Q. Against the macro backdrop of 2016, how do you perceive investor sentiment in the Turkish market today?
A. There is no doubt that 2016 was a challenging year for Turkey, with the failed coup attempt and two rating downgrades. The latter did initially change the investor appetite and investor type due to being moved to non- investment grade status, but its effects were short-lived. We have seen a rapid recovery in 2017, which can be measured through various indicators. Both the number and volume of international debt capital markets issuances by Turkish names have been higher in the first three quarters of 2017, compared to full year 2016. Five-year Credit Default Swap levels have shown volatility since the beginning of 2016, however, they dropped from 300bp levels in early 2016 down to 270bp levels in early 2017, and sit at 160bp levels currently. In the secondary credit market, the Republic of Turkey, financial institutions and Turkish corporates have been performing much tighter compared to pre-coup attempt and pre-referendum periods, around 30-80 bps.
In the context of Emerging Markets, Turkey still stands as a name offering sound yield while proving to be resilient and strong despite the local and regional headwinds. Most recent examples of continuing and improving investor appetite for Turkey can be seen in Turk Eximbank and Coca-Cola Icecek’s Eurobond transactions, both priced in September. Both issuances were significantly oversubscribed, Turk Eximbank by 4.8 times and Coca-Cola Icecek by 9 times resulting in significant tightening of initial pricing thoughts and both books were dominated by asset managers with over 60% allocation.
Q. Where is HSBC spotting new funding opportunities in Turkey? What sectors do you see driving deal flow, and why?
A. From a lending perspective, we are primarily focusing on the profile of our customers versus a predominately sector led approach. We want to focus more on customers for whom we can create value; namely multinational companies, Turkish corporates, public sector entities and financial institutions. International capital markets issuances have historically been dominated by Turkish treasury bills and Turkish financial institutions, with limited supply from corporates, but we anticipate more inaugural issuers to come from the large corporate space in the coming years, and more structured issuances to take place on both green and project bond front, as well as in the project Sukuk format. As of September -end 2017, HSBC Group counted USD6.4bn of Eurobond transactions – all lead managed - USD1.25bn through Sukuk transactions, USD1.3bn through conventional and Islamic syndicated loans and USD190mn through export finance loans, so this anticipated pipeline is definitely something we have a proven track-record in and can deliver on.
If we were to articulate a sector-based funding perspective, our top five picks would be wholesale trade, construction, energy, retail and agriculture. We expect to keep seeing deals aimed at the financing of construction projects and infrastructure projects, such as roads and bridges. Given the vast energy needs of the country, we believe energy will continue to be one of the main areas for greenfield and brownfield investments and we may see more deals on that front, especially environmentally-friendly energy projects in the solar and wind arenas.
Q. HSBC participated in a range of capital markets transactions this year. What were some of the deals worth highlighting and what makes them notable?
A. Compared to the whole of 2016, 2017 year-to-date Turkish issuance has proven to be much more fruitful, both in terms of capital markets deal volume and diversity, despite a period of political uncertainty and rating downgrades.
HSBC acted as Joint Lead Manager and Bookrunner in 12 out of 21 issuances out of Turkey as of September-end, with 11 Eurobond transactions and 1 Sukuk issuance. All of these transactions have been very important signs of continued trust in Turkey’s credit and Turkish issuers, and it’s worth highlighting a number of important ‘firsts’. TSKB’s USD300mn green Tier 2 Eurobond was the first-ever structure of its kind globally, a testament to the parties involved. Yapı Kredi’s TRY500mn Eurolira transaction was also landmark, the first Eurolira transaction since 2013 when Akbank issued its debut Eurolira transaction, and of great importance signalling international investors’ interest and enhanced trust. HSBC has also executed the Republic of Turkey’s USD1.25bn Sukuk transaction this year, which marks the fifth international Sukuk mandate awarded to HSBC by the Republic of Turkey – HSBC stands as the only bank mandated for all five Sukuk issuances of Republic of Turkey. Another notable deal we have executed is the Republic of Turkey’s euro-denominated bond issuance in June 2017, which was Republic’s first euro issuance since April 2014, allowing the issuer to achieve the lowest-ever euro coupon to date.
Q. There are a range of mega-projects moving forward in Turkey currently, but many lenders have become more conservative in the aftermath of these original deals being signed due to economic circumstances. To what extent do you see the capital markets as a viable alternative to the loan markets for financing these initiatives, either in part or whole?
A. Currently, the local depth of the market, in terms of size and tenor, is not yet adequate to finance these types of mega project and remains a key bottleneck. This type of funding requires long tenors, tailor-made repayment profiles and sizeable liquidity, so the dynamics of the market are not entirely suitable. Additionally, the nominal cost of funding in lira is much higher compared to hard currency funding.
There are a few precedents of Turkish issuers tapping the international capital markets for mega project financing. The Mersin Port bond issuance was an important first in clearing a path for these transactions. Elazig Hospital PPP, which was closed in December 2016, was a true milestone for the banking sector as this was the first ever greenfield project bond and first ever project financing to achieve 20-year maturity in Turkey, as well as the first ever “Green and Social” project bond. We are proud to have acted as Sole Arranger, Global Coordinator, Bookrunner and Financial Adviser for this ground-breaking transaction. This landmark structure addresses the aims of Multilateral Development Banks searching for new and capital efficient ways of supporting debt financing in lower-rated countries by providing credit enhancement. The success of the deal was partly due to the credit enhancement mechanism used for this bond, which resulted in the bond being rated as Baa2, which at the time was two notches above the sovereign.
Using these types of credit enhancement mechanisms and focusing on the refinancing of brownfield projects which have a proven track record will be key to drawing in these kinds of high-quality investors. As Turkish projects prove themselves more and more on capital markets front, we believe that there will be opportunities to achieve this type of success on a reoccurring basis in the coming few years.
Q. Outside of the Government and FI segments, what other sectors are well positioned to take advantage of Sukuk? Participation banking seems to be growing rapidly in Turkey, and the Treasury and the country’s banks are leading the way with regard to Sukuk transactions.
A. The sovereign and participation banks are leading this market. The first ever Sukuk out of Turkey only launched in 2010 – and it came out of the private sector. The Turkish Treasury has led the way since, with five international Sukuk and 15 local Turkish Lira lease certificate issuances, reaching a total volume of USD14bn (USD6bn international, plus USD8bn local). There have also been numerous Sukuk and lease certificate issuances by the participation banks.
Despite the growth of this market since 2010, the share of domestic lease certificate issuance by corporates only accounts for 5% of deals executed to date, and there has been no international corporate Sukuk issuance from Turkish issuers, other than participation banks and the Turkish Treasury. It is important for Sukuk to become a regularly accessible source of funding for corporates as an alternative and complementary source of liquidity. Unfortunately, the list of challenges is long. Legal roadblocks for the establishment of an Asset Leasing Company by corporate issuers, requirements for the use of proceeds to be Shariah-compliant, the preference for securing a rating from an internationally recognised agency, and requirements to target an optimum issuance size for index eligibility are the main issues considered by potential Sukuk issuers. Coupled with relatively high issuance costs that are assumed upfront, shorter tenors when compared to other credit alternatives, and the resources needed for structuring, approvals and execution.
As for the sectors or issuer profiles that could benefit from Sukuk or lease certificates, we see no categorical obstacles or restrictions as long as Shariah compliance requirements are in place from an obligors’ business activity, use of proceeds and underlying structuring perspectives. Event-financings such as acquisitions in Shariah-compliant sectors, public private partnerships, or project financings are seen as viable candidates for this kind of funding.
In Turkey, we have only seen Sukuk issuances based on ijara and murabaha structures. Thanks to legal and fiscal regulatory changes that have been put in place over the last couple of years, we trust other internationally-tested structures such as manafae, istisna and wakala will start to be used by Turkish corporates as part of ordinary course of their financing exercises.
