Turkey 2007: Return-driven boom
Typically characterised by MLA-heavy loans to banks, the Turkish syndicated loan market has been one of the most dynamic in Europe and the Middle East this year. With falling returns elsewhere highlighting the relative attractiveness of the market – and the country's belatedly successful privatisation programme aiding confidence and providing supply – 2007 is set to be a watershed year. David Cox reports.
The figures are startling. In the first quarter, according to Thomson Financial, Turkish corporates have borrowed close to US$9bn – more than during all of 2006. Moreover, the majority of this year's volume is explained by three groundbreaking deals.
"Banks are positive towards Turkey and with the FI sector now offering lower returns, lenders are turning to the corporate market," said Raouf Jundi, head of origination MEA at Bank of Tokyo-Mitsubishi UFJ.
"While on a pure rating basis, pricing in Turkey seems low, banks take the view that the rating does not necessarily reflect all the positive developments in the Turkish economy many of which have been brought on by the process around EU accession."
"In addition unlike some recent new EU entrants, Turkey has a strong industrial base and a larger economy meaning it offers wider opportunities for lenders."
Mobile carrier Avea was first to hit the market this year when it launched an innovative US$1.6bn loan through MLA ABN AMRO. The facility was unusual in as much that the first phase was completed on a bookbuild basis with sub-underwriters bidding proposed pricing. This resulted in an out-of-the-box 240bp over Libor and a 125bp MLA fee, and a strong enough response to mean that retail syndication was not necessary.
Rival mobile group Turkcell followed Avea with a hugely ambitious US$3bn loan. The facility was doubly daring as not only was it the largest corporate facility seen to date in Turkey, but it was also a war chest financing for unspecified future acquisitions in a sector that is generally unpopular with banks. In testament to the new environment, as well in tribute to Turkcell's excellent credit and adept working of its relationship banks, the facility scored a good oversubscription in syndication.
To round off that record quarter, Ojer Telekomunikasyon, the vehicle that controls 55% of Turk Telekom, broke through Turkcell's size benchmark with a US$3.8bn refinanancing. To clear up any doubt about the depth of Turkish corporate market, in senior syndication the facility raised in excess of US$7.5bn, leaving it well oversubscribed even at take and hold levels.
As a result the leads were able to approach the market with a reverse flex or reduction to the 275bp margin. Despite the large oversubscription, by April the leads were preparing to take the facility into a general syndication as Ojer was looking to build a long term bank group.
So during a quarter that was characterised by generally lacklustre corporate activity in much of Europe and the Middle East these three deals would add up to a remarkable achievement. But for a market that was until recently dominated by short to medium-term FI lines, the fact that over US$8bn in corporate facilities could clear the market with seeming ease was particularly impressive.
Initial indications that there was demand or Turkish corporate appetite came over the past few years when a series of syndicated corporate L/C facilities all scored good oversubscriptions. These were followed by a series of privatisation deals which revolutionised the market.
"Repeated deals from the FI sector over a number of years meant that lenders are already comfortable with Turkish risk," said Hasan Mustafa, executive director and head of CEEMEA loan syndication and sales at ABN AMRO. "In the corporate space, lenders' limits have been increased and with the Government's successful privatisation programme the market soon gained a real impetus."
After years of false starts activity in the Turkish privatisation programme stepped up a gear last year. To fund its takeover of Tupras, an oil refiner, Koc Holding used the loan market to secure an internationally syndicated US$1bn loan and a US$1.8bn non-recourse loan at the SPV level. While, Oyak, the armed forces pension fund, secured a US$1bn syndicated loan to fund its acquisition of a stake in Erdemir, Turkey's largest producer of flat steel.
However, it was Ojer's Telecom's US$2.75bn loan late last year that really opened the doors for corporate borrowings in Turkey. The facility raised more than US$3bn in syndication showing just how liquid the market had become and this meant the leads were able to flex down the margin on the 27-month term loan tranche from 310bp to 250bp. Closing in November last year, the success of such a widely syndicated facility emboldened Ojer to seek an early refinancing, although a longer term take-out was always planned for 2007.
The success of these Turkish corporates is all the more notable when put into the wider context of the emerging markets of Europe and the Middle East. While conditions in the broader loan market remain remarkably benign and liquid, a return of debt-funded corporate activity across Europe and the Middle East means lenders can once again be selective in their choice of assets.
The situation in Russia is especially telling. Over the past few years, top Russian corporates have enjoyed the seemingly perfect combination of larger loans with lower pricing and fewer covenants. But now pricing has fallen to such a level that loans have struggled and in some cases retail investors have fallen away:
"As opportunities from a return perspective began to dry up in Russia, lenders were increasingly turning to Turkey for new supply," said Hasan Mustafa at ABN AMRO. "And while the political and economic environment is seemingly riskier, the higher pricing more than compensates." (See separate article in this report on the political and economic outlook for the country.)
The pricing difference is stark. For example, Tukcell paid 150bp over Libor on the five-year tranche of its recently completed loan, while Anglo-Russian oil group TNK-BP paid 57.5bp on its five-year amortiser that closed earlier this year. And while serial borrower TNK-BP had a tough time in syndication, Turkcell, which has no outstanding syndicated lines and relatively little debt on its balance sheet, scored a good oversubscription.
In addition, Turkish borrowers have been able to rely on a strong bid from the country's banks. With a strong economy and liquid market for their own debt, Turkish banks are extremely liquid and are happy to support the corporate market with large tickets.
"Turkish banks are absolutely instrumental in the emerging corporate market," said one banker. Turkcell is another good example here, as the group was able to place its entire US$1bn seven-year tranche with Akbank and Garanti.
The awakening of corporate Turkey should be seen in the context of last year's Middle East merger wave, in which several overseas big ticket acquisitions were debt funded. This means activity is unlikely to stop at Avea, Turkcell or Ojer. So while the privatisation programme may slow ahead of this year's elections, other corporate deals – specifically in the in the US$500m to US$1bn region – are said to be in the works.
Already Hurriyet, a media group, has turned to the loan market to fund its acquisition of London-listed Central and Eastern European media group, Trader Media East, with a US$550m loan. This facility through ABN AMRO was split between a US$350m six-year loan, paying 250bp over Libor at the corporate level, and a US$200m five-year line secured at the TME level, paying 250bp. By April the lead was closing the facility with a good oversubscription.
FI market in the shade
This focus on the corporate market has overshadowed the traditional loan activity from Turkish financial institutions, where bankers are now in almost total agreement that that market now offers only minimal interest.
According to Erdal Aral, treasurer of Is Bank (one of the country's big four banks), there is no value for lenders in the one-year sector any more, so international banks are having to go out to two or three years in their syndicated lending. Given the top-tier banks' focus on price, after testing the three-year tenor barrier last year, most banks appear to have settled on two years.
Is Bank is paying 57.5bp on its upcoming loan, which is a 5bp reduction from the last borrowing round in late 2007. However, banks estimate that a three-year deal would take the pricing up to around 95bp, which is too expensive for top-tier FIG borrowers.
In addition, given the price now on offer, syndications have now largely been abandoned in favour of club deals, which allow the banks to flex their relationship muscles. And in a new development this year, Garanti has opted to coordinate its first refinancing of the year, a development widely welcomed by the lending community.