Slow but steady start
Turkish issuers’ reluctance in issuing sukuk will not disappear in the immediate future, but as politicians and businesspeople are laying the groundwork to facilitate issuance, there is hope that obstacles will be overcome.
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The founder of modern Turkey may have famously wished all religions “at the bottom of the sea” but, almost 74 years after Ataturk’s death, the republic’s deputy prime minister Ali Babacan announced that the government would issue Islamic sovereign bonds, which market participants say is one of several measures necessary to develop the nascent Turkish sukuk market.
Low issuance volumes to date cast a spotlight on existing obstacles blocking prospective borrowers in this fledgling market, even after tax neutrality measures introduced in early 2011 removed some of the barriers, including exemption from withholding tax on issues of five years or more.
“Prior to the change in law, issuing sukuk did not make sense,” said Selim Kervanci, head of global banking for Turkey at HSBC.
Sharia-compliant “participation” bank Kuveyt Turk is the only Turkish sukuk entity so far to take advantage of the changes, with an issue in October 2011.
This US$350m five-year Islamic bond was well subscribed, attracting orders worth US$560m. Leads said at the time that the combined growth stories of Turkey and Islamic finance had allowed it to price about 50bp tighter than conventional market peers Garantibank and Akbank.
Despite this promising beginning, however, the door has not been flung wide open to Turkish sukuk issuance.
Albaraka Turk and Bank Asya, two of Turkey’s other three participation banks, called off planned sukuk issuance in the fourth quarter of 2011, during volatility that sent pricing levels unfeasibly high for many issuers in both Islamic and conventional spaces.
Improved market conditions so far this year could provide firmer ground to develop the market. However, a number of local measures remain to be taken first, aside from the sovereign issuance which would create a benchmark, said Farmida Bi, Islamic finance specialist and partner at Norton Rose.
“We would like the regulators to take away the maturity limit to allow issuance of any duration that is needed,” said Bi. “The tax system also needs to be addressed again so sukuk can be backed by other types of assets as well as real estate.”
Real estate is commonly pledged to back sukuk, but taxes over such assets are not the only consideration for Turkish borrowers looking to issue in the Islamic format.
Perhaps the strongest buyer base for Turkish sukuk is in the Middle East, where discreet scholarly opinions on the Sharia-compliance of an asset or business can make or break a bond deal.
“I think the role of GCC investors in any issuance would be critical,” said Murat Cetinkaya, executive vice-president for treasury, investment banking, international banking and investor relations at Kuveyt Turk.
Middle Eastern investors bought 69% of Kuveyt Turk’s last bond, and Bank Asya followed the established sukuk roadshow trail there in October.
“If any sukuk is structured for sale into the GCC, the investor base will focus on the asset backing it, and what the proceeds are used for,” said Matthew Cahill, a partner at Clifford Chance in Dubai.
Bankers in London agree. “It’s not just about documentation,” said one syndicate manager. “This is about substance over style. Investors want to know they’re buying something Islamic.”
“Government sukuk issuance sends a very strong statement that a jurisdiction is open for business in Islamic finance”
Such discernment could discourage issuance from any secular country or non-Islamic borrower due to sheer logistical restrictions. However, Turkey’s participation banks, three of which are subsidiaries of Gulf-domiciled institutions, can call on recognition for their names among experienced sukuk investors. Kuveyt Turk is the local arm of Kuwait Finance House, Albaraka Turk is a unit of Bahrain’s Albaraka Banking Group, and National Commercial Bank of Saudi Arabia holds 64% of Turkiye Finans (which has indicated no intention to tap the sukuk market). Given the strong link between these banks and the voracious Gulf investor base, it should come as no surprise that sukuk deals and mandates have so far been limited to this sector.
The participation bank’s starting point could provide a template for future issuance from other sectors, said Kuveyt Turk’s Cetinkaya. “There are some corporates which would like to move ahead,” he said, adding, “as Kuveyt Turk, we are ready to provide an advisory role in this process.”
While the question of whether Ataturk’s vision of modernisation included Islamic financial instruments will remain unanswered, there is little room for doubt that politicians and businesspeople are laying the groundwork to facilitate sukuk issuance.
Turkish issuers’ reticence to date is not forecast to disappear immediately, however. HSBC’s Kervanci emphasises that this process remains in its “infancy”.
“The conventional Eurobond market is also nascent in Turkey and it will take time for the very young sukuk market to develop.”
The best way to encourage this development, says Bi, is for the government to make good on its suggestion and issue Islamic debt. “Government sukuk issuance sends a very strong statement that a jurisdiction is open for business in Islamic finance,” she said.