Turkey 2006 - Poised for growth

IFR Corporate Hybrid Capital 2006
5 min read
Emerging Markets

IIt has been some time coming, but it now seems pretty certain that 2006 will see the first domestic corporate bond issuance from Turkey for many years. The combination of lower government financing needs, falling interest rates and the equalisation of tax treatment has set the scene for the new issues.

Seniz Yarcan, executive vice-president at Industrial Development Bank of Turkey (TSKB), is certainly expecting to see domestic corporate bonds launched this year. The bank has already arranged a couple of meetings with involved parties, including the Istanbul Stock Exchange, the Capital Markets Board (the regulator) and the Turkish Bankers' Association to discuss possible improvement areas on current conditions in order to get issuance started soon. Confident this will happen, TSKB has also set up its own DCM team.

"We could see the first issue as early as May," said Yarcan.

TSKB is hoping to be in the forefront of these developments. Founded 55 years ago, the bank has always focused on development and investment banking services to the private sector. The largest privately-owned development and investment bank in Turkey, it counts Is Bank and Vakifbank among its major shareholders. Akbank recently sold its stake (IFR 1623).

"We continued to extend long tenor, foreign exchange-denominated loans at all times," said Yarcan. TSKB has a good corporate and sector coverage which has been the bank’s main strength. This will also help in reaching potential corporates for tapping the debt capital markets.

Before the mid 1990s, Turkey used to have a domestic corporate bond market in which TSKB was a regular issuer and arranger for corporates. Now, in line with its mission of promoting the development of capital markets, the bank is aiming to share its knowhow and expertise with potential issuers.

"In our DCM team we are making use of the experience that we have developed in project finance as well," said Yarcan.

But who will buy TL-denominated corporate bonds? "Institutional investors, some private investors, and foreign investors who are happy to buy government debt should all be buyers of Turkish corporate paper," she said.

The development of a domestic corporate market will require the sort of infrastructure common in other markets, for example a local ratings agency. Given its history, TSKB has a good knowledge of Turkish corporate credit and has its own internal rating system. But soon the market should see local rating systems designed and applied by the rating agencies.

TSKB is also involved in the international capital and financial markets as a borrower. In April 2005, it completed its first international syndicated loan, a US$120m facility with 14 MLAs. Then in October 2005 it completed a US$50m murabaha syndication for its Bahrain branch through WestLB. That 364-day facility paid a profit margin of 45bp over Libor and was increased from US$30m. Interestingly, according to Yarcan, most of the demand came from European banks although the aim was to tap into Gulf money.

This year, the bank completed a US$195m one-year club loan at plus 30bp. "In 2005 we paid 20bp–30bp more than the top-tier borrowers due to our debut status. This time we were able to price a lot closer to them," said Yarcan.

For medium-term funding TSKB has considered a Eurobond, but in Yarcan's opinion: "That route is still too expensive. We need the country to be re-rated a couple of notches first."

Turkey has an established reputation as a source for DPR-backed ABS deals, and with a new Mortgage Law due to become law later this month, there is a lot of excitement about the creation of MBS and covered bond markets. But in TSKB's case: "Given that most of our receivables are on shore, an on-balance sheet secured loan or a covered bond look more likely solutions than a securitisation," said Yarcan.

Another source of potential funding for Turkish banks is the willingness of foreign banks to lend in Turkish lira given the high real interest rates. But here Yarcan sounds a note of caution. "How much demand is there from Turkish corporates to borrow in TL," she asks. "Historically it has been very expensive for them, and that will take some time to change."

Aside from its DCM business, TSKB is also active in advisory investment banking work. The bank has advised the Privatisation Administration on the sale of six ports, and was an advisor to the SDIF (which administers failed banking groups) on the sale of media assets of the Uzan group.