Coca-Cola Icecek braved the market to become the first Turkish issuer in the US dollar market since last year's lira crash. But the outcome showed that even one of the strongest corporates in the country is unable to separate itself from the effects of Turkey's muddled economic policymaking.
CCI was able to push the US$500m seven-year note over the line on Thursday, although leads were unable to tighten pricing from the 4.75% area starting point. An anchor order accounted for up to 20% of the bond, which was the first in sustainability-linked format from a Turkish issuer. Two investors said demand was just US$775m, including the anchor order. No official book size was provided during the deal's execution.
The deal was the first bond from the country since the sovereign was in the market in September. "It was good to get it done when many others can't," said a banker at one of the leads, pointing out that the strength of the credit and the SLB structure were what made the deal possible.
The bond market silence had coincided with the latest Turkish macro storm, triggered once more by President Recep Tayyip Erdogan's insistence that interest rates be cut despite surging inflation. Since September, the central bank has slashed the main policy rate by 500bp to 14%. Yet in December the annualised inflation rate hit a 19-year high of 36%.
The lira has borne the brunt of the pain. Since the central bank began making its moves, the currency has plummeted in value from 8.29 versus the US dollar to 13.56 – though the current rate represents a recovery of sorts from the low of 16.48 on December 17.
Given that backdrop, no Turkish issuer was expected to hit the market anytime soon, bar the sovereign which has to raise US$11bn in external markets this year. So far, the treasury has sat on the sidelines, hoping for a better opportunity.
Taking the plunge
CCI, though, decided to take the plunge. A bottler in the Coca-Cola Company franchise, it is seen as one of the few Turkish credits that has market access. CCI serves customers across 11 countries, and draws about 57% of its revenues from outside Turkey.
"In a normal market the sovereign comes first but obviously there's a specific context in Turkey and CCI is one of those blue-chip corporates with a big chunk of revenues in dollars so less exposed to volatility in the Turkish lira," said a second lead banker. "With a lot of debate on Turkey and the macro environment, it's a bold move."
Despite CCI's international presence – though that includes places such as Kazakhstan, which is also in the headlines for the wrong reasons – Matthew Vogel, head strategist and portfolio manager at FIM Partners, said the issuer could not entirely separate itself from Turkish risk.
"You have a great Turkish exporting company with debt outstanding, Sisecam, the second-largest glass producer in Europe with strong exports sales," said Vogel. "Their bonds have more or less traded with a similar spread to the Turkish sovereign. Like Icecek, they have a lot of operations outside the country too, but it cannot escape its home market country risk so easily."
Another investor queried CCI's move. "CCI is a solid company, but timing couldn’t have been worse," he said.
He acknowledged that CCI is an investment-grade credit, with S&P rating it four notches above Turkey, but said that "given the negative outlook on Turkey’s macro outlook, there is a very high chance that CCI will be downgraded below investment grade this year".
CCI is rated BBB– by S&P and Fitch, although the former has a negative outlook. Fitch's outlook is positive. Turkey is rated B2/B+/BB–.
The second lead banker said the fact the S&P rating was assigned in December suggested any downgrade should not be imminent.
A third lead banker said the bond's timing was driven by the company's desire to start refinancing a US$500m bond due in September 2024. The new issue was linked to a US$250m tender offer on that outstanding bond.
"It was either go now or wait several months," said the third lead banker, adding that Turkey's outlook is unlikely to improve soon. The prospect of a presidential election in 2023 threatens further volatility over the coming year and that US dollar funding costs are going up, he said.
Investors had said beforehand the deal would come down to price, and so it proved. The bond came some 75bp–80bp back of beverage company Anadolu Efes' June 2028s. There was a time when CCI traded inside Efes, which owns around 50% of CCI.
The investor said the final premium was 50bp though he added that CCI's pricing relative to the sovereign was astonishing.
"It was a very difficult sell ... though the pricing was probably the tightest spread over sovereign risk ever – 310bp inside Turkey – which is a really remarkable achievement," he said.
The bond was up over a point when it was free to trade on Friday, bid at 99.625 compared with a reoffer price of 98.526.
As for the SLB structure, with the KPI targets linked to a 13% reduction in water usage by the end of 2027 from a 2020 baseline, the investor was dismissive of its impact.
"The sustainability angle is meaningless for this bond," he said. "It only comes into force in January 2028 with a 50bp step-up, which is pretty minimal. And their water usage target is not very ambitious."
The question now is whether other blue-chip names will follow CCI into the market, or when the sovereign will return and start tackling its external funding target.
The investor, though, is pessimistic over supply. "[CCI] shows that the Turkish sovereign, banks and corporates will have a very difficult time issuing bonds in 2022, when global liquidity is tightening and Turkish economic policy is completely bonkers," he said.
Bank of America, HSBC, JP Morgan and MUFG (ESG structuring adviser) were bookrunners for CCI.