Turkey 2006 - Bold new frontier
This year is likely to see the development of a Turkish lira-denominated securitisation market. The big local banks are gearing up for it, while international investment banks and monoline insurers see exciting prospects for growth in the new market segments. Paul Farrow reports.
For securitisation bankers, Turkey is one of the two most exciting prospects in the emerging EMEA region, the other being Russia. "The great thing about Turkey is that it's big, with a large population. That means that the market for plain vanilla loans suitable for ABS – autos, mortgages and credit cards – is huge," said Christopher Davis, co-head of banking and origination at Deutsche Bank.
And for the monoline insurers, Turkey arguably has more potential than any other country in emerging EMEA. "It is big, it has a growing consumer finance market, and the banks need local currency term funding. Also, unlike many countries in CEE, bank sector ownership isn't dominated by Western European players," said Robert Carney, a director of structured finance at monoline insurer FSA.
This year is expected to be one of transition for ABS in Turkey. On one hand, securitisation is well established. In 2005 there was US$5.5bn of ABS issuance from Turkish issuers, all offshore trades based around future flows of direct payment rights such as workers' remittances, tourism and export receivables. The largest banks such as Garanti Bank and Is Bank are well used to tapping the market two or three times a year, and pricing has been tightening. (See table for details of those deals.)
But what originators are expecting from 2006 will revolutionise the world of Turkish ABS. First, banks are working on securitising a broader range of their own products, a function of their changed and expanded patterns of lending in the last few years. Secondly, they are planning to include lira-denominated assets in their deals. Thirdly, the market could see the first lira denominated ABS issuance.
One reason for the different product offering is that the scope for further DPR-based issuance is limited. One Turkish banker estimated that close to 90% of his bank's DPR capacity would be used up in securitisations by the end of 2006.
The passage of Turkey's first Mortgage Law, long delayed but now forecast to be passed in law this April, will regularise the position of banks that have already started to offer mortgage products, and open the way to both mortgage-backed securitisation and covered bond issuance.
There is scope for banks to start securitising mortgages before the new Mortgage Law comes into effect. For example, they could sell their home loans to an offshore SPV that could then issue the bonds. But most seem to want to wait for the law to be on the statute book. And some banks, Citibank's Turkish operation, for example, will only start mortgage lending at that time as well.
The big banks are already advanced in their plans for this new-style ABS. Garanti Bank in one of the market's most established issuers, and did three securitisations in 2005 for US$1.425bn, most of it monoline wrapped. In 2006, Garanti expects to do about US$1bn of DPR-backed deals in 2006, according Tolga Egemen, executive vice president at the bank.
"The next, and more interesting, stage will be TL deals based on car loans, credit card loans and mortgages,” he said. The potential is certainly there. Garanti claims a 21% market share of the Turkish credit card market's outstanding balances; Yapi Kredi has 23% while Is Bank and Akbank have 13% each. In 2006, Garanti is planning for a lira deal of around US$250m equivalent at some point during the year.
Is Bank is looking at a US$750m-$1bn DPR deal in May. According to the bank's treasurer Erdal Aral, the deal is likely to be half wrapped and half unwrapped. The mandate is due to be announced in the third week of March. Aral is confident that the new ABS market will develop.
"As some emerging market instruments are repaid (for example, Brady Bonds), that money will be available to go into ABS or covered bonds," he said. Overall in 2006 Is Bank aims to issue US$1bn-$1.5bn-equivalent of new securitised bonds; add in refinancing and the total could reach US$2.2bn.
In fact, Riza Kutlusoy, head of capital markets at Is Bank, thinks that a covered bond structure could enable an issuer like Is Bank to tap the market at a better price than is achievable with securitisation. "With average loans of US$30,000-equivalent, and a loan-to-value of around 50%, our mortgages should be attractive," he said.
Covered bonds allow assets to remain on the balance sheet, which is useful if a bank is trying to grow assets, while a securitisation will take the assets off balance sheet and so release capital. With that in mind, Garanti's Egemen favours the covered bond route.
"Turkey is closer to the Continental European model, so initially I expect banks to take the covered bond route, moving on to securitisation at a later stage when they want to release capital," he said.
There are many issues to consider in structuring the new ABS deals. A US dollar-denominated ABS deal referencing lira assets would offer the problems of convertibility and transferability risk. In addition, David Stortz, who leads XL Capital Assurance’s (XLCA) specialised risk group, highlights the legal aspects to consider, such as the ability to foreclose on collateral.
What sort of deals should we expect to see? When domestic ABS deals start to appear, Deutsche Bank's Davis expects that they will have a weighted average life (WAL) of three to five years. "Longer-dated issuance is unlikely given the inverted nature of the yield curve at the long end," he said.
"To be honest, will the mid-tier banks still be around in five years' time?," asked one foreign banker. "From that perspective, in the long term you are taking a lot of originator risk."
As for the investor base, the audience for the existing US dollar-denominated wrapped deals is essentially the same as for Western European RMBS Triple A paper, the incentive being a few basis points (perhaps 10bp) of extra spread. For unwrapped product on the other hand, the buyers are more typical emerging market investors and, in future, domestic Turkish institutions looking for a pick-up over government bonds.
For unwrapped senior lira deals, the investor base is more debatable. "Few typical ABS investors will buy that initially. Would it be swapped into US dollars? Could it be sold locally? There is definitely an educational process with local investors to be accomplished here," said Deutsche's Davis.
The development of these new ABS products will open the door for the big players in European ABS to get another bite at the Turkish cherry. Most of the banks that led 2005's issuance are not in the front rank of ABS houses (see table), a reflection of the fact that the dollar DPR segment has already become commoditised, with bookrunners chosen mainly on price.
"We've bid for those DPR deals, but we don't get the mandates because we won't cut our fees that much," said one international originator.
But the advent of the TL-denominated segment will, at least initially, provide scope for the sort of innovation and structuring that will give the top banks an advantage again.
One curious feature of the Turkish ABS market is the lack of euro-denominated issuance despite the fact that Turkey exports mainly in euros, and has many emigrants working in eurozone countries. In many cases the flows that back ABS deals are in a variety of currencies, but issuance has to date always been in US dollars. The reason for this is that Turkish banks have access to euros in the form of domestic deposits, but lack a similar source of US dollar funding to back their US dollar-denominated lending, for example to importers, so the lack of euro-denominated Turkish ABS deals is likely to continue.