Turkey on target

IFR Turkey 2010
9 min read

The Turkish sovereign has had a productive 2010. It has nearly met its yearly funding target while reestablishing itself with the international market through a serious of well timed and executed transactions. It even became one of the few countries in recent times to experience a rating upgrade. Nick Lord reports.

Turkey underlined its intent to use 2010 as a year to build credibility in the international markets, by becoming the first emerging market bond issuer of the year. The Republic of Turkey (Ba2/BB–/BB+) issued a blockbuster US$2bn, 30-year deal in the first week of January that was very well received by all in the market. The deal was led by HSBC, JPMorgan and UBS who generated demand of US$7.3bn from 260 accounts, covering the book within hours of the deal being announced.

As a result of this demand, the Republic was able to price this deal with a 6.75% coupon and a 98.655 reoffer price to yield 6.85%. This equated to a spread of 224.7bps over 30-year US treasuries.

The deal was a record-equaling size which perfectly tapped into investor demand for liquid emerging market credits that offered a yield pick-up over developed market debt. But more importantly the deal allowed the Republic to regain some of the credibility that its past few years funding activities had damaged.

Bankers report that in 2008 and 2009, the Republic missed opportunities to tap the market and as a result ended up with smaller proceeds from international Eurobond issuance than it would have liked. At heart, this issue revolves around the Republic’s stated goal of raising US$5.5bn a year from these markets (a target that was decreased in 2009 to US$3.5bn due to economic contraction of 6.5%). During these years, there was the feeling was that the Republic had left itself a hostage to fortune by not hitting those targets aggressively enough and early enough.

By not completing its funding target as quickly as possible, the Republic in effect gave investors a free option to ask for higher pricing as they knew the Republic had time-pressure to complete deals. So in 2010 the strategy has changed and the Republic has proactively gone into the market to meet its goals rather than reactively wait for the market to come to it.

In April the Republic returned to the market again with a €1.5bn ten-year deal in a transaction that saw it nearly complete its issuance target. The deal was lead by Commerzbank, Credit Suisse, Deutsche Bank and DZ Bank and was priced at mid-swaps plus 190bps, 10bps inside guidance. The deal was sold largely within Turkey with Turkish accounts taking 40% of the deal by geography and banks taking 64% of the deal by investor type.

Even so, the deal brought Turkey’s fundraising this year up to US$5bn, just shy of the US$5.5bn target.

“The republic of Turkey has done very well this year, taking advantage of the opportunity to come to the market early this year,” said Chris Tuffey, co-head of credit capital markets, EMEA at Credit Suisse in London. “At the start of the year, volumes were high and [Turkey was] particularly fast in coming to market. “

The euro deal was the first euro-denominated trade the Republic had done for three years and came after 11 successive US dollar deals. Tuffey believes that the sovereign may return to the euro-denominated market again this year, possibly by tapping existing issues as a way to improve the euro component of its debt profile.

This kind of selectivity and flexibility in funding is also shown in the plan to issue a 10-year US$1bn-equivalent Samurai that will be backed by Japanese government agency JBIC. It is a sign of the strength of the sovereign credit and the flexibility given by its limited funding targets that it can choose to embark on such a deal.

Show of faith

While the sovereign has been buoyed up by the strength of the country’s underlying economy and its banking system, it can even be argued that the credit of the Republic is actually stronger than that of the underlying Turkish economy. Even though the overall economy contracted last year by 6.5%, this year Turkey’s credit rating was one of the very few in the world to be upgraded (to Ba2 by Moody’s in January).

Moreover, the spreads that Turkey has to pay international investors to hold its sovereign paper is a fraction of that of its neighbours, in particular Greece or Kazakhstan. For a country that is sitting on no natural resources (like those in the Middle East), is without huge foreign currency reserves (like many countries in Asia), this is nothing short of remarkable, especially at this stage of the cycle. Indeed, Turkey’s credit lies squarely on the faith international investors have with how the government is running the economy.

“Turkey is one of the few sovereigns that has been upgraded in recent years and its bonds now trade in line with investment-grade countries,” said Murat Demirel, managing director and head of banking for Turkey at Citigroup. “Turkey stacks up well in practically all credit metrics, and I think it is only a matter of time before the rating agencies catch up with the market and assign Turkey investment-grade ratings.”

The strength of Turkey’s banking system and low levels of external debt make such a step more likely. However, a febrile political situation does negatively impact the country’s credit.

The key political tension is generated by the plans of the current ruling party, the AKP, to introduce a series of amendments to the constitution over the summer. Guessing how this will play out is the parlour game of choice among most Turks at the moment. There are many possible results of the action being postulated, ranging from the opposition taking the issue to the constitutional court, referenda on the new measures, the eventual banning of the AKP, early elections – or everything in between.

What is remarkable is that in years gone by, such a tense political situation would in turn have gummed up the international credit markets for Turkey. But in a measure of how far things have come in the last few years, international markets are much more sanguine about Turkey’s outlook than the domestic markets. This is partly explained by natural Turkish preponderance to assume the worst. But it also testament for how far the Turkish economy stands out in relation to its neighbours, especially its perennial sparring partner Greece.

Getting in early

Even so, with the political tension rising, the Republic is likely to not only complete its 2010 funding target as soon as possible, but also to try to pre-fund some of next year’s target while the going remains good. 2011 is an election year anyway, and this will have a negative impact on the Republic’s ability to tap the international markets, even without the added political tension that exists already.

Markets will look on any approach by the Republic favourably for the absolute reasons of how the country has managed through the financial crisis and for reasons relative to how others have mismanaged their economies.

“Turkey has managed the crisis extremely well,” said Fawzi Kyriakos Saad, CEO, EMEA for Credit Suisse in London. “Much of this is related to events unfolding elsewhere in the region, but it also has lots to do with the previous restructuring of the banking market in Turkey. As a result the sovereign has a very clean balance sheet and good ratios.”

The ultimate expression of this increase in credibility came when it was announced in April that Turkey would not be signing another standby agreement with the IMF and would be going it alone. “This is a big difference,” said Saad. “A year and a half ago the question was when Turkey would need to call in the IMF. Now it is just completely off the table.”

Standing out from the crowd is a lonely business, but Turkey needs to ensure it makes the most of its time in the spotlight. If the crisis can teach us anything, it is that things can unravel very quickly in the international capital markets.