Turkey 2007: Strong foundations
Increasing political stability, impressive economic growth and a strong recovery since the sharp correction of a year ago, all suggest a buoyant ECM market in 2007. With a liquid local market and the possible return of GDR programmes, bankers remain upbeat, although issuance is likely to remain sporadic, with elections impacting the May and November issuance windows. Helen Bartholomew reports.
With the presidential election in May and parliamentary elections on November 4, the Turkish ECM market is expected to remain relatively quiet through 2007, as the uncertainty adds to an already volatile backdrop. So far this year, the country has delivered just one IPO, and although bankers report a relatively healthy pipeline, only two more deals are currently confirmed as first half business.
"The Turkish primary issuance market is characterised by market windows that open and close relatively quickly. Activity has generally been pretty sporadic, although relatively speaking we have seen good levels of more regular issuance over the last few years," said Richard Stout, equity capital markets at Citigroup.
Following the May 2006 sell-off, markets have stabilised. The ISE all-share index has regained most of its losses, and even the recent wobbles that took their toll in February and March this year have failed to dampen sentiment as the index heads back to all-time highs. Even so, bankers see plenty of upside.
"Turkey is still looking cheap relative to other emerging markets. The effect of elections is to some extent factored in the markets. Despite potential volatility related to the forthcoming election we remain very bullish and see significant scope for upwards adjustment," said Evans Haji-Touma, managing director, CEEMEA equity capital markets at HSBC.
The ISE 100 recently hit 46,000 and local broker Is Investment has a year-end target of 48,000. Analysts at another local firm, Global Securities, believe that if Prime Minister Recip Tayyip Ergodan decides not to opt for the presidency, a market rally would be on the cards given that his AK Party would be more likely to get an overall majority in the November elections if he remains at the helm.
Many believe that concerns about the impact of the elections may have been overplayed given the increase in overall stability.
"The prospect of a double election makes issuers a little more jittery, but irrespective of the elections, the general mood for the macro-economic environment and general ECM prospects are very positive right now. The Turkish equity market is much more resilient than it used to be, and gets far less affected by political issues," said Ugur Bayar, chairman of the Turkey advisory board at Credit Suisse.
ECM activity in the region may be sporadic, but the limited pipeline should ensure strong demand for those deals that do emerge. While other emerging markets such as Russia and Kazakhstan have begun to feel some fatigue as evidenced by more modest levels of demand, reduced deal sizes and cancelled transactions, bankers have strong hopes for Turkey in terms of both demand and performance.
"Turkey has a slightly longer tradition of accessing the capital markets than Russia, which has really only become active in the last three years. General standards of corporate governance have improved. The lack of regular issuance out of Turkey typically means that when the market is open, issuers find that there is a degree of pent up demand which makes it somewhat easier to attract interest," said Citi's Stout.
But in spite of the pent-up demand for exposure to Turkey's growing economy, a number of challenges remain.
"The challenge in Turkey is the market volatility. In the recent past, investors have been distracted by elections, EU accession talks and the currency rebasing, all of which has made some investors slightly more nervous of investing at these specific points in time," said Stout.
Investors are taking an increasingly discerning approach to IPOs from the region and demand tends to be sector rather than country specific. For example, the strong reception to airport company TAV came in part on the back of the current demand for infrastructure assets rather than a simple rush to boost exposure to the country as a whole.
International vs domestic
The February IPO for TAV Havalimanlari Holding raised TL388m (US$279m) and generated overwhelming demand with books around 14 times covered. The deal attracted a broad range of investors including emerging market specialists, infrastructure accounts and hedge funds, as well as traditional long-only investors.
Interest came from both domestic and international accounts, with the TL120m domestic tranche closing nine times covered while the TL268m international tranche closed 16 times covered with more than 150 accounts participating. Credit Suisse and HSBC were joint bookrunners while Garanti Securities was joint global co-ordinator and worked on the domestic offer with HSBC Turkey.
"There is a relatively shallow market for domestic retail, but TAV received very strong demand with domestic books almost 10 times covered. We find that Turkish investors are not so price sensitive as long as the majority [of the deal] is going to international accounts, as they see international participation as a good sign for a successful deal," said Doga Ohan, project manager of corporate finance for Garanti Bank.
Domestic share ownership in Turkey is small relative to international participation, which represents more than 70% of the total holdings on the Istanbul stock exchange. The regulator, the Capital Markets Board, requires companies to sell a minimum of 30% of a public offer to domestic investors, but after an IPO much of that domestic allocation finds its way into international hands. For example, the IPO of Coca Cola Icecek in May 2006 saw 70% of the TL362.5m deal allocated to international investors, but one year on, 94% of the freefloat was held internationally.
"The domestic equity culture is developing, but at the moment retail investors buy single stocks. The asset management industry is developing slowly, but more tax incentives for asset managers and pension funds are required to take the market to the next stage and give investors access to broader investment portfolios," said CS's Bayar.
The problem is that while government bonds continue to pay such a high yield, there is little institutional interest in equity markets, while private pension funds are relatively new, and their holdings are still small. If inflation continues to decline, however, institutional interest in equities could increase, though bankers believe it could be another couple of years before there are any significant developments.
Meanwhile the visible pipeline for 2007 remains limited to the banking sector, which is particularly well-developed by emerging markets standards.
As of mid-April, Is Investment, the investment banking arm of Isbank, was preparing a second quarter IPO worth around US$60m–$70m and representing up to 30% of the company.
Halkbank launched pre-marketing for its privatisation IPO in late April through CAIB, Goldman Sachs and Isbank. The 25% sale will be marketing right through the presidential elections. Turkey's seventh largest bank, which has TL35bn of assets under management, controls a 7.5% share of Turkey's banking market.
While privatisation still represents a large portion of emerging markets ECM activity, the Turkish government tends to favour M&A over the ECM market for the sale of its remaining industrial holdings. The largest privatisation project for 2007 is for Turkish Highways. The government intends to lease the operation of its toll roads to private investors for a period of 10 to 15 years. The tender for electricity distribution assets was planned in 2006 but has been put on hold until after the elections, and the invitation for bids for 51% of petrochemicals company Petkim, is due to close on June 15.
Return of the GDR
Unlike Russia, which attracts a great deal of international interest through GDR listings, primarily on the London Stock Exchange, the Turkish ECM market is completely reliant on its local market due to recent tax rules have wiped out most DR programmes.
"There is a problem with withholding tax, which has been implemented on foreign share ownership and impacts the cost of a GDR listing. The GDR market for Turkish issuers has completely dried up as most liquidity has shifted to the local market, so most issuers find that there is no point in considering a GDR programme," said HSBC's Haji-Touma.
The new tax regime was implemented by the government two years ago in an attempt to promote the development of local markets. As such, the custodians put their DR programmes on hold as the onus fell on them to determine whether investors were domestic of foreign.
However, the government recently backtracked on those tax changes and GDR programmes could become a serious option for issuers once again. That said, most bankers are adamant that local liquidity is sufficient to attract ongoing international investment so even with a more favourable tax environment, issuers may still choose to concentrate solely on a local market listing.
Given the impressive growth expectations and the ultimate, if distant, prospect of EU accession, bankers believe that investors will increase their exposure to the Turkish market regardless of whether this is done through depository receipts or on the local market.
"Turkey is becoming more like an emerged market than an emerging market, and is a play that no one can neglect right now. It is the second most populous country in Europe, and with 67% of the population under the age of 30, the growth factors can not be overlooked," said CS's Bayar.