Two Turkish banks have raised subordinated debt this week at levels that would have been unthinkable less than a year ago, showing just how far the entire Turkey credit complex has tightened since the summer.
Newcomer Turk Ekonomi Bankasi issued a US$400m 9.375% January 2034 non-call January 2029 Reg S Tier 2 on Wednesday at par, a day after return issuer Yapi Kredi inked a US$650m 9.25% January 2034 non-call January 2029 144A/Reg S Tier 2, also priced at par.
Illustrating how far Turkish yields have moved and spreads compressed over the last year, the new bank Tier 2s came inside and on top of where the sovereign issued US$2.25bn 9.375% March 2029s in March 2023. Those bonds priced at a yield of 9.375% and are now bid at 7.4%, according to LSEG data.
The rally in Turkish credit last year goes someway to explaining the demand for local Tier 2. Books for the TEB transaction exceeded US$2.9bn, while Yapi Kredi saw orders in excess of US$2.4bn.
“Firstly, I think most investors are buying into the Turkey reform story,” said a syndicate banker on the TEB trade. “But some people missed out on the rally last year and I think are looking for where the next one might be. Tier 2 is one avenue to explore and the yield it offers is attractive.”
While not explicitly referencing Tier 2, one portfolio manager said that until recently his fund had no exposure to Turkey. “Now we have a fair amount, but we’ve only been buying bank and some corporate bonds,” he said.
Pricing approach
Pricing Turkish Tier 2 debt is not a simple exercise, especially when it comes to debut issuers. Even Yapi Kredi’s transaction was tricky, given the lack of comparables.
In November, QNB Finansbank issued US$300m 10.75% November 2033 non-call November 2028s, which were bid at a yield of 8.67% at the start of the week. But that deal has rallied hard since it was issued at 10.75%.
Because of its ownership – it is 99.88% owned by Qatar National Bank – QNB Finansbank’s bonds typically see greater participation from Middle East accounts compared to other Turkish issuers. So instead, leads on the Yapi Kredi deal used the Ziraat Bank US$500m 8% January 2029 senior sustainable bonds priced on Monday at 8.125% as their starting point.
Syndicate officials on and off the Yapi Kredi deal saw fair value for a new Yapi Kredi five-year senior in the region of 8%–8.10%, with a senior-sub spread of around 150bp looking reasonable, and therefore started marketing the Tier 2 at 9.75%–9.875%
Yapi Kredi then provided the best reference point for TEB, which opened books at 9.875% area. Final pricing levels – TEB landing at 9.375% versus Yapi Kredi’s 9.25% – reflected the inaugural nature of the TEB deal.
“But what TEB benefited from was the BNP Paribas ownership,” the first syndicate banker said. BNP Paribas holds a 72.48% stake in the lender. “That halo of ownership, with a large international bank involved, does help, just as you see with QNB Finansbank.”
Widening
All the Turkish bank deals this week – subordinated and senior – were given a helping hand by the very recent widening in Turkish credit after last year’s rally. During the first week of 2024, sovereign’s curve sold off around 40bp. The rest of the complex followed suit, making valuations more enticing.
“With Turkish levels repricing a little wider at the start of the year, I do think that helped some investors get more comfortable with these deals,” said a second syndicate banker involved in TEB. “Valuations were starting to get quite tight. The rally looked overdone.”
Despite the move this year, Turkish valuations remain squeezed, by the estimates of some investors, and last year’s rally in Turkish bonds also potentially shifted the relative value between senior and subordinated debt and between corporates and banks.
“I would prefer to hold some other names out there [rather than Turkish bank Tier 2] purely on valuations, such as the Turkish corporates, which typically offer some protection during periods of Turkish macro volatility,” said Euart MacKerron, emerging market debt investment analyst at Aegon Asset Management.
“With ever-present risk of policy change in Turkey, given [President] Erdogan’s history, though I think quite remote in the near term, credits such as WE Soda and TAV Airports with yields of 7.9%–8.6% look decent value here relative to both financials and the sovereign.”
TEB hired Abu Dhabi Commercial Bank, BNP Paribas, Citigroup, Emirates NBD Capital, HSBC, and Standard Chartered to run its deal.
Yapi Kredi was run through Abu Dhabi Commercial Bank, Citigroup, JP Morgan, MUFG, SMBC Nikko and Standard Chartered.
Ziraat worked with Abu Dhabi Commercial Bank, BNP Paribas, Citigroup, ING, JP Morgan and Mizuho.