More spice for covered bond recipe

Turkey Report 2012
5 min read

Sekerbank’s pioneering efforts in launching a covered bond in July last year has set a precedent for others to follow and although progress is being made, there are still some obstacles to overcome.

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Three Turkish banks are poised to follow in Sekerbank’s footsteps by issuing SME-backed covered bonds, seeking to diversify their funding and lure international investors to the country.

According to Wasif Kazi, structured finance director at UniCredit, the country’s banks are all at different points in their preparation for issuance but are making steady progress.

“Certain banks have already begun the transaction process and others are still at the planning stage,” he said. “But transactions like this take some time to prepare in terms of getting systems ready, and obviously banks need to assess whether or not this template is appropriate for their individual funding needs.”

Turkey’s banks run huge asset-liability mismatches, as most of their funding comes from short-term deposits and most of their assets are longer-dated loans.

For banks that focus on SMEs, such as state-owned VakifBank and Halk Bank and private sector Alternatifbank, the instrument will be a useful way of diversifying funding sources, while also ameliorating these mismatches.

“We can do these deals for other domestic banks,” said Kaan Basaran, CEO of UniCredit Menkul Degerler, in Istanbul.

In July last year Sekerbank sold the first covered bond out of Turkey, but it is also the first anywhere in the world to be backed by a pool of SME loans, a private placement of three series of bonds from a the first dual tranche of an inaugural TL800m (US$477m) programme.

With its SME backing, the deal had strong support from the development bank community. Arranged by UniCredit, the first tranche of US$25m was sold to the IFC, while a second tranche of €25m went to Dutch development agency FMO. UniCredit’s London branch was the arranger of the deal and is buying a €50m portion.

“From Sekerbank’s perspective they have been able to use this programme to basically to gain international IFI investors but with the same programme they can also access the local market with bonds in that space,” said Wasif.

Almost a year after Sekerbank took the bold action to test out a covered bond format in Turkey; the bank has sold two additional tranches.

And according to those who were involved in structuring the programme, it has given the issuer flexibility in terms of its funding and its success is driving other Turkish banks to look at similar structures when they would have been held back in the past.

“Turkish banks tend to be quite concerned about market share so it is worth noting that the assets backing the covered bond are not transferred off balance sheet,” said Wasif.

“In the past all the market share calculations had to deduct the assets sold to the SPV so there was some reluctance to do that type of transaction in addition to tax complications to do with selling the assets.”

What’s in a name?

Of course, there are certain market participants that question Turkey’s labelling of SME-backed securities that are kept on the issuing bank’s balance sheet as covered bonds.

Indeed, the covered bond world can be extremely protective about anything that uses the covered bond label and does not adhere to the strict criteria set out by the European Covered Bond Council – and a Turkish deal backed by SME loans that resembles a structured finance transaction certainly does that.

“An SME is not a covered bond and particularly not from Turkey,” said a covered bond syndicate official about Sekerbank. “Some of the buyers were international public agencies and were not real-money investors.”

Another DCM banker echoed that sentiment, saying: “Sekerbank was co-financed through the IFC so it’s hard to really call it a covered bond.”

There is also considerable scepticism as to whether dedicated covered bond buyers would look at the product. “At the moment there is so much to look at in the European market I think Turkish covered bonds would be more suited to emerging market investors,” said Marc Stacey, a covered bond specialist at asset manager BlueBay.

Wasif agrees that for traditional covered bond investors and issuers Turkish banks are not exactly following the recipe.

“These aren’t traditional mortgage covered bonds they have SMEs with short-dated maturities so they can amortise at fairly short notice,” he said.

In Turkey, mortgages tend to be between five and seven years but now in a sign of a developing mortgage market, banks are beginning to offer slightly longer-dated mortgages.

“Mortgage-backed covered bonds are something banks could potentially consider in the medium term but the legislation would have to move along with the product,” said Wasif. “Right now the capital markets board is looking at adjusting some of these features in the legislation and I think if they decide to proceed that could be done relatively quickly.”

A Turkish vendor sells dates, dried fruits and spices at the Egyptian Bazaar