Turkish banks have broadened their funding activities in recent months, taking advantage of the lucrative relationships they have with banks around the world. But as they move away from the syndicated loan market will they be able to maintain their momentum? Nick Lord reports.
Turkey’s banks have been on a funding spree in recent months. Most of the major banks have been active in the syndicated loan arena, where they have traditionally sought most of their foreign funding. Now they are increasingly looking at new markets, with Akbank’s Eurobond and Kuveyt Turk’s sukuk providing evidence that the demand for Turkish paper can be found away from the loan market.
Akbank has been the most active Turkish bank in the market, undertaking three international deals each over US$1bn in the past six months. In the process it has lowered its cost of funding, diversified its sources of finance and gone some way to ameliorate the asset liability mismatch that bedevil most Turkish banks.
In August, it led the market in new levels of pricing and tenor, securing €1bn in a dual tenor dual currency term loan facility. Approximately €780m has a one year tenor at 130bps over Libor and €220m has a two year tenor at 175bps over Libor. Until this trade, all the previous one year syndications during the last year had been priced at 150bps over Libor.
Akbank preceded this deal with a groundbreaking Eurobond deal in July, becoming the first Turkish bank to sell senior unsecured offshore bonds. Its US$1bn five-year Reg S/144a transaction was priced at US Treasuries plus 350bp through Bank of America Merrill Lynch, Citigroup, JP Morgan and Standard Chartered.
Both deals have set a new tone for the market with other banks quickly following in the loan market and others preparing to tap the bond market. On September 1, VakifBanksigned a dual-currency refinancing loan split between a US$145m tranche and a €453m tranche. It refinances a US$203.5m and €372.5m club term loan from August 2009 and carried the same pricing as the Akbank facility. At the time of going to press, Isbank is understood to be wrapping up its own syndicated loan, similarly sized, structured and priced as Akbank’s deal. Garanti and Deniz Bank are also in the process of putting their syndicates together.
WestLBwas the initial mandated lead arranger and also acted as coordinator, documentation and facility agent for all three deals from Akbank, VakifBank and Isbank.
The secret of their success
Key to the success of these syndications is how the Turkish banks approach the syndicate. All the deals are led internally by members of the correspondent banking units, who tap every relationship they have with banks around the globe. These relationships are such that the syndicate banks are willing to make concessions in pricing to maintain profitable relationships with the Turkish banks in businesses like treasury, repo, deposits and securitisation.
“These syndicated loans are essentially relationship driven transactions and the Turkish banks have phenomenally good relationship management teams,” said David Pepper, managing director at WestLB in London. “The liquidity that is available for the banks is, to a large degree, driven by the quantum and diversity of ancillary business that they can offer to their international relationship banks. It compensates for the tight pricing.”
Participation rates for the loans are strong. Last August Garanti bank got the ball rolling when its deal was the first Turkish bank deal since the crisis to get 100% renewal. Since then both the Akbank and VakifBank deals have seen new entrants into their syndicates of 52 banks and 31 banks respectively.
The ongoing crisis is having an effect. Whereas before the crisis, international banks would participate in three or four of the syndications coming out from the top five Turkish banks, that is now down to an average of two. Given the pricing similarity between all the syndications on offer, syndicate banks are making their credit choices based on participation, rather than spread.
What Pepper finds most noteworthy is the number of new banks from Asia, Australia and even Brazil that are now participating in these transactions. This reflects the growth in trade and thus trade finance links between Turkey and these other markets.
Even with all this activity, Turkish banks still have a job to do in evening out their assets and their liabilities. A full 85% of Turkish bank liabilities are short term deposits, mostly lasting an average of just 45 days. The banks, however, want to take part in long term domestic project financing deals that are coming out in Turkey, particular in financing the energy privatisation programme that is underway. Moreover, when they lend to Turkish companies, the median price they can get is around 230bps over Libor, according to Birgul Denli assistant general manager at VakifBank in Istanbul.
This means that even though they would like to extend the maturity profile of their liabilities, it will come with a cost. Akbank’s Eurobond came out with a coupon of 5.125% a price of 99.431 and a yield of 5.256%. Many banks are looking at this level of pricing and wondering if it is too high a price to pay for a liability extension exercise.
Akbank makes no bones that it is a price it is willing to pay. Hulya Kefeli , head of international banking at Akbank, said the bond is “the most suitable product for long-term funding.” While traditional syndications have been a reliable funding source, they are short term and the proceeds are generally limited to trade finance. “It is important to borrow long term funding to manage the maturity mismatch in our sector,” she said. “It made economic sense for us to go ahead with a structure which would offer a lot of potential.”
And yet the costs for such issuance are high. The Turkish Ministry of Finance has imposed a withholding tax on issuers of Eurobonds, which Akbank has had to pay. These extra costs are understood to be causing YapiKredi Bank – which has been talking about doing a Eurobond since the beginning of the year – to delay its plans.
Relying on the one or two year syndicated loan market remains a risky strategy for the banks. There are large numbers of bank issuers coming to the market from all over the world and 2011 and 2012 could be difficult years. While Turkey’s banks are enjoying abundant demand for their one year paper right now, it might not be there in the future. Therefore some are saying that it makes sense for them to swallow the cost and extend their maturity profile, if nothing else as an act of risk management.
“The refinancing risk in 2011 and 2012 for the loan market as a whole is significant and so the more access to long term financing that the banks have, the better,” said Pepper. “The development of the Turkish bank Eurobond market is a welcome move which is positive for everybody.”
Diversification has also come geographically. Much has been written about Turkey turning East and this has found its financial manifestation in the form of the first sukuk issued by a Turkish financial institution. Kuveyt Turk is one of four so-called participation banks that operate under Shariah principles. In late August it issued a US$100m sukuk, becoming the first bank from Central and Eastern Europe to do so. The Reg S senior unsecured three-year Sharia-compliant deal has a profit rate 5.25% and was arranged by joint leads Citigroup and Liquidity Management House.
The deal broke ground by resolving differences between English law, the Turkish civil code and Shariah principals. “The deal does provide a template for other Turkish banks,” said Rahail Ali, head of Islamic finance at law firm Hogan Lovells in Dubai and who structured the transaction through advising the lead managers. “There is a lot of appetite for Turkish assets from the Gulf region.”
In all, 95% of the deal went to Islamic and conventional banks in the Middle East and Asia, with only 5% going to Europe. This marks a distinct change in the geographic make up of investors in other Turkish bank financings which are predominantly European and American.
With such new avenues of finance opening up for the Turkish banks, they should be able to start lengthening out their asset liability mismatches. But they will need to translate the success they have enjoyed in the loan market into other products. So far, the signs suggest that they will succeed.