Turkish MTN turn should not yet be troubling
Emerging markets bankers say Turkish banks, in their new enthusiasm for MTNs, have taken their devotion to an alternative market a little too far. But the Turkish issuers are only using this market exactly as they were sold it.
As the Turkish bond markets have become volatile in the face of political turbulence and warring with its neighbours, the lure of short, private funding has been difficult for Turkish banks to ignore. As benchmark spreads have edged wider, demand has inevitably become concentrated around durations of six months to a year, and as such Turkish banks have become more reliant on the MTN market.
Syndicate bankers — whose business is to print big benchmark term funding for these issuers — have been quick to identify the perils of funding with short term instruments.
They make fair points: what if this short term funding dries up and the handful of investors buying this product turn away? A benchmark five or 10 year bond is more expensive because it is more valuable to an issuer — it provides stability of funding.
But actually, Turkish banks are using MTN funding in exactly the way that they were sold this “alternative” market when banks were pitching to set these programmes up.
MTNs are advertised to issuers as providing funding when access to the benchmark market at a favourable price is not assured — Western banks used this market in precisely this way to help them muddle through the financial crisis.
Turkish issuers are simply cashing in on that advantage — having done the work of diversification, once times are tough, they can access other sources of funding.
The difficulty comes when the issuers start to think of the MTN market not as a stopgap to benchmark funding, but as a replacement.
Syndicate bankers are fretting that this is happening already, but several Turkish banks — Akbank, Vakifbank and Halkbank — have already tapped the benchmark market this year and they are still eyeing the public markets. Bankers say there is a pipeline of them looking to print in the fourth quarter of this year, after taking an extra few months to adjust their pricing expectations.
It's reasonable to worry about any banking system leaning too heavily on short term funding, and Turkish banks’ movement to MTNs needs careful monitoring. But for now, Turkish banks are using the product exactly as it was intended.