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Monday, 11 December 2017

IFR Top 250 2007: More exchanges coming

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Issuance from Turkey is benefiting from an expanding investor base as high-yield and crossover accounts take an increasing share of sovereign supply. While an inaugural Sukuk offering seems as far away as ever, further exchanges are on the cards following September 2006’s debut debt liability management exercise. John Weavers reports.

Turkey has had a mixed year in the Eurobond market. It plans to raise US$5.5bn from foreign currency issuance for the third year running got off to a disappointing start when it raised US$1bn from tapping (in equal size) its 7.0% 2016s and 6.875% 2036s on January 9. Both deals priced below initial guidance as market conditions deteriorated.

The additions' fixed reoffer prices of 101.875 and 95.875 were 1/8 and 1/4 less than initial price talk, providing yields of 6.732% and 7.215%, equivalent to 207bp and 247bp over US Treasuries. Expectations had centred on bumper supply of US$1.5bn–$2bn at the start of a potentially problematic year for the Republic with presidential and parliamentary elections falling in May and November. However, with the market so soft the Treasury opted for US$1bn, in spite of attracting a US$3bn book.

“Because the market in general expected an issuance type in line with our strategy, we had expected more than US$1bn, though not as much as US$2bn. That morning the market was fine, then it turned negative, which affected demand,” said Memduh Aslan Akcay, director-general of Turkey's Foreign Economic Relations.

Turkey got its issuance strategy back on track later in January with an above expectations €1.25bn 12-year Eurobond, the country's second-largest deal and biggest non-US dollar issue. The Reg S issue pays a 5.875% coupon and was priced at 99.106 to yield 5.977%. That was equivalent to 168bp over mid-swaps and 193.4bp over Bunds, at the tight end of initial guidance set at 170bp over mid-swaps area.

The Treasury then made its third visit to the Eurobond market in February with a US$750m addition to the existing 2020s that took that issue up to US$2.0bn. The bond pays a 7.0% coupon that with a tap price of 100.95 yielded 6.888%, 2bp inside initial guidance of 220bp over 10-year Treasuries.

As of early June, the sovereign had raised US$3.35bn equivalent, around two thirds of the year's target, with the Treasury constantly tracking the market for a suitable window to return. Despite political uncertainty ahead of (and no doubt beyond) the July 22 general election, Turkey has been speaking regularly with origination desks about a new issue.

In light of this year's €2.5bn of euro redemptions and a preference for alternating between US dollar and euro issuance, the Treasury may be expected to print a euro deal next, but recent talk has centred on a new 10-year benchmark in the more liquid US dollar market.

In addition to meeting its annual Eurobond target Turkey can be expected to carry out some traditional prefinancing. “We never say that we won’t tap the market and pre-fund . . . However, our essential aim is to complete the year’s programme, with some variation. Targets must be meaningful,” Akcay said.

The Treasury also continues to put a lot of emphasis on its investor relations programme. The office was established in 2005, and there are around 1,000 investors on the regular mailing list. This has proved successful in terms of new areas of demand. Italy was a good source of interest for the latest euro issue (taking 9%); Scandinavia, especially retail investors from Denmark, is proving interesting, while there has also been interest from investor bases as different as Austria and Brazil.

The sovereign is also interested in currencies outside the big two. All the Republic’s Samurais have matured, but the country’s sub-investment grade status is a problem in that market. As for sterling, there seems to be interest from the investor base helped by the low yield environment.

On the subject of Islamic bonds, Ackay appeared to play down speculation of a debut deal in the near term. “The country is already getting a lot of investment from Gulf countries through asset sales and FDI. In addition, the sukuk market does not seem to be booming,” he said.

Turkey is expected to follow last year's debut liability management scheme with a second US dollar exchange and/or inaugural euro exchange once market volatility subsides.

"We did a US dollar exchange in 2006. It was our first liability management exercise on the external debt side and was a good experience for us. Forthcoming exchanges might be both in the dollar and euro markets," said Akcay.

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