Sunday, 22 July 2018

Timed to perfection

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A skillful and opportunistic borrower, Turkey has always been clever at identifying when best to come to market to achieve its financing requirements. As investors look to cut back their emerging market exposures to minimal levels, the sovereign has distinguished itself by exploiting opportunities as and when they arise, often surprising the markets with its boldness. Savita Iyer-Ahrestani reports.

Turkey is a highly skilled, successful and steady borrower that has never disappointed foreign investors. Ever since it first issued foreign currency bonds on the international markets it has been hailed as a sophisticated issuer. It will issue in whatever currency, structure and tenor makes most sense to the Treasury at the time. 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 after the issue. “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.”

And so it did. On April 30, at the end of the period covered by this report, it came again with a US$1.5bn 7.50% SEC-registered 10-year Eurobond. The deal took the markets by surprise but, true to form, had come at exactly the moment investor appetite for riskier assets was on the rise. The bond yielded 7.60% with a reoffer price of 99.285, or 447.90bp over US Treasuries and came via Bank of America Merrill Lynch and JP Morgan.

It came on the back of reverse enquiry from a large number of A-list investors, following finance officials' roadshow meetings in New York and talks with the International Monetary Fund in Washington, according to Waleed el-Amir, head of MENA and Turkey origination at Bank of America Merrill Lynch in Dubai.

"The Turkish officials communicated the current macroeconomic situation in the country very well," one investor in New York said at the time. In excess of 200 investors were on the order book, with 43.5% of the paper being allocated to US accounts. Turkish and European buyers took 37.5% and 19%, respectively.

Foreign investors continue to paint Turkey with the same brush they have used for all emerging markets but Turkey’s track record of never having defaulted stand it 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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