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CASE STUDY: First International Residential Mortgage Backed Covered Bond in Turkey - Vakifbank

As the first ever international residential mortgage covered bond in Turkey, Vakifbank’s €500mn issuance led the way for other Turkish banks to capitalise on this growing market and opened up new pools of liquidity for the institution.

Nov 11, 2016 // 2:02PM

Deal At A Glance

Deal Type: Covered Bond

Deal Structure: RegS

Issuer: Türkiye Vakiflar Bankasi T.A.O. (Vakifbank)

Governing Law: Turkey; UK

Listing: Irish Stock Exchange

Bookrunners: Barclays, BNP Paribas, Erste, Natixis, Unicredit

Legal Advisors to Bookrunners: White & Case, Akol Avukatlik Burosu

Legal Advisor to Issuer: Mayer Brown LLP, Yazici Legal

Size: €500mn

Tenor: 5 years

Yield: 2.375%

Reoffer price: 99.059/2.578%

Spread: MS+250bp

Date of Issue: 4 May 2016

Use of Proceeds: To fund existing expenditure plans

Background

One of Vakifbank’s objectives was to access a cross-section of traditional European covered bond investors and emerging market credit investors in a bid to diversify its funding sources and open up new avenues of investments.

The bank issued its residential mortgage covered bond on 4 May 2016, eliciting a tremendous response from the market: the deal was oversubscribed by 6x within half an hour.

Transaction Breakdown

Vakifbank released initial price thoughts in the region of MS+280bp for the €500mn transaction on the morning of 4 May 2016, and was able to shave 30bp off the price on the back of strong demand from the market.

The orderbook was oversubscribed within 30 minutes of the start of the bookbuilding process, growing by €500mm every half an hour before a revised guidance of MS+265bp was released to the market at 10:15am London time.

By midday, orders had exceeded €3bn, which allowed the bank to tighten final spreads further to MS+250bp. The deal was finally priced at a yield of 2.578% paying a coupon of 2.375%, and carried a price of 99.059.

The deal included a number of novel characteristics aimed to boost its appeal to investors. Among them was the inclusion of a USD-TRY swap embedded in the documentation, which helped reduce currency risk by transferring convertibility risk. This allowed the bond to be rated 3 notches above the sovereign (A3 by Moody’s).

The deal saw the lowest yield ever achieved by a Turkish issuer in an international euro-denominated public transaction, and successfully helped Vakifbank access a broad cross-section of covered bond and emerging market investors, mostly based in Europe. About 41% of demand for the bond came from Germany and Austria; 26% from the UK; 10% from Europe; 8% from the Benelux region; and 15% from other regions. Roughly 69% of the bond was picked up by fund managers, with 14% being allocated to supranational institutions, 13% to banks, with the remainder being picked up by insurance companies and pension funds.

Middle East CEE & Turkey

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