK: There have been a large number of Turkish debut corporate issuers in the international bond market over the last year. But does that risk the loss of Turkish corporate bonds’ rarity value?

Güres Erden, Coca-Cola İçecek: It will continue because investment grade corporates issuing debut transactions or second transactions is still quite rare. There is $8bn of paper outstanding right now, but I don’t foresee another $8bn being printed in the next two years.

All the issuers that can come to this market and get good rates and maturities have already done this. I don’t think that there is going to be much issuance this year because of the large amount printed last year.

Shah, BNP Paribas: Rarity value is going to continue to drive the Turkish corporate market. But there are 20 corporates that are rated and only nine have so far come to the market. So I think there will be more over the next couple of years. But as we’ve seen from the oversubscriptions on these deals, investors have been very enthusiastic about these names and there is ample demand.

EUROWEEK: It seems that you all feel fairly comfortable going into 2014 from a funding perspective. But what do you see as the big risks?

Shah, BNP Paribas: Potential oversupply of paper is an issue for the banks. It’s something that investors always bring up with us — they’re very focused on the pipeline of bonds.

And there are going to be more questions about the Turkey macroeconomic environment. Investors are monitoring that far more closely than they were in April so banks will need to be cautious of that.

As we said at the start though, the way to get around that is diversification and there are alternative markets to explore that make sense.

Turkish issuers are generally very well regarded by investors, but higher premiums may have to be paid.

Turan, VakıfBank: We had five benchmark transactions in the market over the last two years. Our largest oversubscription happened at the end of October last year.

No one can argue that last year market conditions were favourable. But, if you have the right marketing and execution strategy and good timing, deals can get done.

We are entering a new environment with regards to financing, but Turkish banks as well as the Turkish economy, in general, are flexible. We adapt maybe even faster than some of the developed markets.

It’s clear that we will no longer go back to 3% coupon transactions in the dollar market. We printed a 3.75% deal in April, but we accepted the new reality and sold a 5% coupon transaction in October.

As long as you are willing to adapt and can do so faster than your competitors in other emerging market countries, it’s still possible to find safe ground.

Yes there will be tapering, but still the world is full of liquidity in different currencies and investors will always look for yield, which Turkish issuers can provide.

There may not be a big year-long window of opportunity but there is lots we can do in 2014.

Böcügöz, DenizBank: There are plenty of uncertainties. Global risk appetite is not a certainty. Turkey has three elections in a 1-1/2 year period which may add to the uncertainty, though we’re not expecting too much volatility as a result of that.

Inflation is not at its target yet, which is linked to Central Bank monetary policy, and growth under the new complex monetary policy is also under question by investors.

We Turkish banks, we think we understand the new monetary policy changes and why they have been put in place. But some investors are worried about what happens if these policies are not enough to keep the currency within certain levels and the knock-on effect to their investments.

The current account deficit is another issue we have to face.

Specifically with regards to the banks though, there have been a lot of regulations and other measures put in place that will constrain the profitability of the banking sector. As a result, the return on equity levels may come down further in 2014.

While we are proud of the prudency and transparency and strength of the Turkish banking sector, investors may see profitability as an issue going forward.

Çelebioğlu, Türk Ekonomi Bankası: All the aspects of elections and tapering may weigh on the market, but Turkish investors have already proven themselves reliable in the international markets. While we may have to pay higher levels in line with the other emerging market countries, there will not be problems with regards to our issuance of new transactions in the market and the availability of liquidity for our bonds.    

By Gerald Hayes
08 Jan 2014