Lucky country

Turkey’s sovereign issuance programme in 2011 has ridden its luck but also benefited from its growing credibility in the international markets. Increasing rarity and a looming upgrade should help it complete its funding programme for the year, unless events get in the way. Nick Lord reports.

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As much as any other country, Turkey has had its 2011 sovereign issuance programme impacted by events. The huge global volatility caused by political upheaval in the Middle East, the natural disasters in Asia and the on-going global financial situation have all left their mark on the country’s issuance plans. But after five months of the year, the Republic can look back with a certain sense of relief.

The country’s international issuance programme for 2011 was set at US$5.5bn, the same amount as it sold in 2010, which it successfully executed with a number of tightly-priced, well placed transactions. The government knew that going into 2011, things might not be so rosy. Locally, there was a general election planned (scheduled for June 12). Turkey’s economic data was also facing something of a flux in 2011, with inflation likely to bottom out while the current account deficit continues to widen on the back of high oil prices.

So it came as no surprise at the end of November 2010 when the Republic decided to opportunistically pre-fund its issuance programme with a €500m tap of its existing 5.125% 2020 bond, bringing the deal to a record size of €2bn. The tap was led by BNP Paribas, HSBC and Deutsche Bank, the first two replacing Commerzbank, DZ Bank and Credit Suisse from the original deal that had been sold seven months previously.

The new tap was priced at 4.25%, inside the guidance of 4.3%-4.35%. However the leads did offer a 7bp new issue premium for the tap over the underlying bonds. The pricing and rarity value of a Turkish sovereign bond, only its second in the euro denominated market since 2007, ensured a healthy order book of €4.6bn. Keen to maintain good relations with external accounts, the final book was split 60% to international investors and 40% to locals. At 156bps over swaps, the tap was the Republic’s lowest ever cost of finance in euros or dollars.

Moving into 2011 and officials at the Turkish Treasury tried to repeat the strategy of 2010, where the Republic was one of the first sovereigns to issue with a wildly popular US$2bn, 30 year trade. In 2011 things were a little different. A new 30 year dollar deal was priced amid a collapsing US bond market on a day when yields spiked in the face of a jobs report. It was clear that execution risk was much higher than in 2011 than 2010.

The deal was arranged by Barclays Capital, Deutsche Bank and JPMorgan, who were forced to reduce both the size and price. Originally targeting a size of US$1.5bn-$2bn, the final size was a mere US$1bn, despite having a reported order book of US$5bn.

Pricing started the day at 6.15% but had to increase to 6.25% as the underlying treasuries widened by 16bps over the course of the trading day. But even with this increase, it was the lowest coupon (6%) and yield for a new 30 year deal that the Republic had ever achieved. Local investors were again restricted to 35% of the final allocation, with investors from Europe taking 33% and those from the US taking 31%. Asian investors took 1%. Banks and asset managers took 48% and 47% respectively with insurance and pension funds taking 3% and hedge funds just 2%.

By restricting the size, the Republic ensured a strong after market performance, which sources suggest was a deliberate ploy so as to allow the bonds to be tapped in the future.

Reversal of fortune

But if the Republic thought itself unlucky to have been caught out by external factors with that deal, its subsequent offering was extremely lucky. On March 11 the Republic priced its first samurai bond deal since 2000, one day before the massive earthquake and tsunami hit Japan. The deal had been over a year in preparation and scored a number of firsts on its completion.

At ¥180bn (US$2.17bn) in size it is the largest sovereign samurai to come with a JBIC guarantee, according to officials at the Turkish Treasury. Although Turkey had issued 19 yen denominated bonds between 1992 and 2000, this was the first such deal for over a decade and the first time it had issued under the new JBIC programme. Under this arrangement, JBIC provides a guarantee and the bonds are then sold to qualified private investors, in a structure known locally as a shibosai samurai.

Pricing for the deal came at 48bps over swaps, 1bp wider than a ¥20bn 10 year deal for Export-Import Bank of India that priced on the same day. With the bonds swapped into dollars, the yield came to Libor plus 125bps. Assuming an undisclosed fee paid to JBIC for the guarantee of between 50bps and 60bps, this would give the Republic all in costs inside that of its outstanding dollar paper. This was no mean feat given the extreme volatility in the market and the general reduction in appetite for emerging market risks from investors around the world. The Republic was able to price the deal before the market shut down due to the disasters that happened the following day.

Turkey’s policy of diversifying funding sources and opportunistically tapping the market has proved successful in a year that stands out as one of extreme volatility. It is also a sign that the increasing rarity value of Turkish paper allows the Republic to issue from a position of strength that its regional and global peers must eye enviously. It is perhaps the only sovereign that is rated a Ba2/BB/BB+ that can take such an opportunistic approach to the markets.

Supporting itself

Turkey is also actively reducing its former dependence on foreign debt. Investors who want exposure therefore need to be quick on the draw when it comes to primary market issuance. According to Mehmet Simsek, Minister of Finance for the Republic of Turkey, foreign debt is 40% of GDP on a gross basis and 30% on a net basis. And this ratio is declining. “We are committed to keeping these ratios on a downward trend,” he said at a recent briefing.

Maintaining this rarity value allows Turkey to stand out in a region where other sovereign debt burdens look unsupportable. “Turkey has one of the most sustainable foreign debt dynamics in the world,” said Cevdat Akcay, chief economist of Yapi Kredi Bank in Istanbul. “Turkey is much better now than it was even before the crisis, and everybody knows its non-investment grade status doesn’t make sense.”

With only US$1.67bn left to fund in its 2011 Eurobond programme, the Republic can afford to take its time and wait for two particular events to work in its favour. Firstly, there is the election, which should result in a victory for the ruling AK Party. This will give it a strong mandate for government which will be welcomed by the markets.

The second event is less certain but more eagerly anticipated. There is the strong possibility that Turkey will be upgraded to investment grade status by one or more of the rating agencies shortly after the election results. If this happens, sources suggest the government can quickly come back to the market. Given a second half of 2011 where interest rates are likely to rise, it makes sense to lock in long term funding and so market sources suggest the Republic could re-open its US$1bn 30-year deal that it priced at the beginning of the year.