Strong but silent

Initial public offerings require a number of criteria to both launch and price successfully, among them a stable macroeconomic and political backdrop, adequately prepared and attractive companies and both buyers and sellers willing to agree on valuation.

On both the former and latter points, Turkey has fallen short, and until May 2016 the result had been no successful flotations of any size since AvivaSA in November 2014.

Aviva and Sabanci’s Turkish life and pensions joint venture raised TL330.88m (then US$146m) in a flotation that priced in the upper half of original guidance and attracted significant anchor positions from high-profile investors BlackRock, Wells Fargo, Marshall Wace and Abu Dhabi Investment Authority. In total, the deal was more than 2.8 times covered, with international investors accounting for 70% of the offering.

Brendan Spinks, a managing director at HSBC covering CEEMEA ECM, said that provided there is good corporate governance and the semblance of adequate aftermarket liquidity, investors typically like issuance out of Turkey.

“For AvivaSA, there were some big name long funds that had not invested in a CEEMEA IPO for three to five years but put in big tickets, in one case a US$40m order in a US$140m deal,” said Spinks. “In that deal, it was about the opportunity and structural growth, helped by having Sabanci and Aviva as the major shareholders. Investors couldn’t get enough of it.”

An extraordinary dividend in mid-2015 resulted in a scrip issue increasing the number of shares by 230% and in effect reducing the TL47 IPO pricing down to around TL14.25. Since August 2015, the stock has been trading comfortably above pricing, up more than 46% in late February 2016 and still more than 33% above pricing in early May.

Which makes the lack of any tailwind following AvivaSA all the more painful, despite a couple of abortive attempts.

Stumbles and false starts

In May 2015, Global Ports, which operates commercial ports, as well as running harbours for cruise ships, abandoned plans for an up to TL760.5m Istanbul flotation of 36.4% of the company. That was despite a covered message and the EBRD offering to take 20% of the float.

The level of coverage was not enough to provide comfort in the aftermarket, bankers said at the time – 1.55 times covered, and just 1.35 times including the greenshoe. Attempts to rescue the deal, through a lower valuation, less stock or a combination of the two, were considered but rejected by the company and sellers.

Two months prior, in March 2015, National Bank of Greece pulled a sale of Finansbank stock that was intended to kick-start a series of sales that would take its shareholding below 60% to meet an end-of-2015 European Commission requirement. While market conditions were blamed, others suggested that NBG wanted to take advantage of a potentially positive rerating on emerging markets following dovish comments from the FOMC at the time.

In November, NBG announced it would sell its 99.81% stake to Qatar National Bank for €2.75bn and a public markets solution evaporated.

In January 2015, a US$300m Istanbul IPO for 20% of Turkish Aerospace Industries was cancelled after pre-marketing and, in May, dairy group Ak Gida was in the process of preparing for a listing, with a prospectus approved, when it was bought by France’s Lactalis.

A banker involved spoke of the damage done from these aborted sales, particularly regarding future marketing.

“It can be frustrating. Investors end up saying ‘we’ve seen this before, talk to me about a deal when it’s live’.

“And it is frustrating that for a market the size of Turkey that is super liquid and can be supported by domestic liquidity alone, there are other markets which print more business but are just a blip on the radar for investors, such as Greece.”

No more fistfights

At the time of writing, Turkish prime minister Ahmet Davutoglu had just resigned the role he took on in 2014. Many reports suggest he was pushed aside by president Recep Tayyip Erdogan attempting to consolidate power and move beyond a largely ceremonial role, the two having tussled over a number of issues for months.

“There are a lot of opportunities in Turkey, however, political instability is an issue,” said Ignacio Maldonado, who covers Iberia, Turkey and MENA at Bank of America Merrill Lynch.

“First there were diplomatic issues with Russia on Syria, then the refugee crisis and now political turmoil. The prime minister is leaving and Erdogan appears to become a sole leader. That makes it hard for issuers to pull the trigger on deals, as all of these macro events have an impact on primary markets, which is why there has not been a lot of deal flow in the last year or so.”

Spinks agreed that the lack of a near-term path to stability will continue to hobble primary markets, especially when compounded by wider global market concerns.

“The currency has performed poorly since the start of last year and there is somewhat more political uncertainty this year, such as changing the constitution to an executive presidency and the prime minister resigning. Those uncertainties overhang Turkey, as well as what is happening in China, where Turkey is reasonably well correlated with China despite minimal direct linkages. All of this combined can make it hard to price into high volatility,” said Spinks.

Maldonado added: “There will always be issues with Turkey, it is the nature of emerging markets. But you need some stability and for those issues to be fewer and far between, and avoid fist-fighting in parliament. That needs to disappear before you can become a more investible country.”

Despite the current uncertainty, there have been attempts to kick-start the moribund primary market. Via GYO, a REIT, listed in a TL306m float in early May, albeit in a purely domestic affair. A larger international offering had been considered, with Citigroup and HSBC on board, but that was junked in favour of a 25% local offering run by Istanbul-based Finans Yatirim Menkul Degerler.

“International investors have been very active in Turkish equities year-to-date, but marketing an IPO is a different story and requires support from fundamental rather than just momentum players,” said Dejan Borisavljevic, a VP covering CEEMEA at Citigroup.

“The issuer is exposed for a period of four weeks, so you need to have a certain level of confidence and stability in the market, which is why we haven’t seen any internationally marketed IPOs since 2014. 2015 was a volatile year with domestic elections and a challenging geopolitical backdrop in the region.”

While Via ultimately felt that the market was not there for anything other than the domestic route at the time, there is the belief that there may be an option to tap international investors in the future once the backdrop improves.

A fast return?

Borisavljevic was keen to highlight that the backdrop for Turkish ECM is not entirely negative:

“Turkish equities have rallied throughout Q1 2016, supported by the Fed policy on easing and oil prices staying around the US$40 level, and have outperformed all other CEEMEA markets. Even though we haven’t seen any primary or secondary issuance, it hasn’t meant that investors stayed away. The economy in general has fared reasonably well.”

As a result, there is a belief that Turkish ECM can be turned around relatively quickly, with a potential pipeline of attractive deals on a number of investors’ radars.

The Turkish treasury has extended the deadline for an IPO of Borsa Istanbul, with 40% of the exchange likely to be up for grabs. Sabanci Holding is expected to list its Enerjisa energy unit by late 2017, with Istanbul Gas in the running for a listing in the same time period. Turksat and Torunlar Group’s natural gas distribution business have also been mooted as deals that could come this year.

“Turkish equity valuations remain attractive and consumer confidence has shown positive momentum on the back of the recent lira recovery. While markets may remain volatile in the near term, sentiment can change quickly, which means that we could see a pick-up in deal activity, including IPOs, in the second half of 2016,” said Borisavljevic.

* Attribution corrected in 20th paragraph.