Since the 2003 Gulf war, the Turkish syndicated loan market has enjoyed a remarkably successful run with larger and cheaper loans. However, on the back of a yawing current account deficit that sparked a sell-off in the equity and bond markets earlier this year a usually calm loan market wobbled and pricing edged up. However, this is likely to be little more than a blip with lenders still positive towards the country. David Cox reports.
Since the Iraq war the top tier Turkish financial institutions (FIs) have skilfully ridden a wave of lender optimism towards the county and have been able to put in place larger loans at cheaper prices. Syndications having been largely abandoned in favour of relationship defining clubs, pricing fell to as low as 47.5bp all-in with loans regularly breaching the US$1bn barrier. Pricing looked set to continue to fall when events intervened.
Sparked by a sharp devaluation in the Turkish lira market midway through the year, the bond and equity markets saw a huge sell-off. This came as a result of concerns over Turkey's large and persistent current account deficit that was compounded by inflation worries and political concerns about delays in the EU accession process. To counter the sell-off, the Central Bank increased its overnight rates by 225bp (a second such move in three weeks). This was followed by another 200bp hike just three days later. Although, the bank's swift action will help to counter the current account deficit by dampening domestic demand, analysts were quick to trim 2006 growth projections with the Economist Intelligence Unit now predicting GDP growth of 4.5% this year (as of July 2006).
Unlike the fixed income or equity markets, commercial banks in the syndicated loan market do not move with events but tend to take a longer term view, but with such a pronounced sell-off even the normally composed syndicated loan market balked.
Anadoulubank was forced to pull its one-year loan after it failed to agree a price with its lenders, while Oyak Bank closed its US$150m loan undersubscribed with lenders forced to sell down in the secondary market. In the banking top tier: to secure its US$700m loan Vakif bank was forced to offer lenders another 5bp bringing the all-in to 47.5bp. And even with this premium the loan was smaller than the US$750m initially requested with the MLA group shrinking. With Vakif paying up, it was almost inevitable that others would have to follow. After requesting a renewal of its US$1.25bn line at 47.5bp, Akbank was forced to add an extra 5bp fee. Isbank and Koc Bank were then forced to follow suit with their respective US$900m and US$500m loans.
"The loan market is more stable than the equity or the fixed-income markets and Turkey's financial institutions have large groups of lenders, which have proved to be very loyal investors," said Michael Emery, director, loan syndicate, sales and trading EEMEA at ABN AMRO. "Even though there has been some price resistance recently, at the right level these investors will continue with their support".
Fundamentals remain strong
Turkey has run a current account deficit for years and unlike previous problems such as the banking crisis in 2000 the situation is not structural as the country's fundamentals remain strong. For the FIs this time around lenders are not pulling back on credit fears but are looking for higher pricing, which they believed had come disconnected from risk. Ultimately, 5bp of extra margin is a very modest increase and at best a psychological admission from the FIs that the situation has changed and they are willing to acknowledge their relationship lenders' concern. However, the situation should not be compared to 2000 when margins increased to 80bp, fees to the syndicate widened to 140bp and syndicates fell away.
"Things changed forever in Turkey on December 6 2004 when the country finally got the nod and it EU started accession talks," said Hiren Singharay, head of syndications for Europe Africa and South Asia at Standard Chartered. "This was the culmination of a process that began in 1963, when the country became the first (and only) associate member of the bloc. From that point onwards investors' attitude to Turkey changed as they could take comfort that no matter what lay ahead much of the country's economic destiny would now lie with Brussels."
Prior to the wobble, the FIs looked as if they were finally weaning themselves of their addiction to one-year, top MLA heavy loans with the market finally moving towards medium-term financing. In the top tier, Akbank was at the forefront of this trend, most recently completing a €500m three-year loan at a margin of 55bp over Euribor.
But while the trend towards medium-term financing is expected to continue, it will not replace the traditional relationship that arises with the one-year line. This is because Turkish market has been very volatile in the past, ensuring that FI borrowers look at one-year trade related lines as an important part of maintaining this relationship: "The Turkish banks do value their relationships and they always do their homework and make the call," said one Turkey specialist.
Corporate progress
While the FI market has been shaken, the corporate market continues to go from strength to strength. Initially corporate supply was limited to a series of undrawn trade deals but the country's resurgent privatisation programme, followed by corporate acquisitions and now LBOs, have all boosted supply making the market an important European growth area.
Last year the state sold a controlling interest in Turk Telecom to Saudi Oger for US$6.5bn, a 51% stake in Tupras, an oil refiner, to a Koc-led consortium and a stake in Erdemir, a steel group, to Oyak. All these privatisations were backed by a mixture of loans, some with recourse, some not.
Initially, while international banks were involved in arranging these deals, they were reliant on domestic bid in syndication, with local banks happy to take large holds. The first real international test came with Koc Holding's US$1bn loan that backed its equity contribution in the acquisition of Tupras. As the first large, drawn broadly syndicated corporate facility in Turkey to go out to three years, its progress was closely watched. Although, initially a fairly slow sale the deal was a success with the international market and has paved the way for other corporates to follow.
"Typically the investor base that looks at the Turkish FI market did not have the capability to book the corporate sector," said ABN AMRO's Emery. "Now there are a lot more banks that are able to lend to the corporate market and the area is moving from a club-dominated space to a fully-fledged syndicated loan market."
Despite the worries around Turkey, the market has developed from privatisations to the more general corporate space. Turmoil in the wider capital markets has helped the loan market with Efes Brewery choosing to refinance a bridge loan through the bank rather than the bond market because of the former's cost benefit. By the middle of August that US$500m loan through Citigroup and HSBC was finding a strong response and was set to close oversubscribed.
This interest in the market is in part driven by a search for yield as the corporate market pays a significant premium to the FI sector (Efes is paying a margin of 155bp for a three-year bullet). And for lenders, it is Turkey's EU accession status that is crucial and the country is following the path taken by other accession countries and candidates where the convergence play has seen a rapid contraction in spreads: "Banks that once looked at places like Romania and Bulgaria have seen margins fall and are now looking for the value in Turkey," said one London-based loan banker.
Tackling systemic risk
Traditionally, Turkish corporates have been funded bilaterally by local banks that borrowed short in the syndicated loan market and lent long in a classic asset mismatch.
However, since the banking crisis of 2000, systemic problems in the banking sector have been largely tackled in what has been a successful process meaning corporate borrowers are now more likely to diversify their funding sources. Moreover, with local banks choosing to concentrate on profitable consumer business, corporates with a relatively large funding requirement will choose to go international.
“The investing community is now starting to follow Turkey, which is a major trading nation in Europe," said StanCharts Singharay. "And because of this there will be more corporate supply in the loan market. Furthermore, because of banking reform, the situation which existed 10-years ago where Turkish banks were happy to lend to their conglomerate owners at cheap rates is over. And some of the key borrowers have already started to access the market directly while other will follow."
Increased corporate activity is finally having the knock on effect of encouraging private equity interest. Turkey has long been seen as a potential source of buyout supply and this year saw the buyout of Mey Beverage by a consortium led by Texas Pacific. Launching in the middle of August, early indications were positive with two banks joining prior to syndication. And with the country offering a number of targets, bankers said they expected at least three or four chunky buyouts over the next year.