Strength of economy should outweigh political crisis
AS AN INDICATION of investors’ confidence in Turkey’s rehabilitation, the success of the Halkbank IPO in the middle of a political crisis could hardly be more telling. As the army threatened another coup and a million secularists took to the streets to protest against the perceived Islamist agenda of the government, Goldman Sachs and local firm Is Investment managed to fill the book for the TL2.5 billion ($1.86 billion) state bank privatization with more than $12.5 billion of orders.
"Just three days after the beginning of the Halkbank roadshow," says Ilhami Koc, general manager at Is Investment, "the Turkish market was hit by political tensions. But we, together with Goldman Sachs as the global bookrunner, did not step back. At the end of a successful offering campaign, investors oversubscribed the Halkbank IPO, the largest privatization IPO in Turkish history, by around eight times."
The international investment community seems not to be unduly concerned by the dispute between the secularist army and the Islamic AK party, and the resulting flow of capital is fuelling a strong IPO market. Foreign banks that have traditionally covered the market from overseas are either opening offices in Istanbul or investing in one of the increasing number of local brokers. Houses such as Is Investment that are affiliated to a LEADING commercial bank now face competition from smaller boutiques, often formed by teams of bankers jumping ship from the traditional players. There’s plenty of business to be won.
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"The Turkish brokerage business is an overcrowded market, with more than 100 players. Foreign investment banks will accelerate the consolidation in the market and Is Investment is likely to be a main beneficiary of that process."
Ilhami Koc, Is Investment |
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"IPOs and privatization deals have always been hot issues in Turkey," says Koc. "All the bulge-bracket investment banks are part of the game. Demand for Turkish assets is on a rising trend thanks to a successful turnaround in economic fundamentals, the start of EU accession talks and favourable conditions in international financial markets. Apart from the IPOs and privatization, M&A activity has also increased sharply in recent years, in line with the global trends. We see an ever-increasing appetite for private equity and M&A activity: between 2004 and 2006, a total of 530 deals took place, worth about $62 billion."
Not everyone is convinced that Turkey is as safe an investment as this rising tide of investment suggests. Writing about the political crisis in May in a note entitled Turkey: twilight zone, Morgan Stanley analyst Serhan Cevik expressed his concerns.
"Turkey has suffered a major blow to institutional credibility – in my view the Turkish military’s unexpected venture into politics has altered the country’s political and institutional landscapes so that no one really knows what is going to happen next."
Cevik is careful to underline his faith in the "fundamental strength of the Turkish economy" but worries that the risks are not being adequately priced in. "It seems," he continues, "that market participants do not much care about deteriorating institutional credibility. Some of the key assumptions market participants have had about Turkey’s future direction are now, to say the least, weaker and questionable. But asset prices reflect no change after recent events: the lira is as strong as ever and interest rates are back to the level before the political turmoil."
Local bankers, of course, are more positive: their businesses rely to a great extent on the trade that results from foreign investment.
Breathe the air
"If you only read the international press you will get a much blacker picture of what is going on in Turkey than if you were to come here, breathe in the air and see what’s going on for yourself," says Bertan Yordem, a partner at Daruma Corporate Finance. "I’m just back from a trip to New York where I met with a number of banks and hedge funds, all of which expressed a keen interest in what’s going on in Turkey. Interest in new transactions is not slipping. It would not be fair to say that everything is absolutely fine, but if you look at the recovery of the stock and FX markets it’s clear that Turkey is much more resilient now than before. Banks are better capitalized, foreign ownership has in many cases increased stability and management is much improved."
Daruma is one of an increasing number of smaller boutiques aimed at servicing the needs of middle market and upper market Turkish corporates, many of which are looking for foreign investment. There has been a dramatic increase, Yordem says, in the number and diversity of foreign firms looking to make strategic investments in the country.
"As an example," he says, "we had a sell-side mandate for a mid-sized company in 2002 where there were only three bids from private equity players. We’re arranging a similar deal now and we’ve had 16 private equity bids already. We’re seeing names bidding now that we’ve never seen before in the market, both as a result of the global liquidity situation and I think because of an increasing level of interest in Turkey."
Most of this interest comes from banks, private equity firms and hedge funds looking to make strategic acquisitions or form partnerships; there’s no real corporate debt market to speak of.
"Companies are still cautious about tapping the bond market," says Yamac Berki, CEO of Yatirim Finansman Securities, "since real interest rates for local currency are still high and the treasury’s borrowing requirements are still a strong influence."
It’s something of a Catch-22, says Yordem: "In order to be able to sell corporate debt in Turkey, the issuer would need a good reputation but in order to have a good reputation you can’t afford to issue debt at the moment when rates are so high."