Turkish participation bank Ziraat Katilim overcame caution around its relatively small size and question marks over Turkey's banking sector in general to generate a relatively big book for its debut US dollar sukuk.
The US$500m three-year transaction was the first issuance in the Islamic bond market by a Turkish bank in two years. But with conventional markets proving tricky to navigate and sukuk investors keen on more supply, the format makes sense – even more so given strengthening relations between Ankara and the GCC region, which includes financing commitments from the UAE totalling US$51bn over three years.
Ziraat Katilim, which is wholly owned by Turkey's biggest lender, Ziraat Bank, landed the sukuk at 9.375% on a final book of more than US$2.5bn. However, Ziraat Katilim did pay an attractive premium over its parent.
On the day of execution, Ziraat Bank had conventional US$600m 5.375% March 2026s and US$500m 9.5% August 2026s bid at yields of around 8.814% and 8.857%, according to LSEG data, suggesting the sukuk was providing a premium of some 50bp–60bp.
“They are smaller than the parent and a first-time issuer, hence the pick-up, but this helped the trade,” said a banker at one of the leads. “Interestingly, I wouldn’t say that the Islamic orders were driving this. All the guys you see in the conventional Turkish bank deals were also in this one and the Islamic demand was additive.”
The book grew throughout the deal’s execution despite bookrunners Dubai Islamic Bank, Emirates NBD Capital, HSBC and Standard Chartered tightening pricing from IPTs of 9.625%–9.75%.
"Part of that initial premium would have been for the illiquidity of a smaller issuer like these guys because, especially at the minute, investors are really prizing liquidity," said a second banker, who was not involved in the deal. "But you can see they were actually able to narrow that delta between them and the parent a fair amount."
Demand was such that Ziraat Katilim got the largest book for any Turkish bank bond or sukuk this year, according to IFR data. UK investors accounted for 40% of the deal's distribution, while continental Europe, US offshore and Asia Pacific made up 9%, 8% and 4%, respectively. Some 39% of the deal was sold into the Middle East.
For comparables, as well as the Ziraat conventional bonds, leads were looking at Turk Eximbank and the Turkish sovereign curve. Turkey’s conventional US$1.5bn 4.25% April 2026s and US$3bn 4.875% October 2026s were bid at 8.02% and 8.154% on Tuesday.
“Although we have a negative view on Ziraat’s credit outlook, we thought the debut sukuk issue would do well in the primary given attractive pricing and positive sentiment on Turkish assets driven by the new government’s economic policies that have put the Turkish economy on the path of normalisation,” said Faisal Ali, a senior portfolio manager at Azimut.
Macro imbalances
While pricing might have been considered generous, the depth of demand was all the more impressive given that there are some concerns about the performance of the local banking sector in the wake of steeply rising interest rates in Turkey
“Our negative view on Ziraat’s credit profile is based, firstly, on the macro imbalances impacting the Turkish economy, which will have a material impact on the bank’s operating environment as Turkish authorities trigger an economic slowdown, and, secondly, the likely rise in NPLs due to the bank’s rapidly growing loan book that has not been seasoned,” said Ali.
The Turkish central bank raised the benchmark rate by 500bp to 35% in October, the fifth hike in as many months. In early June, the rate was as a low as 8.5%.
“On the positive side, the bank’s role in implementing government policies makes Ziraat a strong candidate for support as past record indicates. Ziraat’s credit profile is further boosted by a strong deposit funding base, reducing reliance on wholesale markets,” Ali said.
The secondary market performance of Turkish bank paper is another reason some investors might be willing to overlook an uncertain sector backdrop. The lead said the majority of Turkish bank deals issued since the start of September, when issuance reopened, have performed well.
“These bonds do well in the secondary, so there is an immediate incentive for investors to participate in these transactions,” the first banker said. On Thursday, the Ziraat Katilim sukuk was bid at 101 for a yield of 9%, according to the second banker.