Toughing it out:
Few sovereign issuers faced the challenges Turkey did in 2022. The funding team not only had to navigate volatile global markets, but also had to contend with worsening domestic economic and financial indicators weighing on investor sentiment. It did so with great skill, reaching its external funding target with a series of deals at the most opportune moments. Turkey is IFR’s SSAR Issuer of the Year.
Imagine a sovereign’s funding team that is seeing its yields jump higher for reasons outside its control. Global volatility and domestic headlines are making investors nervous. Some are unsure whether the sovereign has market access – certainly at acceptable levels – and where the country is headed.
And yet through it all, the funding team keeps calm, uses its experience and seizes on market windows when they present themselves. They don’t mess around, trying to trade the market. Their job is to raise liquidity and get the sovereign’s funding back on an even keel.
That description might have applied to the UK’s Debt Management Office for a few weeks in 2022. It applied even more to Turkey’s treasury throughout the year.
2022 wasn’t the first time that these officials have had to show their mettle. But it was the first year in a long time when global forces and a tough domestic economic landscape combined to limit Turkey’s funding options to the extent that they did.
“Many emerging market sovereigns, especially the ones with sub-investment-grade ratings, could not access the international capital markets,” said Zeynep Boga, deputy director general at the debt office. Yet, as she points out, even though EM sovereign issuance fell by almost half in 2022, Turkey completed its external funding target of US$11bn.
It did so thanks to the debt team’s continuous investor relations efforts, through which they highlighted the outlook for Turkey's public finances. “Moreover, we continue our diversification strategies in our borrowing operations and closely monitor different markets for opportunities,” said Boga.
Against such a difficult backdrop, the team had to adapt. Maturities were relatively skewed to the shorter end. The sukuk market provided a bigger source of funding – accounting for half of the US$11bn raised – than in previous years. The timing of deals had to be carefully managed.
“One of the most important indicators that we take into consideration is obviously the overall cost of borrowing, albeit not the only one. The premium that we pay to investors for a new issuance – the new issue premium – and its comparison with that of peer countries is another key indicator. A stable market backdrop is one of the key items in our checklist,” said Boga.
Investors were left suitably impressed. “Turkey is an interesting case – it is very opportunistic, and I think its treasury office is more flexible in timing capital markets access compared to other EM sovereigns,” said Mikhail Volodchenko, EM debt portfolio manager at AXA Investment Managers.
In total, Turkey tapped the international market five times in 2022. Usually, its first deal would be as early as possible in a new year, and in conventional format. “However, due to the uncertainties and the volatility in early 2022, we skipped January and started our funding activities with a sukuk issuance – rather than a conventional bond – in February,” said Boga.
Luckily for Turkey, it launched the US$3bn five-year sukuk a week before Russia’s invasion of Ukraine. With the relative cost of issuing in the conventional US dollar market more expensive, the Islamic bond market proved a better alternative.
“Given the increase in oil prices in 2022, the demand for our international borrowing instruments from oil exporter countries, especially in the Middle East, increased,” said Boga, in explaining why the sovereign turned more to the sukuk market.
The short-dated sukuk proved to be the right call, as illustrated by the fact the final profit rate of 7.25% meant the February 2027s priced inside Turkey’s conventional March 2027s. A book size of more than US$10.75bn was also encouraging, while the deal itself was the largest single-tranche borrowing by the ministry. Bigger tests, though, were still to come.
A month later, the sovereign was back with a September 2027 offering in the conventional US dollar market. Although the war in Ukraine was dominating headlines, there had been a relief rally following an FOMC meeting.
Turkey’s outstanding March 2027s, for example, had rallied by just over 100bp in the week between March 9 and March 16, to a yield of 7.83%. Banks were also getting enquiries about the prospect of a new deal.
On March 17, straight after a meeting by Turkey’s central bank, the sovereign opened books for the long five-year note. Demand reached US$6.2bn to enable Turkey to print a US$2bn September 2027 bond at 8.625%.
It would be more than six months before another window opened. The global rates cycle was making life tough for issuers across the bond market. Turkey’s own particular dynamic of loose monetary policy despite spiralling inflation was adding to investors’ unease.
Again, the funding team demonstrated great patience, waiting for an appropriate opportunity. And again, driven by the relative cost of funding, it sold another short-dated sukuk issue.
In October, Turkey sold a US$2.5bn November 2025 sukuk issue at a profit rate of 9.75%. In headline terms it was a high rate, certainly by historical standards.
The “significant move in rates and volatility has caused investors to be much more cautious when it comes to making their investment decisions and required additional compensation from borrowers in the form of elevated premiums”, said Boga about the team’s general approach to pricing strategy.
As with its earlier sukuk issue, Turkey’s return to that market was cheaper than issuing in the conventional market where an outstanding October 2025 bond was bid at over 10%.
About US$6.5bn of orders enabled Turkey to exceed its initial size ambition of US$1.5bn–$2bn. Middle East accounts were the key to the deal’s successful outcome, taking 57% of the allocation. “Generally speaking, the Turkish treasury, in our view, has been a shrewd operator in primary markets, often taking advantage of pockets of demand,” said Philip Fielding, co-head of emerging markets debt at asset manager MacKay Shields after the deal priced.
Within weeks of that deal, the tone towards Turkey and credit markets in general had changed for the better as investors bet the rates cycle, in the US at least, would soon peak. On November 7 Turkey pounced on a rally, selling a US$1.5bn January 2028 note, albeit at a yield of 10%.
The deal was more than three times subscribed, with two-thirds of the bonds placed outside of Turkey. With investors holding on average 10% cash, the yield on offer proved attractive and the deal received some big real money orders.
The country received a big boost later in November with reports that the government and Qatar were in talks for the Gulf state to provide up to US$10bn in funding.
That display of commitment by Qatar, allied with a continuation of the credit rally, sparked Turkey into tapping the January 2028s in early December for a further US$2bn, at a yield of 9%. Intriguingly, there was an undisclosed US$1bn anchor order from a foreign official sector entity.
The tap enabled the sovereign to meet its external funding target. While Turkey could have covered any shortfall through other means, it was still a huge achievement to complete its programme in the circumstances. The sovereign was by far the biggest issuer in EM in 2022, and its funding officials displayed great dexterity in tapping different pockets of liquidity and reacting quickly to opportunities.
That it was able to raise the money planned “shows investors’ confidence” in the sovereign, said Boga, “despite all the challenging factors and developments in the markets”.
Another potentially volatile year lies ahead in 2023, especially with presidential elections due in May. Whatever happens, though, Turkey’s treasury is well equipped to meet the challenges and one new direction for the sovereign could be a debut ESG issue.
"We believe our diversification efforts in our borrowing operations will help in the case of volatility. In this context, we would like to make our debut issuance in the international ESG bond market in 2023. We already published our framework in late 2021 and continue our investor work," said Boga.
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