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Sukuk Taking Flight as Airline Readies Debut Sale: Turkey Credit

Turkey’s Islamic bond market is gathering momentum as companies from the national airline to the biggest telephone operator plan offerings after the government sold its first local-currency sukuk.

Turk Hava Yollari AO, or Turkish Airlines, and Turk Telekomunikasyon AS (TTKOM) have contacted banks that may be hired for a sale, people familiar with the matter said yesterday. The government raised 1.62 billion liras ($904 million) from its first sale of lira-denominated sukuk yesterday. The yield on its $1.5 billion debut sukuk sold Sept. 18 has dropped seven basis points to 2.95 percent yesterday compared with average yields of 3.15 percent for the Gulf Cooperation Council debt, based on data compiled by Bloomberg and the HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index.

The government’s dollar sukuk sale set a benchmark for companies in a market luring Middle East investors seeking to diversify. Global sales of sukuk, which comply with Islam’s ban on interest, rose above $37 billion for 2012, beating last year’s record $36.7 billion, data compiled by Bloomberg show.

The government has “opened up the possibility for other corporates to come in and issue,” Abdul Kadir Hussain, Dubai- based Chief Executive Officer of Mashreq Capital DIFC Ltd., who bought Turkey’s dollar sukuk, said by phone Oct. 1. “The underlying long-term story for Turkey is still positive in terms of the momentum and the direction of the economy.”

Photographer: Kerem Uzel/Bloomberg

Turkish traders. Close

Turkish traders.

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Photographer: Kerem Uzel/Bloomberg

Turkish traders.

Turk Telekom

Turkey’s gross domestic product may expand about 3 percent this year, according to the estimates of 20 economists on Bloomberg, more than double the pace of the Group of 10 advanced countries. Turkey’s almost $800 billion economy is the biggest in eastern Europe and the Middle East excluding Russia.

Demand for the government’s two-year lira sukuk was more than twice the amount on offer at 3.28 billion liras, the Treasury in Ankara said in a statement yesterday.

Turkish Airlines may use money from the sukuk sale to help finance planned aircraft purchases, one of the people with knowledge of the plans said yesterday, declining to be identified because the details are confidential. The company is considering buying at least six superjumbos, Chairman Hamdi Topcu said in an interview at an airshow in Istanbul Sept. 6.

Tender terms will be presented to Airbus SAS and Boeing Co., makers of A380 and 747-8 widebody planes, he said.

Sukuk Market

Sukuk issuers will benefit from tumbling borrowing costs for Islamic debt. The yield on global sovereign sukuk plunged 102 basis points, or 1.02 percentage points, this year to a record low of 2.88 percent Sept. 28, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index. The yield was 2.91 percent on Oct. 1, the data show.

“We are expecting Islamic banks to assess sukuk sales and they will be followed by companies from real estate and leasing industries,” Basak Selcuk, deputy director for corporate finance at Is Investment, said by e-mail yesterday. The Istanbul-based brokerage was a co-manager in the state’s sale.

Turkish units of Shariah-compliant banks have already tapped the sukuk market. Kuveyt Turk Katilim Bankasi AS, an Istanbul-based Islamic Bank owned by Kuwait Finance House KSC (KFIN), sold $350 million of five-year sukuk yielding 5.875 percent, according to data compiled by Bloomberg. Is Investment expects as much as 200 million liras of further sukuk sales by Islamic banks in Turkey this year, and total sukuk sales in the country in 2013 “at least to double from this year,” Selcuk said.

Debt Ratings

Albaraka Turk Katilim Bankasi AS (ALBRK), a unit of Bahrain’s AlBaraka Banking Group (BARKA), canceled a debut sale 10 months ago as yields were too high. The bank still plans to raise as much as $250 million of seven-year dollar-denominated sukuk this year, Adnan Yousif, the group’s chief executive officer, said by phone Aug. 27.

The boards of Turk Telekom and Turkish Airlines (THYAO) have yet to approve the possible sukuk sales and the size of the issues hasn’t been determined, the people said. Ali Genc, a Turkish Airlines spokesman, didn’t answer calls seeking comment. A Turk Telekom official, who asked not to be identified, declined to comment when contacted by Bloomberg yesterday.

“We would assess the corporate risk and we would make a judgment whether we’re getting compensated for it compared with where the sovereign is trading,” said Hussain, whose Mashreq Capital DIFC had $265 million in assets under management as of June, according to Moody’s Investors Service.

Extra Yield

Turkey is rated BB at Standard & Poor’s, the second-highest non-investment grade rating, and one level higher at both Moody’s and Fitch Ratings. The cost of insuring the country’s debt against default for five years plunged 139 basis points this year to 148 today, according to data compiled by Bloomberg.

The decline compares with a 20 basis point drop to 107 for Qatar, the Persian Gulf emirate rated nine levels higher at AA by S&P. The contracts pay the buyer face value in exchange for the underlying securities or cash, and falling prices signal improving investor perceptions of a borrower’s creditworthiness.

As a regular issuer in global emerging markets, Turkey “cannot be viewed with the same standard of judgment as other sukuk issuers in this region,” Hussain said.

The extra yield investors demand to hold Turkey’s dollar- denominated debt over U.S. Treasuries dropped 8 basis points to 216 as of 1:29 p.m. in Istanbul today, according to JPMorgan’s EMBI Global Index. The emerging-market average was 301.

Mideast Appetite

The lira climbed less than 0.1 percent to 1.7918 per dollar, while the yield on benchmark two-year bonds increased 3 basis points 7.57 percent. The extra yield investors demand to own Turkish notes rather than equivalent ruble debt was 83 basis points.

Turkish companies may benefit from a growing appetite among Middle East investors for Turkish assets and a drive by the government of Prime Minister Recep Tayyip Erdogan to strengthen trade with the Arab world as the country’s aspirations of joining the European Union fade.

Lebanon’s Bank Audi (BQAD) Sal-Audi Saradar Group obtained permission from Turkey’s banking regulator to operate in the country, according to a decree published in the Official Gazette yesterday. Bank Audi was also among a group of international banks that provided Dogus Holding AS of Turkey with a three-year $255 million loan last month.

“Middle Eastern investors have become more familiar with Turkish corporates in recent years,” Nick Stadtmiller, Dubai- based head of fixed-income research at Dubai-based Emirates NBD PJSC (EMIRATES), said by e-mail on Oct. 1. That “would help sell a Turkish corporate sukuk into the region,” he said.

To contact the reporters on this story: Ercan Ersoy in Istanbul at eersoy@bloomberg.net; Alaa Shahine in Dubai at asalha@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Claudia Maedler at cmaedler@bloomberg.net

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