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Tuesday, 17 October 2017

Faltering opportunities

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Local market colatility has killed off trades, but with political uncertainty on the wane, issues may pick up in the long term.

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Real estate group Emlak Konut defied the markets with its revived US$1.6bn follow-on share issue last November. Some investors, however, were stung when a corruption scandal forced them to dump their stock only weeks later, which, coupled with political instability, has left many issuers and investors waiting in the wings.

Emlak, whose biggest shareholder is state housing authority TOKI, first sold shares to the public in November 2010. The REIT has privileged access to state-owned land, which it auctions to real estate developers for a share in the revenue generated.

In June last year, the state-owned property developer postponed a 1.3bn-share follow-on offer set to raise more than US$2bn as civil unrest in Turkey knocked nearly 13% off the BIST 100 Index. Though the market recovered a little ground and Emlak was suspended during the deal, it was hard to find a price to suit new and existing shareholders. It finally sold 1.3bn shares at TL2.5 each in a secondary share sale in November.

Lessons were learnt from the previous aborted attempt in June, when the US was left until last on the roadshow and the deal coincided with protests on the streets in Turkey. With US funds driving the rally in Turkish stocks since then, the decision was taken to split management, with one team starting in New York and then Boston, and also to accelerate the sale with just three days of bookbuilding.

As a result, the US dominated the book, with more than 40% of orders, followed by the UK with 20% and the rest of world also with 20%. Domestic institutions took 10%, with the remaining 10% going to retail.

“As a huge secondary public offering, it was a success at that time. But of course, after the secondary public offering, the corruption probe devastated the [company’s] reputation,” said Kurthan Atmaca, equity analyst at Deniz Invest.

Shares in the property developer slumped by 14% when its chief executive officer Murat Kurum and two board members were called in for questioning amid scores of arrests tied to an investigation into allegations of graft involving government officials and public tenders. They were released after questioning, the company said, on December 22.

But for many investors, particularly US funds, selling off their shares was the only option.

“For most of the American-based funds, if there is any risk of corruption, even if there is speculation, they prefer not to invest,” Kurum added.

Lined up

Turkey is home to the cancelled ECM trade due to local market volatility often killing off trades. The country lumbers at the lower end of market cap to GDP ratios versus other emerging markets.

In total last year, TL4.6bn was raised on the equity markets through IPOs and SPOs, compared with TL5.1bn of funds raised on the equity markets in 2012, with the lion’s share coming from Emlak’s secondary public offering (about TL3.25bn), according to data from Borsa Istanbul. 

However, in the long term, Turkey’s capital markets are expected to pick up speed, with more companies opting to turn to the equity markets.   

“The speed of IPOs has declined over the last year or so, but looking forward, I think more companies will be inclined to open to the public in order to tap into an equity investor base. I can see that happening, especially when your cost of financing increases… We’ve started to have a positive change and corporate culture in favour of capital markets, also evidenced by the increasing number of corporate bond issuances,” said Didem Gordon, CEO of Ashmore Turkey.

For now, political instability and the corruption scandal have stoked high levels of volatility across the financial markets in Turkey, scuppering hopes of any large IPOs in the near term. Local election results on March 30 prompted a strong rally on markets, with the outcome viewed as reducing political uncertainty and prompting some market stability.

“Right now, we are seeing some kind of signs. IPOs are being lined up in the pipeline. But we won’t see any big IPOs in the near future,” said Cem Oba, head of corporate finance at Tekstil Securities in Istanbul.

This may translate into small or mid-sized deals, while larger issuers are waiting for clearer signs and greater market stability.

Meanwhile, some companies are simply waiting for good market conditions. These stocks, which are relatively ready for offerings, may look to come to the market but only if there is a period of prolonged stability.

“If new investors come to the market and investor appetite increases, we will see the bigger IPOs and bigger issues come to the market,” Oba added. 

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