Down but not out
The financial crisis may have severely impacted the emerging Turkish securitisation market but a trickle of deals is still coming through. Market participants, meanwhile, are hopeful that relatively strong fundamentals will help the market recover. By John Ferry
Turkey’s securitisation market was developing at a heady pace up until the financial crisis kicked in. According to rating agency Standard & Poor’s, Turkish securitisation future flow issuance went from almost nothing in 2002 to over US$2bn in 2004, to almost US$6bn of annual issuance by the end of 2006. The talk then was of asset-backed securitisations referencing existing assets being next to hit the market, a development that would have put Turkey on a par with emerging market countries such as South Africa and Russia, in terms of the sophistication of its securitisation market.
Turkey’s booming lending expansion, especially in the areas of mortgage and consumer lending, was expected to motivate banks to shift some of their risks to the international capital markets. There was also progress on the legal side when, in February 2007, a new law was finally passed that allowed for securitisations within Turkey using domestic special purpose vehicles. “The potential was definitely there,” said Zeynep Adalan, London based director in S&P’s structured finance group, who covers Turkey. “There was enough mass to make securitsation a good financing tool, and a viable financing tool. Unfortunately, just when the structures were in preparation the credit markets changed sentiment and it all got put on hold.”
The start of the global credit crisis brought the securitisation market to a near complete halt, although a trickle of issuance is still coming through. Last year saw two small deals, both of which securitised diversified payment rights, which are designed to capture the offshore cashflows of a domestic bank. Specifically, DPR deals –often referred to as future flow deals – involve securitising future payment orders that the bank raising the cash expects to generate during the life of the deal (see box). To date, DPR deals have been the most common form of securitisation in Turkey.
In August one of the country’s largest financial institutions, Akbank, raised €250m with a 10-year DPR securitisation. The transaction references present and future trade and diversified payment rights deposited with 29 of Akbank’s correspondent banks in Europe and the US, the payment rights consisting of letters of credit, cash against goods, cash against documents, workers’ pay and other payment and cheque transactions processed through the foreign banks. The deal was rated Baa2 by Moody’s, the rating agency.
Meanwhile, Garanti Bank, another of Turkey’s largest financial institutions, completed a similar DPR transaction in August. It raised €200m with its 10-year notes in a deal that was also rated Baa2 by Moody’s.
Nihan Turgay, senior vice president and head of financial institutions at Garanti Bank in Istanbul, said DPR deals have strengths that make them relatively sound investments in the current climate. “Investors should feel comfortable with the structure and resilience of DPR future flow programs. There are certain design aspects to them that make them appealing,” she said, adding that there have been no DPR downgrades in Turkey. The structural and legal protections built into Garanti’s DPR securitisation, including required minimum debt service coverage ratios which, if not met, would trigger the early amortisation of the notes, were particular strengths of the deal, Moody’s said.
Garanti would like to do more DPR deals, Turgay said, but it will take time for private investors to return to the market. A salient feature of the two deals done last year was the fact that the only buyer of the paper was the European Investment Bank, the European Union’s financing institution which aims to stimulate development in the countries it lends to. In the case of the Garanti and Akbank deals, it came in as buyer so the banks would provide lending to Turkish small and medium-size enterprises.
But there is only so much investing the EIB is willing to do. “We’ve also been speaking to the EIB to see if they would be willing to do more transactions, but unfortunately they don’t seem to have any appetite for these types of deals anymore,” said Selim Kervanci, head of investment banking at HSBC in Istanbul.
The monoline problem
Beyond the general retrenchment globally, a major stumbling block for investors is the departure of the big monoline insurers, such as MBIA and Ambac, from the market. Before the financial crisis kicked in it was common for monolines to be brought in to provide an additional ratings boost on a deal, but those days are long gone. “The big problem is that so many of these deals had to be wrapped by credit insurers, but that’s obviously not happening anymore because the credit insurers are no longer rated Triple A,” said Drew Salvest, a London-based partner with Mayer Brown, the law firm, who has advised on Turkish securitisations.
Salvest said investors in Turkish debt will just have to get used to buying paper that has not been wrapped by a monoline. “People have to be comfortable buying Triple B or its equivalent as opposed to Triple A,” he said.
So for now the ambitions of Turkey’s financiers simply amount to getting private investors interested in simple single-tranche DPR deals again. There are signs that when credit markets do start to settle down, Turkey could be in a stronger position than many other countries. “If we compare it to other emerging markets, one thing to note about Turkey is that its banking supervisory agency was a lot stricter with its banks, hence Turkish banks have been more conservative in how they finance themselves, which means they have had to rely more on deposits than wholesale funding. So some of the problems that other banking systems got caught in didn’t occur in Turkey,” said S&P’s Adalan. Compared to other regions, Turkey will probably be one of the first countries to recover, based on the fact that it is a country of 75m people with still a lot of demand for housing and a lot of demand for consumer goods, she added. That bodes well for securitisation in Turkey in the long term.
The quicker investors come back to the DPR market the better it will be for Turkish banks, not to mention the wider Turkish economy. “Primarily, the only source of long term funding for Turkish banks was these securitisations, which they would swap into Turkish lira to create funding for their long term mortgage assets and long term financing to small to medium-size enterprises,” said Kervanci.
A couple of years ago it looked as if ABS referencing mortgages or car loans or consumer credit would soon start to emerge from Turkey. That now looks a very long way off. But if banks can get the message across to private investors that simple DPR structures are fundamentally secure in terms of both the cashflows they reference and their structure, then securitisation will remain a feature, if a relatively insignificant one, of the Turkish market.