Sunday, 22 July 2018

Opportunity knocks

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A skillful and opportunistic borrower, Turkey has always been clever at spotting the right time to come to market to achieve its financing requirements. But as investors look to cut back their emerging market exposures to minimal levels, the sovereigns gain could be the loss of other Turkish asset classes. Savita Iyer-Ahrestani reports.

Turkey is a highly skilled, successful and steady borrower that has never disappointed foreign investors. Ever since Turkey first issued foreign currency bonds on the international markets it has been hailed as a sophisticated issuer. Many argue it is comparable to any Western nation in its ability to swiftly gauge the markets and play them accordingly.

“Turkey is a regular, capable and heavy issuer of Eurobonds and with that comes a lot of experience in debt management,” said Ed Parker, sovereign analyst for Turkey at Fitch Ratings in London.

Case in point: the US$1bn, eight-and-a-half year bond Turkey sold in January through HSBC and Citibank. The issue, sold at par, came with a coupon and a yield-to-maturity of 7.5% and a spread of 501 basis points over US Treasuries. More importantly, the issue was placed during a period of brief reprieve in one of the worst months for global financial markets, Parker said. The Turkish government spotted that window of opportunity and executed the deal in record time.

“Getting that issue size away so early in the year and in those market circumstances is a good example of the technical capacity of the Turkish government,” Parker said. “I would expect them to issue more bonds this year, depending on market sentiment, especially since their Eurobond spread levels are relatively moderate in the current circumstances.”

The only downside for Turkey is that, with such an adept sovereign borrower absorbing much of the investor demand for Turkish exposure, there may not be much left over for other asset classes. (See the next feature on Turkish corporate bonds.)

With US$1bn of its planned US$3bn in 2009 issuance done, Turkey is in a good position and foreign investors – who have always shown considerable support for Turkish sovereign issues, not least for the great yield they offer – are likely to look with just as much interest at forthcoming issues. Turkey will certainly seek to issue more debt internationally, according to sources – when markets permit, and in whatever currency, structure and tenor makes most sense to the Treasury at the time. Just as it did in January, the sovereign is more likely to tap the markets opportunistically, sources say, in light of the ongoing market troubles.

Of course, foreign investors continue to paint Turkey with the same brush they have used for all emerging markets. Things are not as easy as they were in previous years. But the fact that Turkey has never defaulted on its debt and has never had any problems in paying redemptions stand the nation in good stead for future sovereign issuance, said Zeynep Aslan, a director at investment firm Turkisfund Sicav in Istanbul.

“Many other countries that have defaulted more than once on their debt obligations are rated higher than Turkey,” Aslan said. “Turkey offers higher interest rates but it also has higher credibility, and given the debt history, you can be sure that you get your money back. The very first thing an investor checks – and more so at this time – is for an exit door. In this respect, I can see Turkey being a good investment.”

According to Paul Bizsko, senior emerging markets strategist at RBC Capital Markets in Toronto, local Turkish investors currently hold about 60% of outstanding Turkish Eurobond debt. “This represents a relatively captive investor base for the sovereign, which should also help it to issue external debt,” Bizsko said.

Turkey has now successfully tapped international bond markets five times. In September 2008, the sovereign successfully placed a US$1.5bn, 10-year global bond – an issue that was priced attractively enough to secure healthy international interest and enabled the Treasury to raise half of its remaining 2008 issuance target in one go. The deal, co-led by Deutsche Bank and UBS, priced within 12 hours of its mandate announcement and came in line with 7.05% yield guidance, equivalent to 334.4 basis points over US Treasuries.

And last June, Turkey issued a US$500m retap of its 7.25% March 2015 bonds, which were first sold in October 2004. Demand for the issue, co-led by JP Morgan and HSBS, reportedly exceeded US$1bn.

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