With huge currency and stock market volatility and the waning fortunes of president Recep Tayyip Erdogan, Turkey’s bond market was a spectacularly inhospitable place for sukuk deals last year.
Despite this, the Turkish government and HSBC succeeded in bringing a $3 billion five-year sovereign sukuk transaction in February 2022; the largest-ever international deal from a non-Gulf Cooperation Council issuer.
It was Turkey’s biggest single-tranche issue in any currency or format, generating an order book of over $10.75 billion, reflecting amid strong demand from Islamic and international investors. The deal was a shot in the arm both for Turkey’s access to global markets and for the Islamic finance sector.
The transaction was also a huge relief for Erdogan’s embattled administration. It was Turkey’s first foray into global markets in a year of extreme volatility. The proceeds represent great progress in achieving Ankara’s annual $11 billion external funding target.
The issuer took a big gamble on tapping markets in chaos. But thanks in part to its huge global investor network, HSBC managed to compress original pricing by 25 basis points to 37.5bp during the book-building process. It priced within about 25bp of the conventional yield curve, demonstrating the benefits that can come from the sukuk format.
The deal saw Turkey harness enviable participation rates from Islamic and international accounts. Of the final allocations, 66% went to Middle Eastern accounts and just over 30% went to international investors.
By courting the biggest investors and offering credible plans for fiscal consolidation, Turkey reminded sovereigns everywhere that Islamic finance is an attractive alternative funding source
The demand dynamic was all the more impressive considering the sukuk was priced days after Fitch downgraded Turkey to B+ from BB-. The rating agency warned that self-inflicted financial stress, including double-digit inflation, risked increasing Turkey’s vulnerabilities.
However, by courting the biggest investors and offering credible plans for fiscal consolidation, Turkey reminded sovereigns everywhere that Islamic finance is an attractive alternative funding source. HSBC was joined by bookrunners Citigroup, Dubai Islamic Bank and KFH Capital on the deal.
Turkey also proved that a sukuk transaction can be a springboard for other bond issues this year. In March 2023, the sovereign borrowed $2.25 billion in dollar-denominated bonds, in a sale that was three times oversubscribed.
