Banking: Turkish delight less sweet
Turkish banks are feeling the global squeeze in bank funding, having been immune to recent problems facing other EMEA issuers. But concerns in Europe are now being felt as the banks refinance their annual syndicated loans. Nick Lord reports from Istanbul.
RELATIONSHIPS MATTER IN Turkish banking, arguably more so than in any other EMEA market. For years, Turkey’s banks have been able to rely on the strong relationships built with banks around the world to finance their one-year syndicated loans.
These loans are euro- and dollar-denominated trade-finance related facilities, and until this summer, they have generally increased in size and in the number of participating banks. Most of Turkey’s big banks undertake two of these a year – one in the March to May slot and one in late summer to autumn. Moreover, the all-in costs have been steadily coming down: from the summer of 2010 to the summer of 2011 alone they fell by 50 basis points to a level of 100bp over Libor.
But that process is now in reverse. In recent deals fewer banks have come into the syndicates, the overall size of the facilities has stopped increasing (and in some cases has come down) and the price is now starting to edge up. And much of this has to do with the problems of the wider European bank funding environment. As much as Turkey might wish it, the country is not an island.
DenizBank is in the market looking to refinance a $650 million dual-tranche facility that it signed in October 2010. That facility was priced at 130bp over Libor/Euribor and came from 30 separate banks. At the time of going to press, it looked as if DenizBank might have to take a smaller amount from a smaller bank group, even if it can maintain its 130bp all-in pricing.
At 130bp, it will be 30bp wider than the most recent Turkish bank deals. This represents the uncertainty premium attached to DenizBank’s parent, the troubled Franco-Belgian municipal finance bank Dexia. The fact that the market is demanding a premium despite DenizBank’s ultimate parent now being two sovereign states shows that the market for loans is in an unforgiving mood.
Once DenizBank completes, all of the big lenders – apart from Garanti – will have managed to roll over their annual loans. Since August, the funding market has become more difficult, even for banks not enduring the bankruptcy of their parent. All eyes are now on the refinancing of Garanti. In May, Garanti’s refinancing kept to the trend of increased amount and size of the syndicate. Finansbank, owned by National Bank of Greece, also showed how difficult raising new money is in this market. In November 2010 it signed a $799 million syndication with a group of lenders led by Standard Chartered. It cleverly also secured a one-year extension option on that loan. At the end of October 2011, the bank called that option and secured a further year of funding rather than having to go out and secure a refinancing of that debt.
A €1 billion facility from 43 banks at 110bp all-in cost replaced a €700 million facility from 22 banks at a cost of 150bp. But in November, it has to secure a refinancing of a $1 billion facility from 49 banks priced at 120bp. It will be a test of Turkish bank strength if it can match that deal, let alone improve on it. Sources close to the bank say it is adamant that it does not want to price wider than the 100bp benchmark set by its arch-rivals Akbank and Isbank.
"Turkey is the last country to complain about the funding environment but we are not immune. It will be much more difficult from now on"
But officials within the bank admit that the environment is now more difficult than it was even two months ago. "Turkey is the last country to complain about the funding environment but we are not immune," says Tolga Egemen, executive vice-president of Garanti in Istanbul. "It will be much more difficult from now on."
The market is looking closely at what strategy Garanti will pursue to secure its funding. It is likely that it will push hard to maintain the current 100bp all-in cost level that has been secured by its peers. This could result in the number of banks in the syndicate going down. Garanti will also seek to maintain the size of $1 billion, but with a reduced syndicate, which means larger ticket sizes. This is what other banks have done – with Isbank, for instance, increasing its top-level ticket size from $40 million to $55 million in its summer rollover.
For Egemen, this is a positive. "We will renew with the same size but the scale-backs will be less than usual," he says. "There is capacity available for us with open lines. We were never greedy in the good times and we gave scale-backs to lenders. This will be rewarded in the bad times."
Even over the summer rollover period, it was clear that Turkey was not escaping the tightening of the market. For instance, state-owned lender Vakif Bank at the beginning of September refinanced its facility with a slight reduction in the number of participating banks from 30 to 26, even though it managed to increase the overall size of the facility by 1.06 times from $710 million to $756 million equivalent. The latest deals consisted of a $145 million tranche and a €433 million tranche.
Yapi Kredi – one of Turkey’s big four banks, which is just over 40% owned by Italy’s UniCredit – has also felt the pressure. On September 30, it refinanced its 2010 facility comprising $342.5 million and €670 million. According to its latest notification to the banking authorities, its 2011 deal achieved a 100% rollover rate in terms of participating banks. In terms of size, it managed to increase the euro portion slightly to €687 million but reduced its dollar portion to $285 million. The new syndication comprised 42 banks from 18 countries.
Akbank has benefited from its refinancing schedule coming in earlier than others, with two annual syndications in March and August. In its March deal, it increased the size by $100 million, from $1.2 billion equivalent to $1.3 billion. There was a bigger change in its August deal. In 2010, it secured €1 billion split between a one-year tranche of €780 million and a two-year tranche of €220 million. It refinanced this facility in August with a $422 million facility and a €708 million tranche. Both were one year. However, its bank syndicate level fell from 52 banks in 2010 to 44 banks this year.
Underpinning the Turkish bank syndications market is the value of the relationships with banks around the world. Turkish banks directly link participation in their syndications with the business they can hand out. Call it what you like – ancillary business, reciprocity, payback – it is a direct and clear quid pro quo, which the banks freely admit. "The syndicated loan market is a reciprocity business," says Birgul Denli, executive vice-president, international finance and investor relations, at Vakif Bank in Istanbul.
The Turkish banks have traditionally been able to offer their peers substantial amounts of business in areas such as trade finance, cash management and general treasury. As a result, the Turkish syndications are led by members of the correspondent banking teams and bring in tightly priced deals that tend to yield less than the participants’ own cost of funding.
"Turkish banks, relative to most other emerging markets financial institutions, have the broadest range of ancillary business to offer their relationship banks," says David Pepper, managing director of DCM loan origination, CEEMEA, at Bank of America Merrill Lynch in London. "The wallet they can offer for this ancillary business is greater than that of other banks, thus putting them in a unique position when it comes to discussions on pricing."
This year, the Turkish banks have been greatly helped by being able to start issuing Eurobonds. In the first six months, the four large banks each issued a number of bonds. But in true Turkish style, they asked the book runners of the bonds to be arrangers of their loans. This has led to a situation where the world’s largest investment banks are now mandated lead arrangers on syndicated loans for Turkish banks. Goldman Sachs, for instance, was one of the MLAs on Garanti’s May euro bank syndication, despite the fact Goldman doesn’t have an office in Turkey. It does, however, play a lead role in Garanti’s wider financing activities.
In many ways, these global investment banks have come to the rescue of the syndications by printing large tickets that make up for the absence of the smaller banks. This accounts for how the banks have been able to increase the size of their loans with reduced numbers of banks in the syndicate. Indeed, many of these smaller banks have left the syndicates altogether. In 2006 and 2007, many Middle Eastern banking groups came into the syndicates but these have now gone. Similarly, some Asian banks started to come into the syndicates in 2009 and 2010, and these too have largely exited.
For these smaller banks, it is an issue of their cost of funds. Middle Eastern groups, for instance, have a cost of funding of Libor plus 300bp and so it makes no sense for them to come in at the primary level of Libor plus 100bp, if they cannot get the ancillary business needed to offset the cost mismatch.
A looming problem for the Turkish banks is that the Eurobond market is now, in effect, shut. If deals cannot start to be printed, then the global investment banks that have taken up the slack in the past six months might start to withdraw their support. There is a long and congested pipeline of Turkish bank Eurobond deals waiting to happen, but with market sentiment where it is and pricing levels so wide, bankers do not see many of these issues coming to market before year end. That could severely diminish the fee pool available to the syndicate banks, which will be asked to come up with another round of funding in the spring.
This will then harm the quantification of the value of their relationships with Turkish banks. Some assess the monetary value of these relationships on a rolling quarter-to-quarter basis. If no fees have been generated from their Turkish bank clients in the previous two quarters, the calls for funds at below their own cost of funds might well fall on deaf ears.
Furthermore, smaller banks that might have lines available for Turkish banks can pick up the loans in the secondary market with yields of Libor plus 325bp to 350bp, according to market sources. These positions have been sold by many of the large banks, which reduce their exposures as soon as their lock-up period expires. A 200bp to 250bp spread differential between primary and secondary pricing equates to a lot of ancillary business that just is not there at present.
"It is all about the DCM business at the moment," says a banker close to the market. "There is a huge pipeline from the Turkish banks but those deals cannot get away at the moment, so you need to pick up a lot of ancillary business to make up for that hit." Those banks that are least exposed to the DCM business and most involved in the transactional businesses, such as trade finance and cash management, have been the most committed. Standard Chartered and Wells Fargo stand out in that regard.
It is the level of reciprocal business that gives Egemen most comfort that Garanti will be able to secure the new funding at the right price, even if the ticket sizes are bigger and the bank groups are smaller. "We have always been different from our peers by our ability to renew our loans," he says. "For foreign banks, the biggest business [they have in Turkey] has always been Garanti. And this volume of reciprocal business compensates for the pricing." Egemen points to the fact that in 2008, when most other banks were only achieving 50% renewal rates, Garanti achieved 92%.
Diversification of funding sources
While the larger banks struggle with the vagaries of the international wholesale markets, they are doing so from a position of strength. Well-capitalized and highly liquid, they do not need to fund themselves in the wholesale markets to the same degree as their European cousins. Rather it is about diversifying their sources of funds. Vakif Bank, for instance, has only 9% of its funding from the wholesale markets and is looking to increase that to 11% to bring its funding level into line with its peers. Generally, around 90% of Turkish bank funds come from short-term domestic deposits.
After the Garanti deal, the loan market will go quiet for four months before the spring rollovers start again. And the Eurobond markets are likely to remain quiet as well, due to general concerns about global bank funding keeping investors on the sidelines. Turkey’s banks are therefore looking to other forms of finance and it is some of Turkey’s smaller banks that are leading the way when it comes to innovation.
Sekerbank is in the process of completing the most innovative bank deal of the year with the sale of Turkey’s inaugural covered bond. This deal scored a global first by being the first covered bond backed by a pool of SME loans. It is the first Turkish covered bond, coming from a law originally passed in 2007.
Structured as a TL800 million ($455 million) programme, the notes can be issued in any currency, with the proceeds swapped back into Turkish lira. The first three tranches were sold in the summer to the International Finance Corporation, Dutch bilateral agency FMO and UniCredit, which was also the arranger of the deal. Sources close to the transaction say that, at the time of going to press, a further four tranches are close to being sold to the European Investment Bank, the European Bank for Reconstruction and Development, UniCredit again and a tranche guaranteed by the European Investment Fund, which will be bought by German development bank KfW.
The price of the bonds is between 200bp and 250bp over mid swaps. The fact that KfW needed a triple-A guarantee highlights one of the problems that Turkish banks have in the wider capital markets. The relatively low rating of Turkey does not justify such relatively tight spreads. If the Sekerbank covered bonds, or indeed other Turkish Eurobonds, are to be sold into the public market and not on the basis of bilateral banking or development bank relationships, they need to find a mechanism that bridges the gap between having an emerging market rating and developed market yield. An upgrade of the Turkish sovereign to investment-grade status would achieve this at a stroke.
Sekerbank is planning a roadshow for early next year to explain its covered bond programme to potential market investors. Zeki Onder, executive vice-president at Sekerbank in Istanbul, says a key feature of the bonds is that they can be issued in any size and any currency according to demand and whether the swap market is accommodative or not. "The more SME loans we put in the pool, the more bonds we can issue," he says. "It is a unique structure and it creates funding for us in different maturities. It has opened up a whole new ball game for all Turkish banks."
In the meantime, the banks are all looking at what they can do, not just to raise some funds but also to get the fees into the hands of their relationship banks that they will be approaching in the spring for rollovers. Diversified payment rights (what the Turkish banks call securitization) issuance is making a strong comeback in place of other forms of international borrowing.
"Banks seem to be focusing their efforts on executable products," says Muge Eksi, managing director and head of capital markets, Turkey, at UniCredit Menkul Degerler in Istanbul. "In light of current market conditions, Eurobonds are on hold and there seems to be pressure on loan spreads and deal sizes," she says. "Where banks have infrastructure set up for DPR issuance, they are benefiting from windows of opportunity to issue. Banks are also likely to actively explore new products that will allow them to access markets through the volatility, such as the Sekerbank covered bond."
In August, Yapi Kredi undertook a $410 million DPR issuance, its first since 2007. The deal was split between a €130 million series and a $225 million series, and brings the total money raised through the DPR programme to $2.7 billion. The notes are something of a hybrid between the trade finance related syndications and the straight Eurobonds. They have a five-year maturity but are backed by export receivables. They also attracted development bank support from both IFC and DEG of Germany. The deal was led by WestLB, Wells Fargo, SMBC Securities and Standard Chartered. Bankers in Istanbul confirm that other banks are looking at similar DPR deals as the year end approaches, to diversify their funding base and stay active in the international markets.
Stable funding source
"We are not going to be in the market for a syndication this year and we will continue to issue local-currency bonds as a part of our funding plan"
Moreover, despite the troubles in the international markets, the domestic markets do offer a stable and growing source of finance for the banks, big and small alike. At one end of the scale, Isbank in October issued its latest series of domestic bonds, selling TL700 million of six-month bills with a yield of 8.13%. At the other end, one of the pioneers of the Turkish domestic bank bond markets is Aktif Bank. This is technically an investment bank and so cannot take deposits. It relies on the domestic wholesale markets for its funding. It had plans to start issuing internationally but these have been scaled back for the time being. "We are not going to be in the market for a syndication this year and we will continue to issue local-currency bonds as a part of our funding plan," says Alper Nalbant, director of GTS at Aktif Bank in Istanbul. "We were the initiator of local-currency bonds in Turkey and many banks followed our lead in that market. Still, there is good appetite from the markets and we are willing to continue in that sense."
With these new funding sources complementing the strong growth in local deposits, Turkish banks are in no danger of following their European cousins and running out of liquidity. But they are affected by the increasing sensitivity of international banks to their own cost of funds. As a result, it will take some deft footwork for them to maintain the size and price of their rollovers. But it might also encourage them to undertake new forms of financing. This will undoubtedly be good for the long-term development of the market.