Turkey's turn to short-dated sukuk highlights limited options
Turkey has announced a mandate for a US dollar three-year sukuk, in a sign of how limited its financing options are given the economic landscape.
Turkey's financing team deserves plaudits for the job it does in the circumstances. Earlier this week, annual inflation climbed to a new 24-year high of 83.45% in September, after the central bank cut rates twice in recent months and the lira subsequently slumped.
Yet the sovereign still needs to raise a further US$6bn to meet its international funding target for the year. So any route into the markets would likely be welcomed. While Turkey has issued a US dollar three-year sukuk before, in 2019, such a short-dated deal is rare for the sovereign.
"There is definitely a sense of [desperate times call for desperate measures] when it comes to Turkey," said Delphine Arrighi, head of emerging market debt at GuardCap, a subsidiary of Canadian firm Guardian Capital Group.
A banker close to the deal said there were good reasons behind the funding team's choice of market and tenor. "They have already printed twice with a five-year [tenor] this year and wanted to return to the sukuk market given the tighter pull from secondaries," he said.
Even so, a glance at Turkey's secondaries would suggest that conventional financing is off the table despite any recent rally. Its 6.375% October 2025s, for example, are bid in the high 9s. A new conventional three-year would require at least 10%, and that is assuming a big number of investors would be willing to contemplate an issue given the pain they have suffered from holding the sovereign's bonds. That note is bid at 91 in cash price terms.
A short-dated sukuk is the sovereign's only realistic option. "As the market has sold off, so have the [outstanding] sukuks, but everything else has sold off more," said a second banker.
This trade is still going to be tough, though, and will require a high profit rate, probably an 8% handle based on secondaries. Turkey's 4.489% November 2024 sukuk is bid at 7.85%, while its 5.125% June 2026 is at 8.3%, according to Refinitiv. A simple interpolation of the curve would suggest fair value at about 8.1%, though investors will also seek a premium.
The second banker, however, said that the important point was the 200bp or so difference in pricing Turkey (B3/B, Moody's/Fitch) can achieve between issuing in the sukuk and conventional markets. Investors in the sukuk, meanwhile, can still get an attractive yield for a three-year note from a sovereign. He added that any mark-to-market volatility for such a short-dated security should be "pretty moderate".
Captive base
"Bond prices have been relatively in check this year compared to fundamentals, largely because of a captive holding base and very light positioning from offshore investors," said Arrighi.
"But it is hard to make a bullish case for Turkish assets when imbalances are growing so large – cue the latest current account deficit numbers – with little hope of a reversal to more orthodox policies and at a time when global liquidity is tightening, reducing the appetite for risky assets."
UniCredit economists wrote last month that Turkey's current account deficit was set to widen to 7% of GDP by the end of the year, after the 12-month rolling current account deficit was US$13.6bn, or 1.7% of GDP, at the end of 2021.
Others, however, are feeling more hopeful. "I have been pushing to add some Turkey dollar bonds but not getting much buy-in from the rest of the team," said an investor. "I know Erdogan policies are very unorthodox, but he always pulls back from the brink when things get really bad, so I expect policy change after the elections next year."
For Arrighi, though, even with a potential high yield on offer for short-dated paper, the state of many sovereign curves means there are plenty of other opportunities to put money to work.
"There are a lot of distressed names that are now more adequately priced with governments already well advanced in IMF talks, making Turkey even less appealing comparatively," she said.
Citigroup, Dubai Islamic Bank, Emirates NBD Capital and HSBC are the bookrunners on the 144A/Reg S offering, which could come as early as Thursday.