Turkey 2007: Turning potential into reality
Securitisation and the development of covered bonds are often mentioned as the most important area of development for Turkish capital markets. Most observers agree that the potential is there, but it would be a mistake to assume that a wave of issuance is about to break, particularly given the embryonic stage of the housing loan market. Paul Farrow reports.
Medium term, many Turkish banks are looking to the securitisation of existing assets as a new source of funding. But to turn those aspirations and that potential into reality requires data and regulations that are often still lacking.
For years many Turkish banks were little more than vehicles for investing in government bonds, and it was only the emergence from the crisis of 2000–2001 – and lower interest rates – that saw the beginning of a market for products like mortgage loans. With only a couple of years’ numbers, RMBS and covered bond issuance is unlikely, even given a suitable regulatory environment.
The lack of historical data on many products means that car loans are a likely starting point for existing asset securitisation. In this case there is information dating back to the early 1990s, and car loans have a good default history and settled collection procedures. Bankers are forecasting a car loan-backed deal in the second half of this year, and Garanti Bank is known to be working on a credit card-backed transaction.
Turkey has the highest penetration of credit cards among the EEMEA countries, and contrasts with Russia in particular. Anyone in Turkey with a salary can get a credit card. In fact, the market is showing signs of maturity, and credit card loans have been overtaken by combined consumer loans (defined as mortgages, car and general purpose retail). In addition, the banking regulator (the BRSA) has acted to curb the excesses of the card marketing, such as stalls in the street and sending out unsolicited cards.
Along with the issuance of Tier 2 capital, Tolga Egemen, head of corporate banking at Garanti, believes that existing asset ABS will be the future of capital markets activity from Turkish banks. He expects
the first TL-denominated deal to depend on foreign demand, with local institutions following that lead.
Given that existing asset flows are in Turkish lira the demand from
domestic investors for such securities would initially be limited, the most likely solution is the issuance of
FX-denominated bonds, with the proceeds swapped back into TL.
Bankers seem confident that the swaps market is deep enough for that.
And in a recent report, S&P looked forward to existing asset securitisation. "The successful development of an existing-asset securities market also requires the stability provided by political and macroeconomic developments," said S&P’s credit analyst Jussi Harju in a statement.
"Turkey has shown remarkable progress in this respect and its apparent commitment to political reforms following the EU accession discussions may provide further comfort that Turkey is on its way toward developing an existing-asset securities market. We consider that Turkey shows strong potential for the development of a market for the securitisation of existing assets. However, some obstacles still remain and need to be addressed before market participants can tap into this potential."
The focus may now be on the prospects for existing asset deals, but the traditional DPR-backed deals will continue, though there issuance depends on whether banks have any future flow capacity left. Garanti does not expect to do any DPR-backed deals in the short term, and Is Bank has no spare DPR capacity since it completed a US$550m conduit deal in March via ABN AMRO (US$150m) and Citigroup (US$400m).
Why did the bank go the conduit route? Bank treasurer Aral explained that the cost on conduit business (85bp–90bp) is around 10bp–15bp cheaper than for a marketed, wrapped deal, where the monolines charge 70bp–75bp and the Triple A spread is around 20bp–22bp. He thinks that the main factor that would reduce the cost of DPR-backed deals would be an upgrade of the sovereign.
But a wrapped, marketed DPR deal can still provide savings compared with a straight Eurobond. Standard Bank's Noel Edison, a bookrunner on Yapi Kredi’s US$1.2bn deal at the end of 2006, said at the time: "A straight Eurobond would trade wide of the comparable Turkish sovereign spread of 130bp over Libor, whereas the all-in costs of the wrapped DPR series were significantly more attractive to Yapi.”
Last year’s roster
Last year's ABS business kicked off with a US$350m credit voucher ABS deal from Akbank, via HSBC and ABN AMRO. Three tranches with a Triple A rating and WAL of 4.7 were offered, two of them wrapped with HSBC as bookrunner. The A tranche of US$150m, with an MBIA wrap, priced at 16bp over three-month dollar Libor; the US$250m B tranche, wrapped by XL Capital, also priced at plus 16bp. The unwrapped tranche, which had ABN AMRO as bookrunner, priced at 101bp. The collateral consisted of credit card receivables arising from purchases by non-residents, a function of the tourist industry.
Then in May, Garanti Bank secured an impressive book of just under €900m for a €300m five-year diversified payment receipt (DPR) deal through sole bookrunner Dresdner KW. The DPR was priced at 17bp over three-month Euribor, 1bp inside guidance.
The single-tranche deal had a monoline wrap from MBIA and an average life of 3.97 years. The collateral is foreign currency payments due to Garanti Bank denominated in US dollars, euros and sterling. The notes offered were Triple A rated due to the wrap provided with an underlying Triple B rating (Baa2/BBB–).
In July, VakifBank completed a US$915m multi-tranche DPR issue that priced inside both the Akbank and KKB comparables of 25bp and 24bp. After an extensive roadshow the unwrapped portion was increased by US$100m to US$200m and priced at 120bp over three-month Libor – an impressive result as Turkey five-year CDS was trading around 305bp at launch.
That these deals depend on ABS rather than emerging market investors was illustrated by the fact that dedicated ABS accounts dominated the four wrapped tranches, totalling US$715m, while EM investors were allotted around 7.5% of the unwrapped issue.
A US$150m Triple A tranche wrapped by FGIC with a WAL of 5.2 years was issued at 21bp over three-month Libor. A US$250m Triple A MBIA wrapped piece with a WAL of 5.8 years also priced at 21bp, as did a Triple A US$200m Ambac-wrapped slice also with a 5.8-year WAL.
A Double A piece for US$115m wrapped by Radian with a WAL of 5.8 years was priced at 36bp over three-month Libor. An unwrapped US$200m Triple B tranche with a 5.2-year WAL was launched bang in the middle of guidance of 115bp–125bp over three-month Libor.
Then in October, HSBC DPR Finance Ltd series 2006 achieved the tightest pricing yet for a Turkish DPR deal. The US$160m class A Triple A piece wrapped by FGIC priced at three-month Libor plus 15bp; the US$115m class B Double A piece, wrapped by Radian, at +27bp; and the US$125m class C Triple B piece, which was unwrapped, at +88bp.
At the end of 2006 and in early 2007 Yapi Kredi, the fourth-largest private bank, completed a couple of deals. First came an increased five-tranche US$1.2bn Regulation S DPR securitisation issue. The issue was increased from an initial US$750m and became the largest DPR securitisation transaction to date globally, as well as Turkey's single largest, non-sovereign issue into the international capital markets.
Four of the five notes issued under the programme are insured by monoline insurers and were priced in line with guidance. Standard Chartered Bank and UniCredit MIB were joint bookrunners.
The Series A tranche (US$175m), rated Aa1/AAA and wrapped by Assured Guaranty with a 5.6-year WAL, was priced at 25bp over three-month Libor, while the Triple A rated Series B (US$200m) is wrapped by MBIA with a 5.6-year WAL and was issued at 22bp over three-month Libor.
Series C (US$115m) is wrapped by Radian, rated Aa3/AA and has a WAL of 5.1 years, while Triple A rated Series D (increased to €300m from €200m) is wrapped by Ambac and has a 5.6-year WAL. Their respective pricing was at 35bp over three-month Libor and 22bp over three-month Euribor. The uninsured US$310m (BBB–/Baa2) Series E tranche was privately placed and has an average life of 3.4 years.
And in March Yapi Kredi came back with a dual-tranche US$400m DPR that priced inside initial guidance at 18bp over three-month Euribor for the FGIC-guaranteed Triple A €115m A tranche, and 19bp over three-month Libor for the XL Capital-guaranteed Triple A US$250m B tranche. Original guidance for each tranche (both with a 5.6 WAL) was 20bp–21bp.
Pricing was just wide of the HSBC deal, and wider than the 15bp that Kazakhstan's Alliance Bank paid for its DPR completed last year, that being the tightest DPR pricing so far for an emerging market borrower.