Turkey 2006 - Onward and upward
The Turkish syndicated loan market has matured considerably over the past year. The bank market has stretched tenors out to three years, while in the corporate market the country's privatisation programme has yielded a series of jumbo loans. With Turkish borrowers still offering good relative value, pricing going forward is likely to contract further, feeding lenders’ appetite for higher yielding corporate supply. David Cox reports.
The Turkish financial institutional market has had another stellar year in syndicated lending. For top-tier banks this has brought down pricing on their one-year syndicated lines to 57.5bp all-in, while this year Akbank brought the first three-year loan for a top-level Turkish bank.
"The market has moved from a one-year tenor in 2004 through series of one and two-year deals to a single-tranche three-year deal for Akbank in 2005," explained David Pepper, a director at WestLB. "This has been accompanied by an increasing acceptance of term funding away from traditional trade financing as well as an increased appetite for corporate risk."
Finansbank was the first to take the market beyond the one-year comfort zone. Last year the bank completed a US$400m one-year and two-year loan that enjoyed a strong market response and was doubled from US$200m. Although Finans was followed by a few borrowers looking to extend their maturity profile, the top tier of banks – including Akbank, Is Bank, Garanti and Koc/Yapi ve Kredi – all initially declined to go beyond the one-year mark.
A price focus explains this reticence. Turkish FIs have long been more interested in achieving the best price rather than extending maturities. And with pricing falling precipitously over the past few years, there have been few reasons to lock in medium-term funds. Instead, in a falling price environment the banks have opted to put in place one-year deals that could be rolled over at a cheaper price – and usually a larger quantum – on maturity.
At the most recent Turkish funding round at the end of 2005, the top tier settled at an all-in price of 57.5b. That was down from 70bp all-in paid to the syndicate in the summer and 100bp just the year before.
With pricing coming down so quickly and sharply, borrowers have changed their syndication strategy moving from extended MLA groups and a syndication to fund an increase to a club approach, which allows the lead group to preserve their fee income.
This pricing plunge means the move out to longer tenors is no longer so contentious. Akbank was able to mandate 12 banks to arrange its US$500m three-year loan at an all-in of around 83bp to the syndicate against the 100bp it paid on its US$550m one-year December 2004, which the new loan refinanced. As the deal offered a pick-up from the top-tier, one-year pricing, the facility was a hit in syndication and closed well oversubscribed and increased from US$400m. The deal proved especially popular with banks that now find the one-year deals too tight for their return requirements but are keen to support the sector. This is particularly true of banks from the Middle East that have long been supporters of the Turkish bank market.
The progress of Akbank was closely watched as a template for future deals. With Oyak Bank already signing a US$100m three-year deal in March, Denizbank was talking to banks about a US$200m to US$300m three-year deal. However, just as Finansbank's push on tenors failed to result in many imitators, the move out to the medium term is likely to be steady rather than sudden.
Again the reason is price. Just as pricing has fallen in Turkey, it has also fallen across the entire spectrum of emerging markets. This means Turkey still looks good on a relative value basis, especially when the experience of the borrowers and their considerable relationship pull is taken into account.
"Vast European liquidity along with a EU convergence play has been in the main part responsible for pushing down pricing in Turkey," said Pepper at WestLB. "But compared with yields on offer in Central and Eastern Europe and the Middle East, the country still offers a reasonable return."
Take Russia. In late March, Vneshtorgbank launched a US$600m three-year term loan at 37.5bp over Libor. With a European marketplace awash with several billions of euros of excess liquidity, FIs are still loath to lock in medium term funds, so a move from three years to five years, which is now commonplace in the Middle East, is unlikely anytime soon.
Not only is there unlikely to be much borrower demand, but given the speed at which the market has moved from one-year trade finance to three-year term debt, moving out a further two years may be too much too soon for lenders to swallow. And although Akbank's three-year loan was a success, lenders were not willing to take underwriting risk, meaning that the loan launched with an extended MLA group.
The focus on price means that FIs have avoided contact with the Eurobond market. In the past, the focus on short-term borrowing has led to concerns about an asset mismatch with the banks' domestic lending activities. This has largely been addressed through the securitisation market, where bonds with a seven or eight-year final maturity translating into a four or five-year average life are on offer at around 80bp/85bp over mid-swaps.
Going forward, pricing could be further depressed by supply-side pressures, as foreign interest in the country drives consolidation and reduces the number of banks in local hands. Last year Fortis acquired Disbank, which means that bank will now be funded internally. And in the coming year, talk suggests that Zorlu Holding could look to off load Denizbank while Akbank, Turkey's largest private bank, and Finansbank are also considered to be in play. (See separate article on the banking sector in this report.)
With the financial market developing rapidly, lenders have been paying increasing attention to the corporate sector. Initially corporate supply was limited to a series of undrawn trade-related deals, but the country's resurgent privatisation programme has since boosted supply. (See separate article on the political and economic outlook for more on the effects on FDI of these investments.)
Last year the state sold a controlling interest in Turk Telecom to Saudi Oger for US$6.55bn, a 51% stake in Tupras to a Koc-led consortium, and a 46.12% stake in Erdemir, the steel group, to Oyak. All these privatisations were backed by a mixture of non and recourse loans.
"Falling returns in the FI market mean lenders are gong to start to look elsewhere for yield," said Peter Kennedy of Standard Bank Plc. "Not only will the privatisation programme continue to bring supply in the coming year, but private equity houses are now starting to look at Turkey."
However, though international banks have been involved in the arranging of the non-recourse bank deals, the lion's share of these deals has been taken up by local names. The first real test of the international market came earlier this year when Koc Holding launched a three-year US$1bn full recourse loan backing its acquisition of Tupras
As the facility is the first large, drawn corporate facility to go out to three years it was closely scrutinised as a barometer for future supply. And though syndication was initially fairly slow, the borrower's patience paid off. By late March, six banks had committed at the US$100m ticket level with a few responses outstanding.
That success means that others are now likely to follow. The local bank market is very liquid and most borrowers are likely to be satisfied domestically, but for deals too large for the locals to digest it is clear that the international market is now open.
"International banks are not interested in going too far down the credit spectrum and lending to smaller corporates," said Raouf Jundi, head of origination for Middle East and Africa at Bank of Tokyo-Mitsubishi UFJ. "Smaller deals will remain the domain of local banks, with international banks targeting mainly larger deals."
After a record 2005, the Turkish privatisation programme shows few signs of slowing down with the sell-off of Izmir port set to be the next big ticket deal to hit the market. The Turkish privatisation agency has asked for tenders for a 49-year operating lease for the port. Bids are due by April 7 and bankers say the winner is likely to fund the bid through the loan market.
Moreover, the bullishness about the country means that banks are now looking beyond privatisation to the tempting prospect of genuine private equity interest in the country.
"Private equity houses that have been active in Western Europe and the US are now starting to set up and start joint ventures in Turkey," said Standard Bank Plc's Kennedy. "In the first place the likely targets will be in the middle market with an enterprise value around the US$250m mark."