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Market parched after supply dries up

01 May 2003

"W ater, water everywhere, but ne'er a drop to drink." Turkish bank funding officials know just how the ill-fated sailor in Samuel Taylor Coleridge's poem The Ancient Mariner must have felt.

While their peers in the rest of emerging Europe are largely awash with liquidity from foreign banks that are practically falling over themselves to lend to the EU wannabe states of central and eastern Europe, Turkish financial institutions are finding that there is no longer any easy money available to them from the international syndicated loan market.

Once the darlings of the emerging Europe segment of the Euroloan market and long used to being ardently wooed by marketeers keen to book relatively high yielding assets from an OECD member country, as a result of the Iraq crisis Turkish banks suddenly morphed into the ugly sisters of the market and found themselves themselves in danger of being shunned by their ertswhile foreign lenders.

However, the lethal mix of domestic and international politics has made Turkey a high risk, high volatility investment destination in recent months.

"Turkey's proximity to Iraq has made a lot of potential lenders and investors uncomfortable," says Peter Kennedy, global head of origination, syndication and new issues at Standard Bank London. He adds: "A lot of people decided to wait and see what happened in Iraq before looking to lend to or invest in Turkey." Now that the war in Iraq is over Kennedy says that there is likely to be greater appetite for Turkish risk.

Walking through Istanbul's nearly deserted Grand Bazaar soon reveals the everyday consequences of the Iraqi crisis, however. First the threat and then the reality of military action against Iraq frightened off foreign visitors in their droves.

And while there is the usual warm welcome from the traders in the once bustling market there is a clear note of desperation in their entreaties to tourists to come and browse their stalls. The shelves may be packed with goods, but there are precious few buyers around.

In many ways the Grand Bazaar is an appropriate metaphor for the current state of play in Turkey's banking sector - while there is certainly no shortage of salesmanship among the country's bankers, a combination of political and economic instability means that there has been a reduction in the number of banks willing to lend to Turkey's banks.

As a result, there has not been a single syndication from Turkey so far this year. There is both good and bad news for prospective borrowers though. The good news, according to Kim Humphreys, head of the corporate and sovereign syndication group at Mizuho Bank in London is that the country's top three commercial banks - Akbank, Türkiye Garanti Bankasi and Türkiye Is Bankasi - will continue to enjoy access to the Euroloan market.

The bad news is that they will almost inevitably have to pay a premium over last year's funding levels in order to maintain a presence in the market.

Akbank up first

The first of the leading trio of Turkish banks set to test the waters this year is Akbank which recently sent out requests for proposals for a $300m 12 month facility, with a likely $15m ticket required from potential arrangers. Akbank, which at 37% boasts the highest capital adequacy ratio of all the Turkish banks, is understood to be looking to mandate a group of arrangers by mid-May.

Meanwhile, Garanti is reported to be looking to refinance a Eu350m 12 month loan, priced at an all-in margin of 80bp over Euribor last May. The market consensus is that this year the leading banks will likely have to pay at least a 10bp-15bp premium to the average 160bp-180bp all-in pricing levels payable in 2002. "The enthusiasm to lend to Turkish banks is not as great as it used to be," says Humphreys at Mizuho.

"In the short term it will be challenging for banks outside the top three to access the loan market," says Standard Bank's Kennedy. "As important as the headline pricing will be the amount of ancilliary business on offer. A premium to last year's pricing levels will win over some waiverers, but the spin-off business available will be a key driver."

Ever since Turkey was rocked by two financial crises in November 2000 and February 2001, the country's banks have struggled to regain investor confidence.

The very foundations of the banking sector have since been further damaged by recent developments in Turkey's political relations with the US - the country's principal economic sponsor - which continue to switch from warm and friendly to cold and hostile on what seems like an almost daily basis.

The net effect of all of these factors is that the entire sector faces the challenge of a major restructuring which will see the dismantling of old, shaky structures in favour of new, more stable ones.

Whether such a restructuring will be successfully implemented, however, is far from certain and the lack of leadership from the current majority Islamist government is paralysing the whole business spectrum.

At the heart of the problem facing the banking sector in Turkey is the hoary old issue of related party lending within the financial-industrial groups that still dominate the business landscape in the country. Turkey is not alone in having a microeconomic environment where the fortunes of the banking and manufacturing/production/services sectors are intimately linked. But it is finding it harder and more politically contentious to push through the reforms needed to reduce the risk of lending money to corporate Turkey, which in turn is acting as a brake on economic development.

Cukovara Group, for example, has spent most of the past 12 months arguing the toss with Turkey's Banking Regulation and Supervision Agency (BRSA) over its ownership of two of the country's best known financial services providers - Yapi Kredi Bankasi and Pamukbank.

Last June, Cukovara, a highly diversified conglomerate owned by Turkey's one time richest business magnate Mehmet Emin Karamhmet, suffered the indignity of seeing the BRSA seize Pamukbank after the independent regulator ruled that the country's sixth largest bank's losses had exceeded its funds and that its precarious financial position constituted a threat not only to its depositors, but also to the entire Turkish banking sector.

After demanding that Cukovara stump up $2bn to plug the gaping hole in Pamukbank, the BRSA lost patience and took control of the bank. Central to Pamukbank's financial impecunary was the repayment - or more precisely lack of repayment - of nearly $2.7bn worth of loans to Cukovara group companies. While it was widely applauded as a sign that Turkey was at last getting serious about cleaning up the country's banking sector which has cost nearly $40bn to rehabilitate since 1997, any joy at the BRSA's move was cut short when Turkey's highest constitutional court, the Council of State, ruled against the agency's actions and suspended its seizure of Pamukbank.

Bankers view the Council of State's preliminary ruling - to be followed by a definitive judgement some time in the second half of the year - as a severe setback to the reformist role of the BRSA, which could now face having to contest its seizure of a number of banks in the past couple of years.

Uncertainty over the final outcome of the Pamukbank saga has cast a pall over the restructuring of the country's banking sector, which is widely viewed as a test case for Turkey's ability to integrate itself successfully into the global economy. *

01 May 2003