Istanbul Metropolitan Municipality paid a fat spread over the Turkish sovereign on Tuesday, securing a safe landing for a US$305m five-year with an eye-grabbing double-digit yield.
IMM's debut bond came in 2020, a US$580m December 2025s that paid a pick-up of around 140bp over the sovereign. That spread had widened to around 170bp by the time investor calls began last week, and when books opened on Tuesday for the new deal, it was clear that a considerable pick-up would be on offer.
The trade was also the first from a Turkish issuer, bar the sovereign, since Coca-Cola Icecek's deal in January, and the first high-yield non-sovereign trade from CEEMEA since Russia's invasion of Ukraine.
"As the first mover, there was a price they had to pay, and it was quite a bold and brave move," said a lead.
"They had the approvals in place, market conditions on the day were pretty good and the feedback from investors had been positive."
IMM (B2/–/B+) went with IPTs of 11%–11.25%.
Perhaps the best comparable on the sovereign's curve for the trade was Turkey's March 2027s, which were bid at 7.93%. However, Turkey did price a September 2027 note last month at 8.625%. The yield has since moved to 8.17%.
One factor for investors to consider was that IMM's bond would not be index-eligible. The size of the note, the proceeds of which will help finance two metro railway lines, was another consideration.
"I think this will struggle due to a lack of liquidity," said a banker away.
But with US dollar rates likely to continue rising and uncertainty about how often Turkish issuers will find an opportunity to fund, especially given President Recep Tayyip Erdogan's propensity to make pronouncements that puts foreign investors off, IMM was keen to go ahead.
A Moody's note in December said the city had huge investment needs driven by fast population growth and rapid urbanisation, though that is also translating into growing pressure on its finances. It said Istanbul's financing deficit-to-total revenue ratio was 9.4% in 2020.
On the other hand, strong tax revenue collection helped the city post a gross operating balance in 2020 of 33% of operating revenue, from 28% a year before. Moody's expected strong increases in tax revenues in 2021 benefiting from extraordinary real GDP growth rate of 9%.
As well as the city's finances, investors also had to take into account its politics. Istanbul's mayor, Ekrem Imamoglu, is a leading politician in Turkey’s main opposition Republican People’s Party, the CHP. However, the mayor's relationship with Erdogan is a functioning one. Given Istanbul's huge importance to Turkey's economy, any political strains will be felt at central government level too.
One buysider said he was obliged to pass because of a lack of research coverage at his firm for EM local governments.
"The only way they can get this thing done is to price cheap," he said. "Obviously, if there is demand, they will tighten it towards 10%."
IMM was able to bring the price down to 10.75%.
"As a municipality, that risk is not significantly higher than the sovereign and this was an opportunity for investors to switch," said the lead. "This was the chance to grab a good name with a good yield, where the spread might compensate for any upcoming volatility."
Books at final terms were over US$850m.
"Clearly, there was investor appetite, as the book was almost three times subscribed," said the lead. "The proportion of allocations to local investors was in the low single digits, and that tells you how engaged the international community from Europe, the UK and the US was in the deal."
HSBC, ING, JP Morgan and Societe Generale were the leads on the trade.