It is over one year after the Turkish currency reform and the international bond market has been through some significant changes. The buoyant start to 2005 soon slowed after the currency strengthened and the EU convergence story ran out of steam, but in Q1 2006 the market appears to have got going again at more sustainable volumes.
The first of Europe's frequent borrowers embraced the Turkish lira as a desirable currency for bond issuance in January 2005 after six zeros had been slashed from the previously cumbersome currency. But bankers who led the wave of borrowers into the new market had not predicted the deluge of issuance that was to follow, with almost US$4bn-equivalent of issuance in 2005, most of that was sold in the first half.
"There was a lot of issuance early last year followed by something of a lull as the market digested the heavy supply, but some of that early issuance was as short dated as one year ,and the maturing of those issues is no doubt contributing to the good flow we are currently seeing," said Glen Sorensen, a syndicate manager at RBC Capital Markets.
A strong currency rally in early 2005 was partly responsible for the halt in issuance, as the currency fell from 1.38 to 1.26 against the dollar between January and March 2005. But aside from a currency wobble in early March this year, which hit all emerging markets, the technicals remain relatively positive, with the currency comparatively stable against other emerging markets at between US$/TL1.30 and TL1.35.
Bankers remain upbeat that the market is sustainable at current levels. So far, 2006 has seen steady supply, with the currency continuing to offer double digit coupons, albeit on yields somewhat lower than were achievable at the beginning of 2005. Volumes have been relatively robust, the first quarter of 2006 delivering just under US$1bn-equivalent of new bonds.
This year, redemption flows should also bring some significant demand given that a large portion of issuance at the beginning of 2005 came in the one-year maturity, where coupons are the highest due to the inverted nature of the yield curve. According to Thomson Financial data, this year sees a total of TL700m of bonds maturing, equating to more than US$500m-equivalent.
"There has been a pick-up in activity since the start of this year. Although we are not expecting to see levels that were apparent one year ago, volumes are improving and supported by redemption flows. Rates are certainly lower, but still not unattractive, and the accounts that we have been selling to are looking to reinvest, so we expect relatively high reinvestment flows of around 60%," said Paul Eustace, head of syndicate at TD Securities.
The buyside for Turkish lira-denominated bonds has been primarily retail hence the strong demand for shorter dated and higher yielding issues. But there is also a strong institutional bid that has allowed a number of issues at the longer part of the curve, as far down the maturity spectrum as 10 years. Unlike some other currencies – such as Mexican pesos and Canadian dollars – Turkey has no domestic bid, and the majority of interest comes from European accounts that previously invested in a range of East European currencies, and have shifted into Turkey now that the EU convergence story has moved on.
Although it is the Triple A names that continue to dominate, some issuance has been seen further down the credit spectrum. With yields beginning to fall, bankers expect to see some lower rated names tap the market, although that could be some way off.
"New and lower rated names are definitely keen to look at the markets, but many investors are looking to take currency risk and may not wish to take credit risk on top of that. As the market develops, we will see further demand for lower rated credits, and we have seen this occur to some extent already in the Turkish lira market with transactions for Double A rated issuers such as NRW State" said RBC's Sorensen.
But niche currency markets remain cyclical. The Turkish lira has benefited in part from the fact that the South African rand has been under pressure since the beginning of this year. That cycle will change over time, and money could quickly flow to other currencies. Even so, with an expanding economy, EU membership as a (distant) prospect, and some decent liquidity, there is plenty of scope for growth.