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Thursday, 24 April 2014

Savouring a taste of Turkey

Mrs Watanabe has caught on to the idea of Turkey. Thanks to an almost 5% appreciation in the lira this year, no wonder that Uridashi denominated in the currency have made up a third of issuance this year.

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The Uridashi market is changing. Between April and September last year about 50% of Uridashi were denominated in Australian dollars, 25% in Brazilian Real and only 7.5% in Turkish lira. But from April to June this year, the rankings had changed. The Australian dollar was still at the top at 43%. But the Real had slipped to 16% and sales of Uridashi in Turkish lira were up to 34%.

What has happened is that Mrs Watanabe, the idealised buyer of these bonds denominated in a foreign currency and sold directly to Japanese household investors, has caught on to the Turkish story. The currency has appreciated almost 5% this year alone and the yield on one-year bonds is near a mouth-watering 8%.

There is certainly scope for growth. At the moment, Japan’s investors probably have no more than an US$8bn portfolio exposure to Turkey and the Turkish lira. That translates into 1.2% of total emerging markets portfolio exposure by Japanese investors, according to estimates from Barclays. Compare that with 4% for Brazil, 3% for South Korea and 2% for Mexico. A recent report by the bank, whimsically entitled “Turkey: Welcome Mrs Watanabe,” reckons that potential portfolio flows to Turkey from Japan could reach US$5bn–$6bn a year compared with current levels of about US$2bn.

It makes sense. As one banker on Barclays’ MTN team said: “The lira is a good currency backed by a well-balanced economy. The country is internationally competitive, it has a good location, it has access to Islamic, Asian and European markets and above all has a diversified industry.”

Other currencies – like the Russian rouble or the Saudi Arabian riyal – occasionally get a look in, but are unlikely to become big sellers. They don’t tick all of the boxes and, more to the point, don’t come with that level of political stability. Little is likely to change in the near future. The Turkish central bank has maintained a tight grip on monetary policy and has vowed to keep the lira strong. All of which is music to Mrs Watanabe’s ears.

Moving beyond vanilla

So solid is the currency and the Japanese comfort level with it, that issuers have gone beyond the plain vanilla offerings. In early July, Rabobank sold what was dubbed an “Agri Bond” via Daiwa, the first themed Uridashi bond in Japan from a non-supranational or agency issuer. The TL190m (US$105m) 7% two-year deal supports Rabobank’s various projects, lending and other financial support aimed at enhancing sustainable business practices in agribusiness in developing countries.

But of course where the volume has been is in bank issuance – especially from Korean houses. In June, Korea Development Bank made clear its retail funding plans and unveiled a large twin-currency Uridashi deal of getting on for US$200m via Daiwa. Investors had the option of R$45.5m (US$22.9m) five-year paper at a coupon of 7.02%, or a much meatier TL323.9m three-year bond with a 8.35% coupon

And in mid-August, Korean policy bank, Export-Import Bank of Korea, sold a TL55m three-year 6.52% Uridashi. The size of that deal in and of itself is negligible, but Kexim has so far raised around US$1bn-equivalent in the Japanese retail market year-to-date and is looking to raise at least another US$400m-equivalent before the end of the year. More to the point, the paper priced inside the curve for Kexim’s US dollar funding. For the infamously price-sensitive Korean banks that is not to be underestimated.

Other bankers also mention that what has helped Korean names in the market with Uridashi is not just the pick-up in Turkish lira, but the strong appetite for non-European credits. While the institutional market is prepared to make distinctions between so-called good and bad European names, the retail market will not always do so. Many investors simply prefer to steer clear altogether.

This is not to say that Europeans have been unable to come to the market at all. Swedish government-owned mortgage lender SBAB Bank has come twice this year. First with a US$130m equivalent in mid-March: a R507.2m (US$66.5m) four-year note with a 7.66% coupon, a A$39m (US$41.2m) four-year piece with a 5.82% coupon and a ¥2.06bn five-year tranche offering a coupon of 1.17%. And again at the end of May with US$140m equivalent, though this time with ¥2.31bn 0.88% five-year tranche, a A$38.5m 4.75% four-year note and a R$613.2m (US$73.9m) 6.93% four-year piece.

But other banks have been much more cautious. Lloyds has also visited the market twice – at the end of June and beginning of July. First with a ¥14.7bn three-year 1.01% and then a ¥11.4bn five-year 1.55%. Both deals were plain vanilla retail Euroyen. The same was true of Credit Agricole CIB which has also come to the market twice. First in June with a ¥2.5bn 1.6% five year deal and then again in mid-August when it sold a ¥13.05bn 1.31% four-year Uridashi.

Canny investor

What has become clear is that for deals to print there does not just have to be a good yield, but that it is a solid name too  – either a name familiar from past deals or an entirely new name. “Mrs Watanabe is a canny investor. She likes her coupon, but she also looks at what it means,” says Vince Purton, head of debt capital markets at Daiwa Capital Markets Europe.

Nonetheless, top of the tree will remain the Australian dollar which has comfortably made up the largest component of the Uridashi market for the past four years. “There is a level of comfort and familiarity with the Australian dollar for the Japanese investor – it has always been there for them,” says one Tokyo-based banker. Indeed the Australian dollar is not spoken of in the same tones as many other currencies; rather it is almost spoken of in the same terms as the US dollar.

Typical is financial services corporation Orix which sold a A$130m 4.28% three-year via Daiwa. The company, well-known to domestic investors, wanted to expand its long-dated financing and the non-core currency deal is part of this initiative. This was a safe and well-trodden path.

The sheer popularity of the Australian dollar format could be seen in early July when frequent issuer Toyota Finance announced two rather similar deals at the same time and both of them in Australian dollars. At the end of August, Toyota Motor Finance first priced an A$125m four-year note at 3.83% via SMBC Nikko. Then it sold a US$135m equivalent three-part five-year deal with a US$43m 1.03% tranche, a A$75m (US$78.7m) note with a coupon of 4.02% and a R106m piece via Mitsubishi UFJ.

What is clear is that there is no chance that Uridashi issuance is likely to slow down in the third and fourth quarters of the year. Uridashi issuance figures are notoriously difficult to pin down, but estimates from several bankers put year-to-date sales at around ¥2.5trn–2.8trn. In this low interest rate environment and with equity markets under constant pressure, there are expectations that volumes could hit ¥3.2trn–3.5trn before the end of the year. 

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