Turkey’s corporates, having long shied away from international debt markets, are waking up to an array of financing choices available to them. “Turkey is an attractive investment grade country on the fringes of the eurozone with very strong corporates that have both domestic and international business,” says Nick Darrant, head of CEEMEA syndicate at BNP Paribas in London. “Expect 2014 to be busy.”
Debut and repeat issuers are tipped to make an appearance in 2014, even bringing deals in currencies other than the dollar. But before investors rush to Turkey in anticipation of deals, they would do well to pay attention to the lessons of last year. Bad news, goes the old saying, comes in threes; a teaching that Turkish corporate issuers will certainly understand after a promising start to 2013 in the capital markets was almost snuffed out by a trio of damaging events.
Violent domestic protests, civil war in neighbouring Syria and investors’ rush to exit emerging markets after comments from the US Federal Reserve in May about possible plans to taper its quantitative easing programme, placed obstacle after obstacle in Turkish borrowers’ paths.
“That unsettled markets around Turkey,” says Darrant, “and you didn’t see any issuance for three or four months, which was unfortunate because quarter one was really quite active for Turkey across all sectors.”
Indeed, in Q1, Turkish issuers across all sectors — SSA, corporate and financial institution — printed bonds in the international market totalling $4.4bn, according to Dealogic. This was slightly up on the $4.1bn printed in the same period in 2012.
Turkish corporates made up a small fraction of the Q1 2013 total, with just one deal signed. This is somewhat understandable — as well as having a much higher funding demand than corporates, the sovereign and the bigger banks are much more established in the bond market, with the sovereign coming to the dollar, and most recently euro, market once a year or more since the start of the millennium.
But the corporate bond that did print in Q1 2013 — a March issue by Arçelik — was a corker. The white goods firm printed a $500m note with the tightest ever pricing for a 10 year sub investment grade CEEMEA corporate borrower. The bonds were priced with a 5% coupon to yield 5.125%. The thinly traded bond hasn’t done as well in secondary as it did in the primary markets, and was trading at 89.875 on December 9.
Turkish corporates began to warm to the market in the second quarter of last year, printing $2.04bn of bonds across four deals. Overall, high bond volumes continued into Q2 2013, with $6bn of deals across all sectors sold to international investors, according to Dealogic.
But volumes dropped off sharply after May 22 when US Fed chairman Ben Bernanke dared to remind the world that at some stage QE had to end — though he was careful to say that the Fed would only start to turn off the taps if the US economy could take it. The resulting sell-off of all local emerging market debt hit the Turkish market too. Only $2.2bn of internationally marketed bonds were sold in Q3 in Turkey across all sectors, though almost half of this total came from corporate issuers.
The first Turkish issuer to come to the market after May 22 was Port of Mersin. The port operator printed a $450m deal from a $1.5bn book on August 1. The second deal was a $500m Eurobond debut at the end of September for soft drink bottler Coca-Cola İçecek.
The market found stable ground again towards the end of 2013 and began to pick up with $8.8bn of bonds printed across all sectors between October 1 and November 26. “We are now beyond most if not all of those macro concerns,” says Darrant.
First time frenzy
The driver behind 2014’s business will be more debuts. “We’ve seen half a dozen names come to the market for a debut and there will be probably double that in 2014 and maybe even some repeats,” says Darrant. “Corporate names trying to build a curve is a new direction [for the market].”
In total, six debut issuers, three of which were corporates, raised money through bonds in 2013, according to Dealogic. The corporates to come to the market were some of Turkey’s largest and most diversified. In addition to Arçelik and Coca-Cola İçecek, industrial conglomerate Koç Holding issued a $750m bond.
The most likely name to kick off corporate debuts in 2014 will be Türk Telekom. The firm hired BNP Paribas, Barclays, JP Morgan, Standard Chartered and Emirates NBD to arrange its debut Eurobond, according to bankers away from the leads. However, the plans have been put on hold, most probably because of the dispute with Syria and the Fed announcement, the bankers reckon.
“You want marquee names to set reference points in both primary and in secondary,” says Darrant, speaking generally and not about Türk Telekom, “so as to put Turkey on investors’ maps with big deals from easily recognisable companies. Whether by design or otherwise, that’s how it’s going to pan out in 2014.”
Where the sovereign leads...
But it won’t only be debut issuers keeping bond desks busy. For those firms willing and capable to build up their presence in the capital markets, the most obvious route is to follow the path of diversification beaten by the sovereign. As well as printing three dollar bonds in 2013 totalling $4.2bn, according to Dealogic, the sovereign had huge success when it printed its first euro-denominated bond since 2010 at the beginning of November. The €1.25bn eight year note was priced at 99.339 to yield 4.45%. The sovereign has also had success in the sukuk market in the last six months, printing a $1.25bn Shariah-compliant bond in October 2013.
“The sovereign’s sukuk could mean that it opens the sukuk market for corporate issuers,” says Spencer Maclean, head of syndicate, West, at Standard Chartered in London. “One thing that Islamic accounts cannot buy is conventional bonds, so this will make a new set of investors available should they come.”
Other asset classes are also becoming more common in Turkey, such as Swiss franc deals and increased MTN activity. “Each feature demonstrates Turkish issuers being able to attract a diverse set of borrowers,” says Maclean.
And there’s potentially more diversification to come in 2014. “Malaysian ringgit Islamic deals are something we could see in 2014 across the broader Turkish market,” says Maclean. “This is all good in terms of developing Turkey’s capital markets.”
Turkey can and should exploit its geographic position to attract investors. Few countries can boast such close links to Europe, Asia and the Middle East.
“Turkey is ideally placed to gain from recovery across Europe,” says Gaurav Arora, director, CEEMEA debt origination at RBS in London. “Those in Europe, the Middle and Far East are becoming much more comfortable with Turkey as an investment destination.”
But it’s not just sukuk that is opening up to Turkish issuers. Again corporates should look to the sovereign for guidance. “The next step is accessing the euro market and this could happen as early as 2014,” says Darrant. “After the eurozone crisis, western Europe is not looking as stable as it once did and euro investors are looking outside their own borders.” However, euro issuance will probably be limited to investment grade issuers in Turkey, says Darrant, adding that they are “going to be the sweet spot for euro deals”.
Loans lay low
While the bond market is growing in volume and investor base diversity, the international loan market in Turkey remains almost completely inactive as far as corporates are concerned.
“None of the international banks have much of a presence in the Turkish corporate space,” says a senior loans banker who does not want to be named. “The local banks have it covered. They offer looser covenants and better terms than we are willing to.”
There were only three loans signed for Turkish corporates from international lenders in 2013, according to Dealogic. The largest of these was a $4.75bn May refinancing facility for telecom firm Otas, that was heavily oversubscribed, suggesting a strong demand for Turkish deals among international lenders.
Akbank, BNP Paribas, Citi, Deutsche Bank, JP Morgan and Türkiye Garanti Bankası were mandated lead arrangers and co-ordinating bookrunners on the Otas facility.
It’s not just the easier terms from domestic banks that push Turkish corporates to the local market. Borrowers are also dissuaded from raising international bank debt by the lack of lender appetite for long tenors.
“Given the privatisation agenda and infrastructure investment in Turkey,” says Arora at RBS, “there is a natural demand for long term financing and in sizeable quantities.”
Banks are often unwilling to lend above five years to corporate deals, not only in Turkey but across all of EMEA. In western Europe a workaround has been reached by adding extension options to five year facilities, though this will not be exported to CEEMEA deals, say loans bankers. Long loan tenors are unavailable to borrowers partly because of the cost of capital to banks, partly because five years has traditionally been the upper limit on loan tenors and the market is loath the break this, and partly because the bond market provides long term funding.
“Loans markets are, and should remain, an important source of financing for corporates,” says Arora. “Especially given strong banking relationships and significant market liquidity. But the bond markets appear to be becoming the go-to avenue for longer term debt financings.”
Though Turkey’s corporates are still new users of the international bond and loan markets, DCM bankers’ positive feeling towards the country is unmistakable. All that’s left now is for Turkish corporates to answer the call.