Eurobonds light the way to Turkey’s future

As the Turkish sovereign looks to reduce its Eurobond activity, the country’s banks are set to grab a bigger share of investor demand. Syndicated lending will remain a key part of their funding, but the bond market is proving attractive. Issuers are also becoming more adventurous, with a covered bond on the horizon. Francesca Young reports.

  • 06 Jul 2011
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To anyone stuck in traffic in Istanbul, it quickly becomes clear that the number of cars has exceeded the capacity of the city’s roads. But the wealth of the country has grown; the road network is being expanded, surfaces fixed.

Roads are not the only infrastructure in Turkey that is in the process of being upgraded. As one of the success stories of the financial crisis, Turkey has demands that are growing fast. Its energy requirement is set to rocket over the next few years and the country’s output needs to match that rise.

These are big projects that demand long timescales — the Gebze-Izmir toll road project in western Turkey, for example, is expected to cost around $10bn. In order to minimise maturity mismatches, financing these projects takes longer term funding than what is available through the Turkish banks’ usual source of funding, the syndicated loan market.

For that reason, the last year has been a remarkable one for Turkish banks in the Eurobond market. After years of inactivity, a stream of issues has been priced in quick succession.

And the momentum of the country’s banks in the Eurobond market has only been fuelled further by Turkey’s central bank raising required reserve ratios four times since December last year in a bid to fight inflation. The ratios now stand at 16% for short term lira deposits and 12% for foreign currency deposits.

"The increased reserve requirement ratio for the banks means that they are less willing to use deposits to fund lending, but the demand for loans is still there," says Nicholas Winther, director of European DCM at Standard Chartered Bank in London. "It’s better for them to use the Eurobond market to fund."

Conveniently for the banks, these increased requirements come at the same time as the sovereign is reducing its reliance on the Eurobond markets, opening the door wider to other issuers to absorb investor demand for credits from the country.

"The government has been dominant in the debt market for many years but recently the amount of debt it is issuing has reduced and the composition of that debt is changing," said Ozlem Meric-Erten, chief executive officer of UBS in Istanbul. "The Treasury is providing room for other issuers and as this happens the corporate debt market is going to develop."

Not only are issuers increasingly willing to visit the international bond market, but investors are similarly enthusiastic. Because of that, competition to win bond mandates is cut-throat. "We are already seeing greater interest from international clients wanting to gain access to the Turkish market across currencies, rates and bonds," says Meric-Erten.

Investors are drawn to the banks’ low levels of debt and high capital ratios of 15%-20%. "In addition, growing asset sizes of pension and mutual funds, funds of insurance companies and increasing investor demand for alternative products are expected to help growth," she says.



Diversification at last

The largest four banks in the country — Akbank, Garanti Bank, Türkiye Is Bankasi (IsBank) and Yapi Kredi — have all now tapped this source of funding with great success. And Finansbank recently became the first medium sized bank to tap the market this year. With more of the country’s smaller banks expected to print bonds within the next 12 months, the universe of Turkish bank paper is becoming more varied.

However, few of the issuers that have already printed bonds are planning a return to the market before the end of the year. Many say they would rather refrain from frequent issuance in order to avoid flooding the market with bonds.

"We don’t want to be an aggressive bank that taps the Eurobond market and then re-taps and re-taps several times in one year," says Ozlem Cinemre, executive vice president responsible for financial institutions at Finansbank in Istanbul. "We have a certain funding requirement to fill for this year, and we’re halfway through that now. The rest will be filled by bilateral, multilateral and syndicated loans, or maybe asset backed financing linked to our credit card lending."

IsBank, however, is one of the banks that does intend to return this year. The bank has permission from Turkey’s banking regulator to place up to $1bn in Eurobonds before November. IsBank has already placed $500m of that.

Vakifbank is also close to mandating banks for a debut issue, one of several small banks rumoured to have approached the Turkish banking regulator for approval to issue international bonds. Denizbank is the latest to have received approval from the capital markets board in Turkey, the BRSA, for a seven year note with a size of up to $750m.

However, with the banks still well funded by syndicated loans — which are cheaper, but have shorter maturities — many banks are approaching this new source of funding with hesitancy and caution.

"The notes are relatively more expensive than many of our other forms of funding, so we’re not sure we will issue again this year, but might look at doing another deal early in next year instead," says Batuhan Tufan, senior vice president, head of financial institutions at Garanti Bank in Istanbul.

Although the frequency of deals looks set to be low from each issuer, the banks are already considering venturing out to different maturities and currencies in their next deals to build a yield curve.

"We’re not averse to issuing in a variety of currencies," says the head of treasury at a prominent Turkish bank. "Singapore, China and the Opec markets have the money at the moment and we see no reason not to tap those, so we are considering issuing in yen, renminbi and roubles, rather than just concentrating on dollars and euros. We see it as an opportunity."

Finanbank has said that it would consider issuing in other currencies. And Garanti Bank is also contemplating diversifying beyond dollars.

"When we issue Eurobonds we keep the foreign currency and use it to fund medium to long term loan demand for on-balance sheet hedging," says Tufan. "In the future we won’t necessarily stick to dollars, we’ll also consider issuing in other currencies."



Covereds getting closer

New structures are also set to be part of the future for Turkish banks, starting with covered bonds. Sekerbank has been planning one such note for over a year — the first from the country — and is now edging closer to pricing the deal. Participation from several multilateral lenders is confirmed and pricing is expected in a few weeks’ time. UniCredit is arranging the deal, which will be a Eu200m five year and is expected to get an investment grade rating from Moody’s.

"We’ve not done the roadshow yet for the deal but there is already a big book for the note through the IFIs — the IFC, FMO, EIF, EIB, KfW, EBRD — and UniCredit themselves," says Zeki Onder, executive vice president of financial institutions and international funding at Sekerbank in Istanbul. "They’re all supportive because the bond is something unique that supports SME lending, and also itself helps the capital markets offerings from Turkey become more diverse."

The deal will not be a one-off. Sekerbank plans to continue raising funds in this format to match its growing SME lending portfolio. Once the first deal is out of the way, it expects others to be more straightforward — although pricing is not likely to be favourable for other issuers at the moment.

"It’s taken some time to get into place because it’s the first covered bond from Turkey, it’s the first time SME loans are being used as the receivable in Turkey and so it’s the first time this capital markets legislation is being put to work," says Onder. "Future issues will be a lot easier, using our existing balance sheet to back the structures — mortgages or car loans, for example."

Sekerbank is one of the most established SME lenders in Turkey, according to Onder. SME and micro loans represented nearly half of its loan assets in the first half of 2010 and asset quality was sound, with impaired loans reaching a low of 2.2%. The consolidated balance sheet shows overall impaired loans of 6.5%, but many date back five years when the bank was more involved in the construction sector. Since then it has managed this exposure down from 30% to 23%, according to a Fitch report from November 2010.

Other banks, while enthusiastic about the idea of a covered bond, say that until the Republic of Turkey is upgraded, the pricing of such a deal would make it uneconomical as a source of funding. Competition for mortgage lending in Turkey is strong, driving down rates, and in the meantime, mortgage portfolios can be funded with bilateral loans from banks.

One of the largest four banks in Turkey estimated that issuing a covered bond at the moment would entail a 150bp-200bp loss on the carry trade.

"Covered bonds are not far off hitting the Turkish market, but you need to consider the ratings those bonds would get and what price level could be achieved for those bonds and whether the carry would be advantageous," says Tufan at Garanti Bank. "If Turkey and Garanti were upgraded, this kind of product would look more interesting to us, but that’s a project for the next two years."

According to Winthers at Standard Chartered, an upgrade could vastly increase the pool of investors willing to consider buying a covered bond. "The kind of investors who typically look at covered bonds are not EM investors," he said. "An upgrade would appeal to more typical covered bond buyers."



Other options

In the Eurobond market, Turkish banks have embraced the new direct issuance structure, a break away from the loan participation note structure that had previously been the norm.

Akbank was the first to use the structure, in July 2010. With the exception of Yapi Kredi, which issued shortly after Akbank, every other bank that has issued since has used the direct issue structure, which is preferred by the Turkish banking regulator.

Turkish issuers had used LPNs to get around the country’s 10% withholding tax on coupons. But for direct issues, international investors were exempted while the issuer pays the tax for Turkish bondholders.

"Looking ahead, direct issuance is going to be the way that Eurobonds from Turkey will be done," says Spencer Maclean, head of syndicate, west, at Standard Chartered Bank. "Now that the issue of how to deal with the withholding tax has been clarified by the regulators, there’s no reason not to go ahead with the formal process that the regulator encourages."

There are other options too. But although many Turkish banks are open in principle to the idea of issuing private placements, they are reluctant to set up the MTN programmes that would make issuance more convenient. They see the cost of setting up such a programme as high compared to standalone documentation — particularly if they do not expect to be frequent users of the Eurobond market.

Finansbank says it would be open to private placements in the future and has placed notes privately to a handful of investors in the past. Cinemre says that $100m would be the smallest possible size for private placements for the bank.

Tufan at Garanti also says that his bank would consider private placements, having recently added a $500m floating rate tranche on to its Eurobond as the result of reverse enquiry from an investor in the US. He says there is no minimum size for the bank to consider for a private placement, but adds that the enquiry would need to be large enough and with pricing that made sense to justify the work involved.

Other banks, however, are less open to the idea. "Despite some requests from large bond investors, we’re only doing benchmark deals," says one treasurer. "Private placements are not worth our time and we tend to find they are more expensive." He adds that his bank is more focused on using all available demand to position itself in the Eurobond market and create liquidity in those notes.



Lending drives the mandates

In the meantime, Turkish banks’ activity in the syndicated loan market will continue in spite of the new activity in the bond markets, particularly in order to finance trade finance activities. And it is lending that will remain a key factor in the awarding of mandates in the Eurobond market.

Sekerbank, Finansbank and Garanti all point to relationship reasons as a main criterion in the choice of banks used for Eurobond placements. Several refuse to use a widely-cast request for proposals to choose banks, short-listing only those firms they work with in other markets.

"We sent RFPs to a shortlist of banks that we have built a reciprocal relationship with and that we had already judged to have a strong commitment to the Turkish market," says Tufan at Garanti Bank. "We felt that in doing that we’d have the right banks to communicate the specific story of Garanti and how we differ from our peers."

Finansbank says that in future it will cherry-pick a shortlist of relationship banks for its mandates rather than approaching a large number of firms, in order to minimise the discontent caused by having to disappoint a large number of banks when making a final selection.

"Turkey isn’t different to Western issuers in this respect," says Maclean at Standard Chartered. "Issuers pick banks that they have built good business relationships with. Selling Eurobonds is a public affair and this is exactly the time that you want to use people and institutions you trust to guide you."

A representative for another bank says that it rigorously chooses its banks based on relationships, experience and fees. However, he adds that the bank is criticised for this by Western institutions, because it lessens the hold that those banks have on Turkish borrowers.

"Our relationship with the banks is very important, but we take into account a variety of factors — experience, price, arrangement fees, which are usually close to zero, although we decide that on a bidding basis, their presence in different markets and the support provided in the secondary market," says the representative. "We’ve created a scoring system to help us choose on an objective basis between the banks."

The top three bookrunners for non-sovereign Turkish international bonds in 2010 were Citi, Standard Chartered Bank and Unicredit. In 2011 so far, the list is headed by Standard Chartered Bank, Deutsche Bank and JP Morgan. Banks being chosen for deals are getting into a market that is still in its infancy.

Unlike the roads of Istanbul, the Turkish Eurobond market is far from crowded. But like the country’s infrastructure, it is a market that will develop quickly. In just a few years, it could be unrecognisable.

  • 06 Jul 2011

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 239,928.76 921 8.16%
2 JPMorgan 222,471.63 995 7.57%
3 Bank of America Merrill Lynch 215,931.77 721 7.34%
4 Barclays 184,694.55 670 6.28%
5 Goldman Sachs 158,679.40 515 5.40%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 32,522.19 61 6.59%
2 BNP Paribas 32,284.10 130 6.54%
3 UniCredit 26,992.47 123 5.47%
4 SG Corporate & Investment Banking 26,569.73 97 5.38%
5 Credit Agricole CIB 23,807.36 111 4.82%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 10,167.68 46 8.82%
2 JPMorgan 9,894.90 42 8.58%
3 Citi 8,202.25 45 7.11%
4 UBS 6,098.17 23 5.29%
5 Credit Suisse 5,236.02 28 4.54%