Friday, 18 January 2019

Eager for esoteric

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  • Eager for esoteric

Turkey’s banks have offered one of the few consistent issuance bright spots in 2016’s CEEMEA primary market, and now they are pushing the boundaries into new structures and investor bases at a rapid rate.

Turkish banks and senior unsecured trades go together like falafel and houmous, but investor appetite has been growing throughout the year for more exotic fare and bond bankers say this is just the beginning.

Turkey’s banking sector kicked off 2016 in the most vanilla way possible – with a US$500m five-year EMBI Global index-eligible senior deal from state-guaranteed TurkExim on February 1.

But it was not long before more esoteric fare began emerging from the country’s banking sector, with participation bank Kuvyet Turk printing a US$350m 10-year non-call five Basel III-compliant Tier 2 sukuk transaction seven days after later.

“Kuvyet Turk’s Tier 2 hinted at the demand available beyond the state-owned support angle,” said Nick Darrant, executive director in JP Morgan’s bond syndicate business. “It would have had plenty of friends-and-family buyers but it hinted that demand was more robust in Turkey than we had seen elsewhere in CEEMEA.”

Until Kuvyet Turk’s trade, the only other non-sovereign deals from CEEMEA in 2016 had been from sovereign proxies, as well as a smattering of niche trades, such as a Dim Sum from National Bank of Abu Dhabi and an under-the-radar privately placed US$600m one-year from Qatar National Bank.

But now the floodgates had been opened, Yapi Kredi brought its own US$500m 10NC5 Basel III-compliant Tier 2 to the market in early March.

Unlike Kuvyet Turk, Yapi’s trade had fewer friends-and-family-type orders to get it over the line, though it did benefit from a related party backstopping some of the deal.

“Yapi Kredi was a progression in risk appetite from Kuvyet Turk,” said Darrant. “It had a significant anchor order from a related party, but that acted as a catalyst for the bookbuild and the deal has performed well.”

Yapi Kredi’s bond printed with a coupon of 8.50%. It was yielding 6.544% at a cash price of 107.944 on May 3 – a weak day in the wider CEEMEA market – according to Thomson Reuters Eikon data.

This kind of secondary market performance is not limited to Yapi Kredi. Turkexim’s trade was at a cash price of 103.4244 on May 3, after printing at a reoffer of 99.568.

“Whatever your fundamental view on Turkey, the market for banks and corporate sector bonds is fully functioning and liquid,” said Tommaso Ponsele, director, CEEMEA DCM at Citigroup. “Partly as a result of this, it also tends to outperform in poor markets.”

Improving bond prices work as a double incentive for Turkey’s primary market, according to Khalil Belhimeur, a director in Standard Chartered’s bond syndicate business.

“Investors see their Turkish paper tighten and are keen to participate in new issuances,” said Belhimeur. “And issuers are seeing their spreads tighten to levels where it makes more sense to consider the markets for an opportunistic trade – and all the banks are opportunistic issuers to an extent.”

The speed that Turkish bank paper can tighten has perhaps been nowhere more apparent this year than during the execution of a capital trade for one of Turkey’s smaller lenders, Alternatifbank.

Little known Alternatifbank, which has US$4.5bn in assets, compared to Yapi, which had US$82bn at the end of last year, printed a US$300m Basel III-compliant Tier 2 trade at 9.00% on April 12.

The execution began with initial levels at 10% area, before tightening 100bp to price and then another 100bp soon after in the secondary market.

“Whenever you have a trade that is pioneering in nature, then price discovery is a completely different ball game,” said Ponsele at Citigroup, which led the deal alongside Bank of America Merrill Lynch and Commerzbank. “It was important to generate momentum for a deal of this kind.”

At the time, bankers away from the trade said that a 200bp swing from IPTs to secondary trading levels in a matter of days was a sign of the deal starting at the wrong level.

It was yielding 7.971% just after market close on May 3, according to Eikon.

Although bank capital deals have been frequent so far this year, not everyone expects them to create the bulk of issuance volumes from Turkish banks in the coming months.

“The bank capital market doesn’t feel like it’s got huge depth in Turkey when you compare it to senior unsecured deals, for example,” said Rajiv Shah, head of debt capital markets for Turkey, the Middle East and Africa at BNP Paribas. ”It’s only when the market is good that you’ll see these trades being attempted.”

But others think that there is still more juice in Turkish bank capital trades – including delving into even more niche structures.

“Turkish banks are well capitalised but we should see some more Tier 2,” said Darrant at JP Morgan. “One wonders when we might see the next Tier 1 trade. It has been rumoured for some time.”

Options open

A rare Tier 1 transaction from the country has every chance of success if this year is anything to go by – one thing 2016 has shown is that Turkish banks are willing and capable of dipping their toes in a wide range of bond structures.

Vakifbank, for example, opened Turkey’s financial institutions to a new investor base at the end of April. It printed the country’s first ever covered Eurobond on April 26, raising €500m through five-year mortgage-backed securities.

Demand for the deal was €3.2bn, which was understandable considering it was rated A3, three notches above Vakif’s senior level, and at the final spread of 250bp over mid-swaps offered over 100bp more than the highest yielding covered bond in the eurozone periphery market.

“You look at that kind of yield and it does make sense that we saw the kind of book we saw,” said Shah at BNP Paribas, which ran the deal alongside Barclays, Erste Group, Natixis and UniCredit.

Covered bond investors made up the bulk of the order book, as at these levels pure emerging market buyers were largely priced out.

But there is not expected to be a deluge of similar deals, despite Garanti and Sekerbank having their own programmes lined up.

“It’s not ECB-eligible, so that impacts demand from the traditional covered bond investor base,” said Shah.

But no matter how deep Turkey’s nascent covered bond market proves itself to be, the successful trade adds to the collage of varied structures that banks in the country can call on to issue debt.

By way of further example, development bank TSKB on May 9 mandated lead managers for Turkey’s first public Green bond, taking the country’s banks into another new territory.

And it is fairly new territory for the CEEMEA market as a whole, with only Latvia’s state-owned energy company Latvenergo issuing a Green bond from the region so far, with a €75m seven-year trade in June last year.

TSKB is probably Turkey’s best-placed bank to issue such a security, as it is responsible for assisting the country’s economy, including the renewable sector.

“Turkish banks are probably some of the most nimble issuers when it comes to opening new markets and making sure they constantly have avenues of funding,” said Shah. “They don’t benefit from a local bid, so they are reliant to a large degree on international financing. It’s not like the Middle East banks.”

This reliance on international funding starts in the loan market, where Turkey’s top banks have been borrowing upwards of US$1bn-equivalent in euros and dollars in one-year slugs at ultra-cheap rates for years. The last round of biannual deals saw Vakifbank sign a 367-day syndicated loan at the end of April split between a US$207m tranche at 85bp over Libor and a €631.5m tranche paying 75bp over Euribor.

At these rates – well below the syndicate lenders’ cost of funding – creditors demand a slice of bond business, and many Turkish banks deliver it with military precision.

One former head of syndicated loans at a European bank said that, once a year, a funding official at one of Turkey’s major banks would call in lenders one at a time, see the size of the tickets they had provided to the last loan, and then tell them exactly what their role would be on an upcoming bond, before marking the decision down in a palm-sized notebook.

Wall of refinancing ahead

The coming months for Turkish banks will see a wave of refinancing deals as the five-year senior trades that were printed in 2011 come due, while they could also look to refinance deals maturing in 2017 early.

Finansbank has US$500m coming due on May 11, while Yapi Kredi has US$500m maturing in February next year and Garanti has US$600m maturing in September 2017, followed quickly by Akbank with US$500m maturing in October.

“Whereas before, Turkish banks were raising senior unsecured debt mainly because of high loan growth and building a curve, we are now more into a phase of opportunistic deals and refinancing transactions,” said Shah. “You are going to start seeing some refinancing trades come through, so there’s a natural base of senior unsecured supply.”

Turkey’s GDP grew by 3% in 2015, according to the OECD, and is forecast to grow by 4% by 2017.

Increased economic growth could lead to more hard currency bonds from the country’s banks.

“This year’s deals will be driven by a combination of refinancing, GDP growth – which should increase loan demand – and Tier 2, as there remains a desire to hedge capital positions through hard currency Tier 2 trades,” said Ponsele at Citigroup.

One thing is certain, Turkish banks have a vast array of markets available to them and will continue to keep syndicate desks busy for the rest of the year.


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