Turkish civil unrest, US Federal Reserve tapering fears and the potential for the eruption of a war with Syria have provided a truly cacophonic backdrop for Turkey’s banks and corporates in the debt capital markets this summer. Garanti Bank, though, has taken the resulting lull in dollar benchmark appetite to expand into private placements in a variety of non-G3 currencies.
Since mid-May, the bank has been picking up funding in the MTN market not just in dollars, but also in Turkish lira, Swiss francs, Australian dollars and most recently a Ck340m (17.6m) three year floating rate note.
The timing of the launch of Garanti’s $2.5bn global medium term note programme was lucky — it was established on April 19, shortly before the sovereign won its second investment grade rating from Moody’s, which swept Turkish bond yields to record lows. The Turkish sovereign is now rated Baa3/BB+/BBB-. Garanti is rated the same by Moody’s and Standard & Poor’s but carries a BBB rating from Fitch.
With the new programme in place and investors looking afresh at Turkey, the bank saw interest in its instruments spike. And aside from printing private placements, Garanti is using demand in that market as a gauge of wider appetite, as it did for its A$175m 5.5% 2018 deal placed in May.
“We have no restrictions on which currencies we can print, it just depends on pricing,” says Batuhan Tufan, head of financial institutions at Garanti Bank. “Our dealer banks have been fielding enquiries for us even in Czech koruna, Mexican pesos and Romanian lei. We’d probably want to see the demand in private placements first before going to the benchmark market, like we did for the Australian dollar deal. That trade started as a private placement but was turned into a public market transaction as demand was so good for it.”
The most important public market for Garanti away from dollars is the Turkish lira market. This is because the majority of the bank’s loans to its customers are extended in this currency. The durations available in Eurolira are longer than can be achieved in the local market or via the bank’s deposits, so the format offers a rare opportunity for the bank to match its assets and its liabilities both in currency and tenor.
Lira trades hit turmoil
But despite a good start this year with Akbank, Garanti and Isbank issuing the first ever bonds of this type, the market suffered as US Treasury rates rose and the Turkish lira weakened. The TL750m 2018s Garanti sold in February via BNP Paribas, Deutsche Bank, Goldman Sachs and Standard Chartered Bank were priced at 99.487 but had sunk to 86 shortly before the Federal Open Markets Committee Meeting on September 18. The decision by the Fed not to reduce its quantitative easing pushed them back up to 90.35.
The lira/dollar exchange rate jumped from TL1.7 to TL2.1 to the dollar over the summer, though there was some rebound in the second half of September to around TL2.0 to the dollar.
“It’s an enormous loss because you’ve lost not just 14% on the price of the Turkish lira Eurobond but also more than 20% on the dollar/Turkish lira FX — so all in all, that’s a negative 35%-40%,” says an origination official in London.
Primary markets for EM local currency Eurobond instruments have effectively been shut since the Fed announced its plans to start tapering quantitative easing, says Tommaso Ponsele, an origination official at Citi in London. While the Fed’s move in mid-September has helped rebuild confidence, the rebound has not been strong enough to reverse the damage done.
“The inevitable consequence of higher US rates is a lowering of the opportunity cost of holding dollars, so investors have been generally reducing their exposure to EM currencies, which in turn has put EM exchange rates under pressure,” he says. “This doesn’t provide a great backdrop for local currency Eurobond issuance.”
An imminent return to that market looks unlikely for Garanti, or any other Turkish issuer for that matter. “When we printed our Eurolira deal, there was high interest from investors,” says Tufan. “Now, there are so many expectations with regards to what the Fed will do that Eurolira now looks very expensive. When we printed our Eurolira deal, the rate was better than we would have achieved by swapping dollar funding.”
The TL750m note was priced at 99.487 with a coupon of 7.375% to yield 7.5%. The bank’s last dollar issue before that was a dual tranche deal placed in September 2012, comprising a $600m 4% 2017 and a $750m 5.25% 2022.
But Chris Jones, global head of local currency syndicate at HSBC, says that while the appetite for new local currency debt is not high, Garanti’s Turkish lira deal has been resilient paper for investors compared to the bank’s notes in other currencies.
“When the Turkish lira deal printed, its dollar cross-currency equivalent pricing level was around 100bp inside where Garanti’s dollar bonds are trading,” said Jones in early September. “If you look at the cross-currency levels for Garanti Bank now, the Turkish lira deal has actually been outperforming the bank’s other notes. Its dollar levels are around 325bp over dollar Libor, its Aussie dollar trade is at 300bp over the same reference curve and its Turkish lira trade is at 160bp over.”
He said that while Garanti would struggle to raise more benchmark funding in Turkish lira now, as would other Turkish issuers, the market was not completely closed to them. He said there were opportunities for smaller deals or private placements in $25m-$50m clips.
Treasurers are eager for this market to re-open as the local market in Turkey provides no opportunity to get large amounts of Turkish lira funding done in long maturities.
“We have around TL2.6bn of bonds in the local market, but the maturities available there are six months to a year, much shorter than are achievable in the Eurobond market,” says Tufan. “A few years ago Turkish banks weren’t allowed to use the local market at all.”
Even with the yield on Garanti’s outstanding Eurolira note having hit 11.5%, origination officials say that funding in the currency would be attractive if there was substantial primary market appetite at this level. This is because the Turkish bank can pass on the cost via their Turkish lira loans.
But while Turkish lira is a natural funding currency for the bank, Garanti surprised the market this year when it printed the first ever Australian dollar bond from the country in May — a A$175m ($173m) 5.5% May 2018 via HSBC.
Embracing diversity
“The Australian dollar trade came about as a proposal from us,” says Jones. “We’ve had quite a lot of success for emerging market issuers in Aussie dollars — the first LatAm name in Australian dollars for Pemex in April 2012 for example. Since then we’ve seen issuance for several Korean, Indian and Russian names in the currency. At the time when we placed the [Garanti] deal, high yielding currencies were working well paired with high EM spreads to bring a very high yielding product to investors. Aussie swaps were at 230bp and it made sense for investors.”
Jones says that, in a similar way to its Eurolira funding, Garanti used the Australian dollar market to get in longer term financing compared to the domestic market and deposits.
Other banks were less certain of the success of that transaction, though. The note’s cash price sank immediately after pricing at 99.574, steadily declining before hitting a low of 90.7 on July 9. They have not recovered much and were trading around 92.57 at the start of September. One syndicate official said the lead might have overestimated demand, but another attributed the performance to US Treasury volatility pushing investors into a more risk-averse mode.
While Garanti has already been adventurous with niche currencies, there are some avenues left for the bank to pursue. Asian currencies are a potential next step, say bankers, or benchmark issues in Swiss francs.
“When the market fundamentals and perception of Turkey Inc is better, doing a benchmark Swiss franc deal may be an option for Garanti,” says Jones. “In the Swiss franc market, because the yields are so low, the investor base has slipped down the credit curve to try to pick up higher yields, so EM is looking more and more attractive to them.”
Ponsele says that for the moment, though, even the low yielding Swiss franc market is not an option for the bank.
“The Swiss franc swap market has also been volatile; even in that market you would need spreads to be quite a bit better than in dollars to justify the economics,” he says.
“The bank’s assets are primarily in Turkish lira, dollars and to a lesser extent in euros, so funding needs to make sense once it’s swapped back to those currencies.”
But bankers are unfazed by the rocky time that Garanti’s non-G3 currency bonds have had over the last few months. They say that Brazil provides a good example of how exchange rates can bounce back fast — its currency sold off to a four year low of R$2.41 to the dollar in August, but it has recovered to R$2.20. They say that when the fundamentals of the country improve, local currency debt could be snapped up. In the meantime, the bank will need to rely on the dollar market, its strong bank lending lines and its deposits.
“Australian dollars and Swiss francs have been raised for diversification purposes,” says Ponsele. “The bank is very well funded via deposits, so can afford to be price-sensitive in any currency. Unlike some other more wholesale-funding dependant banks in EM, Garanti has much less of a necessity to tap a wide variety of currencies.”
He says that this makes the pressure on the bank to diversify bond funding across different pockets weaker than for others. Garanti is an experimental but logical issuer. Diversity is all very well but is not a rationale on its own — the bank won’t do a trade unless it makes clear financial sense.