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Tuesday, 17 October 2017

Banks on parade

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Turkey’s banks have made their annual excursion to the syndicated loan market. The shape of this market in the future will be determined in large part by the extent to which they consider long term bond financing as an alternative. The speed of this transition depends entirely on the regulator, which, for now, is keeping the bond market at arm’s length. Nick Lord reports.

On May 5, Garanti Bank became the penultimate major Turkish bank to tap into the international bank loan market when it sold a one year dual currency loan deal to 41 banks. The deal saw demand of €850m, after an initial target of €600m. The books were eventually closed with the deal sized at €617m and US$116.9m. As a result of the increase in demand, the deal was able to replace two existing facilities of US$109m and €517m that were signed a year ago.

Senior mandated lead arrangers on the transactions were Commerzbank and Standard Chartered, with Commerzbank also taking the roles of documentation and facility agent. Of the 41 banks in the deal, 22 joined at mandate lead arrangers, even though it was styled as a club deal and not a syndication. This was largely due to the fact that these banks wanted to get exposure to Turkish banks and so went into the trade for relationship reasons.

The primacy of relationships in determining Turkish bank deals can also be seen in the pricing. Garanti -like all the banks that have come before it this year - priced its deal at 150bps, made up of a 75% coupon and 75% of fees. The fact that all Turkish banks pay the same price for this debt shows how international correspondent banks are keen to get any Turkish bank assets on to their books regardless of the credit of the underlying institution.

One price fits all

Garanti for instance, is currently undergoing a major shift of ownership, as GE tries to sell its 20% stake to a range of bidders. The possible new owners could include the family that owns parent company Dogus Holdings, a European banking group, or even an international private equity firm. This is clearly a material event from a credit point of view. And yet Garanti Bank, the second largest and most profitable bank in Turkey, still priced its deal at the same spread as smaller state owned bank Vakif Bank, which came out with its one year syndication in March.

Vakif sold a dual tranche one year club deal comprising a US$170m and €566.5m, replacing the previous year’s deals which were US$80m and €178m, as well as taking out a three year US$197m facility that was signed in 2006. WestLB was the co-ordinator of the deal and 33 banks participated.

The largest deal to have come out so far this year was Akbank’s March trade, comprising US$437.5m and €584.5m. This US$1.2bn equivalent was sold to refinance a US$600m facility taken out last year.  One smaller transaction that differed from the normal structure of these deals was Bank Asya’s one year murabaha deal. Asya is Turkey’s leading Islamic bank and it mandated ABC Islamic, Noor Islamic and Standard Chartered to lead the deal which came in at US$250m, a considerable increase of the US$75m targeted.

All the major banks, apart from Isbank have now tapped the international syndications market. Isbank is expected in coming weeks and has mandated WestLB to undertake the transaction. Some bankers in Istanbul suggested it is waiting to be last to see if it can break through that all important 150bps level, but international lenders say this is unlikely.

“The price is the same for all the banks,“ said Barbara Berchtold, head of DCM at Commerzbank in Frankfurt, who lead the Garanti transaction. “Even though all the banks are different entities, they are rated similarly and the transactions are largely relationship-driven. As a result, in the last four years we have seen all the banks pay the same price for these deals.”

It is arguably the desire of the lenders to maintain relationships with the Turkish banks that is keeping the price where it is.  Without this desire, “Turkish banks would have to pay more but lenders will take a lower price for the sake of the relationship,” said Berchtold.

Keeping its options open

Isbank’s delay is also down to the bank exploring other options, mainly a lira denominated Eurobond. According to market sources, JPMorgan has been mandated to lead the transaction with an indicative size of TL 300m to TL700m (US$200m to $400m).

“The regulators were against banks issuing Eurobonds,” said one senior banker in Istanbul speaking off the record. “The regulators didn’t want banks to dilute their funding base, but now my sense is that they might have a softer view. The idea is sinking in more rapidly and the extra visibility this would give banks would be a major watershed.” Many local banks are approaching Credit Suisse for help in undertaking potential deals, said Bayar.

One small local bank Sekerbank, founded in 1953 as the Sugar Beet Co-operative Bank, has mandated UniCredit to arrange a US$100m bond that will securitise SME loans. Prior to that, the only other Turkish bank that has been present in the Eurobond market  is Bankpozitif, which in October 2009 sold a US$150m, five year Reg S deal at 428bps over mid swaps.

At its base, the question of bond versus bank finance is the age old dichotomy between the stability of a bank deal versus the size of a bond deal. Moreover banks are thought likely to be more willing to refinance existing transactions than bond markets, where market risks around repayment time can be very difficult to navigate

The present roster of bank syndications suggests that there is ample liquidity within Western banks for these deals to roll over. Indeed all of them actually saw an increase in overall demand, an increase in eventual size and an increase in the individual commitments that each bank ended up making. And this is at a time when bank balance sheets are under considerable strain.

If there were to be a rash of international bank capital deals from Turkish banks, they would need to be considerably longer in size. They would also come from the same investor base the government is looking to tap for its own Eurobond activities. Some cynics in Istanbul’s financial centre mutter that the regulator is not approving bank Eurobond deals because it wants to leave the field open to the sovereign, which is the only large Turkish entity to access these markets at present.

This argument seems somewhat fanciful. The sovereign has been hugely successful already this year, meeting its own funding target of US$5.5bn. The more likely source of concern is the currency. The whole current financial system is a result of a currency and banking crisis that roiled the country in 2001 and the regulations and regulatory attitude are entirely focused on preventing its recurrence. Hence the government is very wary of allowing banks to take on large foreign currency debts that are illiquid and difficult to refinance. They also would prefer that the banks maintain deposits as their main source of funding and not wholesale markets. The efficacy of this policy can be most obviously seen in the strength all the Turkish banks have shown through the present crisis. And the final irony is that with this strength, they are now perfect candidates to go to the bond markets.

Nevertheless, Turkish bank syndications (even though they are actually club deals, everyone calls them syndications) will continue to be desirable to international investors, who are keen to get some Turkish exposure due to the lack of other sources. The bond market’s loss is the bank market’s gain. 

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