Turkish borrowers shake off sovereign downgrade

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Eurobonds back after three-month post-coup shutdown; October supply tops $3.5 billion.

By Lucy Fitzgeorge-Parker and Virginia Furness

Turkish borrowers rushed into the Eurobond markets in October after a successful sovereign deal showed investors had shaken off concerns about the loss of the country’s investment grade rating. 

In the first global deal to emerge from Turkey since the coup attempt in July, the finance ministry sold a $1.5 billion 10-year bond on October 14. Within less than two weeks, four more Turkish names had tapped the market, raising a total of $2.1 billion. 

The sovereign deal had been in the works for some time, say bankers, but debt management officials opted to wait for the results of Moody’s post-coup review of its rating on Turkey. 

At the end of September, it became the second rating agency to cut the sovereign to double-B, causing it to lose its place in investment grade bond indices. Spreads on Turkish bonds and credit default swaps duly jumped, but by mid-October they had stabilized again.

“The finance ministry waited to see how markets would react to the downgrade but once they saw that there was a sustained recovery they decided to come to market,” says a debt capital markets banker. 

The warm reception that global investors gave the sovereign deal inspired two of Turkey’s strongest credits, leading private-sector lender Isbank and state policy bank Turk Eximbank, to issue dollar bonds.

More deals

Further deals followed from second-tier lenders VakifBank and Kuveyt Turk. The latter’s sukuk was particularly well-received, attracting more than $2 billion of orders. 

Hussain Zaidi, head of bond syndicate for Europe and Americas at Standard Chartered, says investor enthusiasm for Turkish risk is partly due to the lack of supply in the previous three months.

“There was a certain amount of scarcity value to the recent deals,” he says. “Spreads are also wider than they were in July and investors saw value at these levels.”

Several more Turkish borrowers are said to be eyeing Eurobond placements, although bankers think a pause is likely after the intense activity in October. 

“We’ve had $3.6 billion of supply from Turkey in less than two weeks so issuers will probably want to see how these deals trade in the secondary market before considering market access,” says Zaidi.

Hussain-Zaidi-160x186

Hussain Zaidi, StanChart

He notes, however, that market technicals still point towards investors wanting to deploy cash. “Flows into emerging market funds have remained strong through October and there are a few redemptions from Turkish issuers coming up this year and in the first quarter of 2017,” he says.

Turkey’s finance ministry has indicated that it has finished its funding for the year but several more banks are said to be looking to issue before year-end. Corporate supply is seen as less likely, however, given the lack of upcoming redemptions and high levels of local bank liquidity.

Despite the recent flurry of activity, however, deteriorating growth prospects and increasing nationalism may threaten its long-term outlook, according to leading economists. 

Turkey has slashed its forecast for GDP growth this year from 4.5% to 3.2%, putting it in line with the IMF’s real GDP projection of 3.3% for 2016 and 3% for 2017.

While many expected revised growth numbers, investors are starting to question the effectiveness of government and central bank policy to stimulate growth. In addition, Turkey’s increasingly nationalist stance is threatening to undermine investor confidence

“The impression I get from speaking to locals and the corporate community is that there is a significant fear factor,” says Viktor Szabo, a senior investment manager at Aberdeen Asset Management in London. “It’s not just the usual uncertainty but the ongoing purges, it is poisoning business relations. Turkey needs FDI but despite noise about ease of access to local markets, it is very difficult to do business there.”

Turkey’s relationship with trading partners, particularly Europe, is complicated. Relations on both sides cooled substantially in the wake of Turkey’s failed coup attempt on July 15. The European community was shocked by Turkey’s move to round up thousands of military personnel and by the associated talks to reintroduce the death penalty. 

The EU said the measures taken were “unacceptable” and that they were “concerned” by Turkey’s decision to declare a state of emergency, which President Recep Tayyip Erdogan’s administration has extended. Turkey was in turn dismayed by Europe’s response. 

Suspicions

While both sides have proceeded with a relationship of mutual suspicion over the immigration deal, anti-terrorism laws and visa-free travel, the relationship could deteriorate further should Turkey reintroduce the death penalty, something which analysts say cannot be discounted.

In addition, now the likelihood of EU membership is waning, analysts are concerned that Erdogan’s increasingly nationalist polices may further affect the business environment, as well as relationships with European partners. 

“The prospects for EU membership have long provided an important policy anchor,” says Markus Schneider, senior EM economist at Alliance Bernstein. “Yet with EU accession firmly on hold post-Brexit, this anchor is likely to weaken again and risks alienating Turkey from its European counterparts.” 

While Turkey’s move to extend by 12 weeks the state of emergency declared post-coup has alarmed some, Schneider points out that Turkey has used its powers of decrees exclusively to counter the threat of domestic terrorism, and not for any other policy measures. “They have been relatively disciplined so far,” he says.