Istanbul-based Unlu & Co has announced plans to launch a broker-dealer operation in London in a bid to create a broader international market for Turkish corporate debt.
Mahmut Unlu, the firm’s founder and chairman, says the events of this year – which include the collapse of the lira in August and the first signs of economic contraction in the third quarter – have left Turkish companies in need of new sources of funding.
“Lending markets have tightened in Turkey and interest rates are high, which is a problem for corporates as most have very limited access to international creditors,” he says.
Turkish banks have been regular visitors to the international bond markets over the past decade but only a handful of companies from the country have outstanding eurobonds.
Unlu’s plan is to use his firm’s new London base to market Turkish corporate and bank debt – likely in the form of ABS – to the city’s specialist debt investors. “We have the ability to originate from Turkey, but we also need to get a better understanding of what buyers of debt – pension funds, debt funds, convertible funds and family offices – want,” says Unlu.
Convertible bonds will also be a focus for the London operation, he adds. “Interest rates are high and the prices of Turkish shares have come down significantly,” he says. “Turkish banks are trading at 0.4x book, companies that are growing at 30% are trading at 4x Ebitda.
“It makes sense from both the issuer and investor’s perspective to embed some sort of equity upside in return for lower interest rates.”
Unlu & Co has experience in the segment, having led the first Turkish lira-denominated convertible bond in its home market last year. The firm has already opened an office in London and expects to receive a licence to operate in early 2019.
The launch will mark the first entry into the city’s broker-dealer market by a Turkish entity. Isbank has a London branch but it is mainly focused on providing wholesale and commercial banking services for Turkey-related companies operating in the UK.
Not everyone is convinced that there is an urgent need to find additional hard currency funding for Turkish corporates, however.
On the one hand, it is clear that Turkey’s banks have been shrinking their FX loan books over the past 12 months as the Turkish lira has plunged against the dollar. Bulent Sengonul, head of research at Is Yatirim, notes that the sector’s stock of foreign currency loans has declined by nearly 10% since the start of 2018.
This deleveraging has been partly prompted by banks’ desire to minimize the risk of being shut out of international debt markets, on which they are heavily dependent for funding.
Akbank has led the charge and is now in a position where it could survive being shut out of international markets for two years, while analysts say most other Turkish banks could manage a year to 18 months.
Local elections are important in Turkey and the ruling AKP party will be desperate to hold on to Istanbul. This may well mean more of the type of rhetoric that unsettles markets- Emerging markets banker
The sector has also been restricted by new government regulations on FX lending, which came into effect in May. These included a ban on FX-indexed loans and a requirement that companies’ FX leverage should be linked to their ability to generate hard currency revenues.
Corporate deleveraging has not, however, been entirely involuntary. Turkish companies’ funding requirements have also declined as the economy has slowed, a trend that is expected to continue.
“The funding requirements will definitely contract as well as we are entering a recessionary period in 2019,” says Sengonul. “This will pull down the working capital needs of corporations, while investment loans will continue to shrink.”
Akin Tuzun, head of Turkish and MENA financials research at VTB Capital, says that as a result Turkish banks should be able to meet the funding requirements of the country’s corporates over the coming year.
“Local banks’ liquidity levels are high and they have significant reserves held at the central bank,” he says. “The delinquency rate will surely rise in the system amid a contracting economy but with banks shrinking their assets gradually they should have enough liquidity to support corporates’ funding needs.”
Meanwhile, concerns over the ability of Turkish banks to roll over external funding have receded again after a round of syndicated loan refinancing in the autumn was completed successfully.
The sector will face a similar challenge in the spring but fears of a shut-out from international markets have faded since the release of American pastor Andrew Brunson in October eased tensions with the US. Sanctions on Turkish officials were lifted in early November. Turkey was also one of only eight countries granted a temporary exemption from US restrictions on purchases of Iranian oil.
Combined with a recovery in the lira and signs that inflation is moderating from October’s high of 25% it has sparked hopes that international investors will regain their appetite for Turkish assets. So far, however, there have been few signs that sentiment is turning. Equity valuations remain at rock-bottom levels, while spreads on Turkish corporate eurobonds are still “in purgatory”, according to Sengonul.
“The spread to the sovereign has improved substantially from the hell pricing in August, but is still substantially higher than in early 2018,” he says.
Analysts say investors’ hesitation may be partly due to concerns over Turkey’s municipal elections, due to take place at the end of March.
“There will be more volatility going into those elections,” says an emerging markets banker. “Obviously the outcome won’t affect Erdogan’s ability to govern the country but local elections are important in Turkey and the ruling AKP party will be desperate to hold on to Istanbul. This may well mean more of the type of rhetoric that unsettles markets.”