The Turkish banks are a competitive bunch, whether they are pricing bonds and loans, or simply being the first to use a new structure. When Akbank opened the Eurolira market for Turkish borrowers in January this year with TL1bn 7.5% 2018s, it beat several rivals that had been eyeing the same goal.
Once Akbank had shown what was possible, others quickly lined up for their own piece of Turkish lira debt — notes from Garanti Bank and Sberbank, which last year acquired Denizbank, followed, and other banks such as Isbank announced their intention to do the same.
For long term financing, Turkish banks had previously only had securitization, which they have been doing since the late 1990s, and dollar denominated Eurobonds, which have only been in use since 2010.
The Turkish domestic market could offer only smaller sizes and shorter notes — typically TL250m two year bonds or shorter.
“Undoubtedly, long term lira bond issuance is the most desirable funding product for the Turkish banks as it helps to reduce maturity mismatch without generating any currency mismatch,” says Hülya Kefeli, executive vice president of international banking at Akbank. “To achieve this goal, Akbank tapped a market that even the Turkish Treasury had not tested before and printed a highly successful debut deal.”
The order book for Akbank’s Eurolira note reached TL2.9bn. But despite the eagerness of other Turkish banks to follow to fund the growth of their retail loan portfolios, particularly mortgages, only a few have been able to as local currency appetite dried up later in the year.
Kefeli says that Akbank would like to return. “Considering the current lack of appetite for EM local currency issuances, it is clear that the decision on timing of the issuance was perfect,” says Kefeli. “Going forward, depending on the market conditions and investor appetite, we would be keen to print more Eurolira paper.”
The excitement for Eurolira paper has not dented the bank’s appetite for dollars though. Kefeli says that Akbank is closely monitoring the markets to find a good time to issue in that currency as well.
“Once we see an improvement in the market conditions, we would consider going to the Eurobond markets,” says Kefeli. “We believe that dollars has the largest investor base and offers the best trade. More importantly, having a liquid dollar curve is important for us and therefore we will continue to issue in dollars with benchmark sizes.”
Itching to innovate
Akbank is in the process of establishing an MTN programme and after that is in place it may also tap other currencies opportunistically, says Kefeli. It has no plans to set up a commercial paper programme as it expects to be able to issue adequate short term paper from the bank’s MTN shelf.
The bank’s yield curve has been hit hard since June as civil unrest in Turkey and US Treasury volatility have spooked investors. Its $500m 5% 2022s were trading at a cash price of 90.5 equating to a yield of 6.38% in mid-August, having yielded as low as 4.1% in late April. However, Kefeli says that Akbank’s elevated yields are less of a concern than the bank’s increased credit spreads.
“Rather than absolute yields, as an intermediary institution, the change in credit spreads is more important to us,” says Kefeli. “Due to the volatility and noise created by Fed announcements as well as a shift in investor perception towards EM, we’ve observed a hike in credit spreads. We believe that once the market calms down and market players pay more attention to the fundamentals in EM, there may be tightening in the credit spreads.”
Akbank, rated Baa2/-/BBB, is however also considering covered bonds in the meantime to help keep down its cost of funding.
“We believe that mortgage covered bonds is the next product that Turkish banks will focus on,” says Kefeli. “The current market environment, where credit spreads are elevated, favours secured products over unsecured ones by offering a reduced cost of funding. We also believe that with its strong regulatory framework, sound performance of the assets, expected yield pick-up over those of traditional issuers, Turkish mortgage covered bonds would attract strong demand from investors.”
The bank also has two outstanding syndicated loans amounting to $1.8bn equivalent. It plans to roll over 100% of these in the next year. It achieved a 60bp reduction in pricing for its August 2013 loan to 75bp all in, despite the market price having moved wider, and other banks have used that as a reason to crunch their own levels tighter. Kefeli is cautious with regards to commenting on whether Akbank will try to push pricing tighter next time around, saying that it will depend on market conditions, but with much in the pipeline with regards to bond business, lenders may struggle to resist its charms.