Turkey: a complex credit story

  • 16 Sep 2005
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Memduh Aslan Akcay, director general of the directorate of foreign economic relations at the Turkish treasury, talks to Nick Parsons about the sovereign's borrowing strategy and its priorities in the capital markets over the next 12 months.

The Republic of Turkey has long been one of the core emerging market borrowers in the international capital markets and more recently has become the key new European Union accession play, a factor that has caused the sovereign's spreads to tighten sharply since the first wave of eastern European countries acceded over a year ago.

However, investors find themselves faced with a familiar conundrum — do Turkey's bonds offer value or has the probability and the timeframe of EU accession been over-exaggerated?

Having six months ago received the go-ahead from the EU to begin accession negotiations this October, doubts have since been raised about Turkey's membership bid as a result of EU constitution referenda in France and the Netherlands.

Still, Turkish debt has on the whole maintained an impressive performance. It is a sign of Turkey's progress in the international capital markets that the French and Dutch 'no' votes had relatively little effect on the sovereign's spreads.

This was partly because the results had already been priced in to the secondary levels of Turkey's bonds, but it is also thanks to investors' growing confidence in the country's overall economic performance.

The republic has more or less already reached its $5.5bn borrowing target this year, though it is likely to pre-fund for 2006 if the market proves amenable later in the year.

It kicked off its funding programme in style in mid-January, gouging a big chunk out of it external borrowing requirement for the year with its biggest ever bond. The $2bn deal was lead managed by Citigroup and Morgan Stanley.

The 20-year deal was not Turkey's longest — it sold a $1.5bn 30 year issue in 2000 and another in January 2004 — but with books of $12bn the deal achieved record demand.

The sovereign followed up with a Eu1bn 12 year issue via Deutsche Bank and UBS in early February that highlighted the extent to which there is now a large euro denominated institutional investor base in Europe that is keen on Turkish paper.

Turkey also looks set to become the latest emerging market sovereign to manage its external debt profile more actively — due in large part to its redeemed reputation in the international debt markets in recent years.

Earlier this year its parliament passed a new law on public finance and debt management that has opened the way for the exchange and redemption of Eurobonds. This would allow Turkey to further lengthen its maturity profile and reduce its borrowing costs — two of its main priorities.

How pleased are you with your efforts to reach your borrowing targets this year?
The strategic objectives behind our external borrowing are based on interrelated concepts — improving our profile in the global investment community, establishing consistency in all of our issues, continuing to diversify our investor base, and ensuring a coherent funding programme.

Our financing objectives accompany these strategic objectives. The ability to achieve low borrowing costs while offering liquidity is one of our primary targets. Our Eurobond deals in 2005 reflect our commitment towards our targets of extending maturities and lowering borrowing costs.

In 2005, our annual borrowing target is $5.5bn. We have been able to raise that amount via four deals without any major hindrance, despite the prevailing volatility in the international capital markets.

In fulfilling our annual borrowing programme, we looked to target the open maturities along our existing yield curve —namely via 20 year dollar, 12 year euro and 15 year dollar deals.

 As a result, we are satisfied with the execution of our 2005 borrowing programme — both strategically and technically.

What has been the strategy behind each of your bond issues?
Our core purpose has been to issue longer dated bonds that offer liquidity and duration. Strong fundamentals have enabled us to reach our goal with ease in comparison to past issues.

It is our preference to tap the market with a long dated, benchmark size deal as the first transaction of a given year, if the market is available.

In 2005, we have issued three large and long dated bonds in the dollar and euro markets, raising $2bn, Eu1bn and $1.25bn respectively. These deals were significantly oversubscribed and the treasury achieved its best ever sales and placement figures, both in Europe and among US institutional investors.

Although we are flexible in terms of the currencies we issue, the frequency of dollar issues outweighs that of euros. However, a positive development within this context has been the increase in the relative weight of euro denominated transactions in the last few years, now constituting around 40% of our borrowing framework.

So we have achieved a positive outcome in terms of the average cost and maturity profile of our bond issues — a substantial decrease in our borrowing cost over the last two years, along with an increase in the average maturity of our deals.

The maturity composition serves the purposes of extending the maturity of our portfolio with liquid, benchmark sized deals. This has enabled us not only to appeal to a more diversified investor base on the additional duration offered, but also to ease our liabilities at the shorter end of the debt profile.

How volatile has the market proved towards Turkish bonds this year, especially in light of the 'no' votes in France and Holland?
Our 2005 borrowing programme enabled us to raise around 60% of our funding target in the first quarter and to monitor the market for the appropriate time to launch further deals.

That strategy paid off and our 2005 borrowing costs were optimised, because the treasury was absent from the market during turbulent times and tapped it whenever favourable conditions persisted.

Second quarter volatility meant we postponed funding until June. However, our first quarter surplus allowed us to wait for better market conditions in subsequent periods.

We have experienced volatility in emerging markets since mid-March. However, as in 2004, we issued the relatively more difficult or strategic deals in the first two months of the year and completed nearly two-thirds of our borrowing target.

That gave us more flexibility for the rest of 2005 and we came back to the markets in June, when conditions improved after concerns related to the France and Holland votes had eased. Our bonds then started trading in a more stable manner.

Comments from EU officials, stating that the EU is determined to start negotiations with Turkey — despite two 'no' votes in the referenda — helped to eliminate international investors' concerns.

Falling yields from global financial products, along with surging liquidity, drove investor appetite for emerging market instruments, including Turkish bonds.

What are your targets next year in terms of issuance in which currencies and tenors?
We are flexible with the currencies we issue, although a tendency towards euros stands out since Turkey is a member of Euroland.

Over the last year, two-thirds of our funding has been in dollars. This development mainly stems from the fact that the emerging markets investor universe has traditionally been more receptive to dollar issuance.

However, recently we have been observing a growing interest from euro investors in emerging market paper.

In the coming years, the euro denominated exposure of our total portfolio is expected to increase, so as to reach a more optimal currency structure. In order to improve our institutional penetration in the euro area, we will improve the liquidity of our existing bonds by targeting larger deals, and build up our institutional franchise through targeted marketing.

Although the dollar still represents the deepest market for emerging market issuers, we expect to increase our euro issuance on the back of positive market sentiment surrounding Turkey's EU prospects. Moreover, the euro market represents a cost-effective market for us, with relatively less volatility.

Turkey has always been a seasoned borrower in emerging markets — notwithstanding the fact that the nature of our borrowing has experienced a shift from shorter dated, smaller deals to longer dated, benchmark sized deals with additional liquidity.

This change is a direct result of stronger credit features. We aim to enhance our cost-effective, strategically executed borrowing programme in 2006 as well. Apart from the conventional bond issues, we might engage in some structured bond transactions and liability management exercises to fulfill interest from international investors.

Are you diversifying your investor base? How important has the bid from Asia been in recent months?
Over the last two years, Turkey has reached a well diversified investor base, consisting of real money accounts and long term institutional investors. This is reflected by the lengthening maturities of our new issues, as well as their additional liquidity.

We deem this development to be healthy, as it shows that Turkey has become a strong credit rather than a short term convergence story.

The bid from Asia posted about 5% of the nominal bond size for dollar issues and 2% for euro deals. Asia represents an unexploited potential for the sake of diversifying our investor base and we envisage increasing our coverage in that market via roadshows and other means in the near future.

On the other hand, there is a growing appetite from foreign investors for Turkish lira denominated debt, whether it is in form of a Eurobond from high grade issuers or domestic paper issued by the Treasury.

The local currency Eurobond market helps a country to extend maturities, lower borrowing costs, and create additional demand for its domestic debt instruments.

Its development also sends a strong signal as to the long term confidence of foreign investors in the convergence country's currency.

All in all, the increasing exposure of international investors in domestic paper also helps us to diversify our investor base. 

Turkey's Eurobond issuers in 2005
Issue dateMaturityCurrencyAmountCoupon (%)

Yield to investor



Jan 2420$2bn7.3757.52UST + 282.5bp
Feb 1612Eu1bn5.55.695Bund + 224bp
Jun 0715$1.25bn77.22UST + 332bp
Jul 067Eu650m4.754.95Bund + 212bp
Source: Turkish treasury
  • 16 Sep 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 415,838.72 1590 9.03%
2 JPMorgan 379,647.36 1732 8.25%
3 Bank of America Merrill Lynch 359,324.90 1302 7.81%
4 Goldman Sachs 267,102.04 920 5.80%
5 Barclays 266,010.35 1070 5.78%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 45,073.36 191 6.67%
2 Deutsche Bank 37,312.62 138 5.52%
3 BNP Paribas 36,204.20 208 5.36%
4 JPMorgan 34,040.23 112 5.04%
5 Bank of America Merrill Lynch 32,958.96 107 4.88%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 22,398.41 104 8.67%
2 Morgan Stanley 19,092.40 102 7.39%
3 Citi 17,768.49 110 6.88%
4 UBS 17,693.89 71 6.85%
5 Goldman Sachs 17,256.05 98 6.68%