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Sunday, 19 November 2017

Turkey 2005 - Stepping up a year

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In a benign 2004, Turkish bank borrowers were able to put in place record-sized loans at prices not seen since before the country’s 2001 crisis. With the top tier looking to repeat that success this year, the oft-promised stretching of the traditional one-year tenor to two is a real possibility. Meanwhile, falling pricing for the top borrowers is only likely to fuel lenders’ appetite for small banks and a burgeoning corporate market. David Cox reports.

Building on their success in 2003, the top tier of Turkish financial institutional borrowers (FIs) had a bumper 2004. Leading names like Garanti and Is Bank were able to push down pricing to around 120bp over Libor all-in to the arranger, and at the same time put in place their largest loans to date. In part this was due to the high level of liquidity sloshing around the European loan market, but it also signalled the full resurrection of lenders’ confidence in Turkey, and optimism about the country’s tentative steps towards EU membership.

“Pricing in Turkey fell considerably last year, and that not only reflects excess liquidity and a general lack of assets in the market, but also a continuing recognition that Turkey still offers a good value on a risk/reward basis," said David Pepper, a director at WestLB.

The availability of big ticket, competitively priced funds in the loan market meant that FIs continued with their unique – and highly successful – syndication strategy. Instead of mandating a small group of banks to underwrite a loan that is then syndicated, the FIs carefully cultivate large relationship groups and mandate oversized MLA groups. With upwards of 20 lenders mandated, the amount sought is almost in place prior to syndication launch. That means that any money raised from the market – while also bringing arrangers down to final hold – will provide for an increase.

Some lenders privately say that from a syndication perspective the process can be tortuous, but for borrowers it is highly effective, and there is little incentive for change.

“Turkish banks see these loans very much as relationship-defining exercises, with some borrowers offering asset-backed securities business as lucrative ancillary business in addition to the traditional trade finance flows," said Pepper.

With margins settling around 50bp (with similar fees) for the co-arrangers, suggesting an all-in of 120bp for the MLAs, and loans going as high as US$600m for Garanti, bankers are now looking for the first round of Turkish refinancing due to kick off in April.

Garanti Bank and AKBank are likely to set the tone for others to follow. In the first financing round the top-tier banks are not expected to try and push out tenors, but instead to look for a pricing reduction. Assuming that the all-in ended the year at 120bp, bankers expect the top tier to look to reduce the all-in to the MLAs to 90bp.

However, with margins firmly on a downward trajectory, bankers say that the time is now right to push tenors out in the second financing round in the autumn.

“The market has significantly broadened for the Turkish FI market,” said Peter Kennedy, managing director, global distribution and specialised finance at Standard Bank London, “And the top tier is going to be looking to repeat the successes of last year, with jumbo one-year loans at lower pricing. We also expect that in the forthcoming borrowing round some of these banks are likely to try and stretch tenors out to two years.”

A similar reduction in pricing for the autumn round would mean an all-in of about 70bp; a two-year loan would require about a 50bp premium. The view from lenders is that the extra yield would still be cost effective for the borrower, while give lenders a nice pick-up. Furthermore, confidence about developments in Turkey means that previous fears that taking loans beyond a year would cause liquidity to dry up, are probably unfounded.

From the borrowers’ prospective, previously there has been little incentive to move away from the traditional one-year line. Even at the depths of the 2001 crisis the Turkish banks were able to roll-over their syndicated loans, albeit at higher prices. And given this security of funds the borrowers have tended to focus on price rather than tenor. But with pricing falling so rapidly making the loans less attractive to asset gathers, the FIs may that it is cost effective to take the tenors out to maintain the same level of liquidity.

Although a move to two years is possible in Q3, stretching tenors out to three or five years is not expected in the near term. The top banks all have access to an increasingly deeper pool of longer-term three or four-year funding in the ABS market at competitive pricing. This largely private market is growing rapidly and with an all-in cost of funds around the 130bp/140bp mark. Finansbank (through Bosphorus Financial Services) was able to print a US$500m future flow transaction in the Eurobond market at 180bp over Libor. In local currency, banks are able to lock in even longer-term tenors. According to Is Bank’s head of capital markets, Riza Kutlusoy, foreign banks now offer rates of 13%–15% for bilateral loans in TL with a maturity of up to 20 years. These loans are collateralised with swaps or Eurobonds.

But despite these new avenues of funding, syndicated lending is likely to remain the market of choice for Turkish banks given the cost advantage the banks receive from the product.

Though international bankers are confident that the time is now right to move tenors to two years, the successful, top heavy MLA borrowing strategy means a move to a more traditional underwriting strategy is unlikely any time soon.

“From a return perspective these deals are still very attractive, especially when compared to similar credits in neighbouring countries,” said Christopher Day, vice-president at Bank of Tokyo-Mitsubishi. “Given the success of these loans there is little requirement for underwriting.”

As confidence rose and pricing fell for the top-tier borrowers last year, the smaller, second-tier banks were able to take advantage and tap the market for larger and cheaper facilities. Deniz Bank, offering an all-in yield of around 160bp, was able to increase its US$225m loan to US$325m, all the more impressive given that its largest previous loan was just US$135m.

With the pricing variant for the smaller banks considerably wider than for the top tier, for the better borrowers the average all-in is likely to settle around the 140bp this year. And as the all-in falls for the top tier below 100bp, with the likely result that some areas of traditional liquidity will dry up, the smaller banks are going to increasingly attract attention.

In spite of this optimism, there is still some concern about the banking sector. Though it was successfully rehabilitated after the 2001 crisis, a frequent complaint is the over reliance from some banks on booking government securities instead of longer-term loans.

“A lot of Turkish banks need to start behaving more like banks and take a more long-term approach towards lending,” said one senior loan banker. (See banking article for more on this.)

Moreover, there is some concern that the move to a Basel II, ratings-based risk weighting system may mean that some liquidity drains away from the country.

At present Turkey’s OECD’s status affords the country’s banks a 20% risk weighting, but based on the sovereign’s sub-investment grade (B1/BB–) rating, Basel II risk models – especially for smaller banks without sophisticated risk management capabilities – may mean heavier reserve requirements.

But ultimately these are minor worries, and Turkish banks are almost certain to retain their strong and loyal following in the loan market. “Where do you put your money in this market?” said one senior banker. “Turkey is boring, but a safe bet at the moment.”

Corporate sector

While the FI sector dominates the headlines, the corporate sector made substantial progress last year, albeit from a low base. With domestic banks generally liquid, there is little need for most corporates to go off shore, and the syndicated loan market remains dominated by a few large conglomerates. And although previously dogged by transparency concerns, demand for these loans is now very strong.

Beko Electronics recently scored a significant oversubscription on its US$75m letter of credit facility through mandated lead arranger ABN AMRO, but the borrower only opted to take a small increase bringing the loan up to US$100m.

As the bulk of supply is trade-related, 370-day lines, the market is to be tested as TPAO Turkish Petroleum prepares to award a mandate for a US$250m six-year loan. Given its size and tenor, the facility will set a new benchmark for the country.

While the corporate sector promises steady if unspectacular growth, Turkey’s privatisation programme continues to promise much but deliver little to loan bankers. AKBank, Garanti Bank, Standard Bank London and Vakif put in place a US$550m loan backing the sale of a 67.76% stake in state oil refiner Tupras to Tatneft and Zorlu, only to see the sale cancelled.

“The Turkish government needs a big success in its privatisation programme,” said Standard Bank’s Kennedy. “As an arranger the rewards can be significant, but it is also possible to tie up a lot of manpower with these bids which, based on recent experience, can easily fall away at the eleventh hour.” (See the equities article in this report for more on privatisation prospects.)

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