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Monday, 11 December 2017

Reaching limits

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Turkey’s companies have become far more active in the international loan markets, giving international banks exposure to the non-financial institution sector. But with huge financings due to come, some question whether there is enough liquidity. Nick Lord reports.

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International banks have traditionally gained exposure to Turkey through one year trade finance related loans to Turkish baks. But over the last year, direct lending to Turkish corporates and Turkish projects have increased dramatically.

According to Estel Gurdogan, head of financial institutions at TSKB in Istanbul, total loan volume pre-crisis was about US$30bn, but during 2008 and 2009 this volume fell by about 60%. But now volumes are coming back to the levels they were in 2007. Key to this has been the increase in appetite of international banks for Turkish corporate exposure. “Foreign banks have increased their funds to Turkey by about three times in recent years,” said Gurdogan.

Much of this is due to the reduction in country risk associated with Turkey due to the way it has come out of the crisis. “The perception of country risk is very positive,” said Pierre Lebit, chief country officer for Societe Generale’s corporate and investment banking business in Turkey. “Turkey is being impacted by the debt crisis in Europe but because of its large potential growth we are confident in the market.”

One key metric that the market used to assess foreign demand is the rollover rate for the Turkish bank syndications. This is now approaching 140%, and new banks from regions such as Australasia, Asia and Latin America are joining the syndicates, reflecting the widening spread of Turkish trade.

Even with this rapid growth in loan availability, some are question whether international banks will actually be able to keep up with the demand for finance that is going to come from Turkey. “We have been growing our loans books, but this year liquidity will be a major problem, especially in hard currency” said Mustafa Tiftikioglu, head of project finance at Garanti Bank.

The government’s huge privatisation plans are compounding already ambitious corporate investment plans, said Tiftikioglu, creating a situation where demand will completely outstrip available supply – even with the rapid increase in Turkish country limits at foreign banks. There are around US$10bn of greenfield power projects in the market, US$10bn of electricity distribution deals, US$20bn of electricity generation privatisation deals, US$10bn of transport infrastructure deals, as well as plans for new refineries, hospitals and factories, said Tiftikioglu. Altogether there is US$70bn of long term financing needed over the next three to four years. With debt to equity ratios of 70% or 75%, this means US$50bn of loans. “Given the liquidity concerns in the market, this will be a challenge,” he said.

Privatisation on parade

There will also be loan demand driven by M&A, with two big deals in the media sector expected shortly. Dogan Yayin, the biggest media company in Turkey, is for sale. International bidders are likely to include RTL, Time Warner and private equity group KKR. Another private equity player, Providence, is also in discussions with buyers for its 47% stake in Digiturk, the leading cable TV company in the country. Both deals could be around US$3bn in value and much of the finance to pay for the purchases in likely to come from the international bank market.

Given this huge demand, new solutions and sources of finance are will be used. According to Sule Kilic, head of financial advisory at UniCredit, export credit agencies and multilaterals will provide key support to get more finance into the country. “The ECAs are bringing lots of liquidity into the market and the multilaterals are one of the main sources of finance,” she said. “Turkish banks are the main players, but when it gets over about US$1bn, then we need to approach other sources.”

One deals that best sums up all these trends is a recent €700m 12 year deal for Enerjisa. The company is a joint venture between Sabanci Holdings, Turkey’s second largest group, and Verbund of Austria and it aims to become the biggest integrated power company in Turkey through a series of acquisitions and greenfield developments. The loan is structured as a corporate loan which over time morphs into a project loan, secured by the revenues of individual power projects and shedding its recourse to the parents. The deal is led by IFC, UniCredit and WestLB. Bankers in the market expected similar structures to become more common, as the energy privatisation process continues.

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