Friday, 19 July 2019

Emerging EMEA Bond: Republic of Turkey's US$1.5bn 31-year bond

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A currency in freefall. Emergency rate hikes. A leading emerging market on the brink of a crisis driven by negative political and financial headlines. No, not Russia – this was Turkey in early 2014.

Now that the country is seen as a haven for investors selling their Russia exposure, it’s easy to forget that Turkey was at the centre of a storm in late January and early February.

For several months beforehand, the country’s financial assets had come under pressure, weighed down by public protests against the government, the US Federal Reserve’s tapering plans, and a corruption probe into the sons of various ministers.

The sovereign tried to win some confidence from the markets with a jumbo US$2.5bn 10-year issue on January 22. The move was successful – but only for 24 hours.

The new bonds then fell more than two points as the lira quickly sank to fresh lows, forcing the central bank to intervene in the foreign exchange markets for the first time in two years. Emergency rate hikes were also put in place to stem capital flows.

As the lira’s woes spread to other emerging markets, fears grew of a full-blown crisis. Some wondered when Turkey would again be able to access the capital markets.

The answer? Just three weeks later. Not only did the sovereign return more quickly than expected, it did so with a 31-year tenor at a slight premium to the long-end of its curve, thanks to a book that peaked at US$7bn.

Sentiment towards Turkey had been improving in the week leading up to the deal. The lira had rebounded from its low of 2.37 against the dollar to trade inside 2.20. The sovereign’s five-year CDS was back to its mid-January level of 245bp.

The lead banks – Bank of America Merrill Lynch, BNP Paribas and Goldman Sachs – had seen growing investor interest in long-dated Turkish paper in the secondary market. And with Treasury yields at competitive levels, a new 30-year benchmark bond made sense, taking advantage of the sovereign’s flat curve.

At US$1.5bn, the deal was smaller than the earlier 10-year note issue, but that helped support its performance in the secondary market, where the bonds traded up.

Even rival bankers hailed the transaction. Just like that, Turkey was back in the markets.

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