High expectations

IFR Turkey Special Report May 2013
8 min read

Turkey’s blooming economy is attracting jumbo loans from international lenders to fuel the emerging country’s growing portfolio of multi-billion infrastructure and privatisations projects and support its well-established financial institution market.

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Turkish borrowers secured US$20.2bn of loans in 2012, dipping slightly from a record-high of US$22bn in 2011. “The market is constantly improving in the way that more liquidity seems to be available. We see more names knocking at the door and more banks are open to listen,” one European banker said.

The positive state of the market is reflected by the launch of Ojer Telekomunikasyon’s US$4.75bn deal in early March – marking the country’s largest corporate loan in five years. The competitive pricing – margins of 425bp over Libor for the five-year tranche and 495bp for the eight-year tranche – illustrates the strong faith that top Turkish borrowers have in international lenders’ appetite, bankers said.

“It’s a good starting point in today’s market and those who can and have the right limits will probably do it,” a second European banker said.

The IMF’s 4% growth forecast for the Eurasian country over the coming year, combined with borrowers’ expansion plans and lenders’ new-year budgets, means international loan volumes are expected to swell. Cash-rich local banks will also drive domestic loan volumes higher.

“Turkish banks have been providing more loans for Turkish acquisitions and projects than the European banks. Of the deals that we do more than half or two-thirds of the financings are now from Turkish financial institutions,” Ayse Yuksel, managing partner at Chadbourne & Parke’s Istanbul office, said. “It used to be the other way around.”

Project promise

Turkey’s booming infrastructure and privatisation projects are the most promising source for new syndicated loan deal flow in 2013. A US$960m loan for the Eurasia Tunnel Project’s construction of a 5.4km tunnel between the European and Asian shores of Istanbul signed via financial adviser UniCredit in December, while the first stage of a US$6.5bn financing for the Gebze-Ismir highway project signed a US$2.8bn financing with a syndicate of Turkish banks in mid-March.

Looking ahead, there will more sizeable financings for Gebze-Ismir, a multi-billion loan roughly pinned at US$2bn for the total US$9bn financing for a third Istanbul airport and around US$2bn of loans to back US$3bn of hospital projects are expected throughout the year.

Lenders are still waiting on a potential US$4bn project loan to privatise 2,000km of state-owned toll roads via the Turkish Privatisation Administration scheme, after the government said bids were too low and raised plans for an IPO.

Project financing poses a number of challenges for lenders, which have to address emerging market risk, demands for tenors exceeding a decade and new legal frameworks.

“It is not entirely clear what the shake-out will be from Basel III. Financings have not ground to a halt, but Basel III is an issue and only time will tell what the long-term impact will be”

“Emerging market returns are attractive, but the nature of emerging markets means that the path is not always directly forward,” Magnus Rodrigues, partner at Chadbourne & Parke London said.

Turkish banks are better placed to navigate such risks as they are more familiar with the sponsors, but they are unwilling to lend beyond five years and demand relatively higher pricing.

International banks, however, are able to provide loans for up to 20 years for competitive pricing, though both factors are highly dependent on the sponsor and sector. The Basel III regulation is also making longer tenors increasingly tricky.

“It is not entirely clear what the shake-out will be from Basel III. Financings have not ground to a halt, but Basel III is an issue and only time will tell what the long-term impact will be,” Magnus said. “Nevertheless, at least for recent projects Basel III does not seem to have prevented them from being financed.”

The rising support of Middle Eastern banks is helping to widen Turkish borrowers’ financing options and pool of liquidity. Samba and the National Bank of Abu Dhabi are two banks, among others, that have increased their presence in loan syndicates, and Islamic loan tranches could become a familiar feature in larger syndicated loans.

“Most banks in the Middle East look at Turkey very positively and I think that will only increase. The plan is to make Istanbul a major global hub, so they will be there,” a third European banker said.

Project bonds may offer some relief, as they offer longer tenors and financing can be raised more quickly than other project finance debt. They are not a new concept, but their exposure to capital market volatility means they are still relatively uncommon.

“Project bonds are not yet the light at the end of the tunnel, but there are steps taken by the government to make project bonds an easier-to-use financing alternative for build-operate-transfer projects,” said Deniz Sahbaz, partner at Cigdemtekin Sahbaz Attorney Partnership, Chadbourne & Parke’s affiliated firm in Turkey.

“Most banks in the Middle East look at Turkey very positively and I think that will only increase”

New legal frameworks also need to be digested as a lack of understanding is slowing down negotiations. The most significant recent introduction is the New Turkish Commercial code, which will limit certain acquisition financings and scrutinises intra-group transactions under Turkish law.

“Investors are asking a lot of questions [about the recent legal developments] and we don’t have all the answers so far. There are no precedents for some cases,” Yuksel said of Turkey’s legal changes.

For example, the new structure of the public-private partnership healthcare projects are being approached more cautiously by all lenders, other legal sources said.

Pricing play

Turkish bank borrowers are the bread and butter of the country’s loan activity for international lenders, with demands for bi-annual refinancing loans that usually start in February and August. The last round of refinancing in the second half of 2012 raised around US$8bn.

Pricing rows over highly competitive margins define Turkey’s FI market. Akbank, usually the first to tap the market and thereby outlining the pricing expectations for other Turkish banks, reignited frustration among its relationship lenders this year as it signed a US$1.16bn loan that pays all-in pricing of 100bp for a one-year tranche and 125bp for an 18-month tranche – both lower than the 135bp all-in Akbank paid on its last US$1.5bn loan in August. Garanti, Yapi Kredi and Vakifbank are among the bank borrowers set to follow its lead.

Bankers expect pricing to drop further over the coming year as Turkish banks take advantage of international lenders’ – particularly European banks – appetite after years of turbulent deal flow across the emerging markets. One banker said Turkish banks were likely to secure sub-100bp all-in in the second round of refinancings that kick off in the third quarter.

The list of bank borrowers also expanded in early 2013 with debut deals from ING Bank Turkey and Fibabanka for US$497m and US$78m-equivalent, respectively.

Sapphire Tower in Istanbul