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Garanti, MDM Cut Loan Costs as Emerging Markets Outpace Europe

Banks vying to invest in the best-performing markets in Europe are slashing costs to borrowers in Russia and Turkey, where growth is outpacing Eurozone economies.

Turkiye Garanti Bankasi AS, the Turkish lender part-owned by General Electric Co. arranged a $1 billion loan Nov. 30 with the lowest all-in pricing for a Turkish lender of 120 basis points this year, Bloomberg data show. OAO MDM Bank, Russia’s second biggest non-state lender, is seeking to cut the interest margin on a new loan to 220 basis points more than benchmark rates, compared with a margin of 400 basis points last year, according to data compiled by Bloomberg.

Banks are favoring companies in Russia and Turkey, whose economies have been quicker to recover from the financial crisis than their Western European peers and have so far remained insulated from the Eurozone’s sovereign debt woes. Turkey’s economy is forecast to grow 7.8 percent this year, the International Monetary Fund said Oct. 6. Russia’s economy is set to grow 3.8 percent, Economy Minister Elvira Nabiullina said last week, compared with expected growth of about 1 percent in the Eurozone.

“Russia and Turkey are not feeling the effects of the financial crisis as much as the Eurozone peripherals and people see them as a relative safe haven,” said David Pepper, head of Central and Eastern Europe, Middle East and Africa loan syndications at WestLB AG in London. “There’s more demand for top-tier Russian and Turkish deals than there is supply.”

Margins Drop

The volume of syndicated loans to Russian borrowers rose 88 percent to $32.5 billion this year, Bloomberg data show. Interest margins for Russian deals dropped to 309 basis points on average from 387 last year.

Turkish loans grew more than fivefold to $21.2 billion as interest margins dropped to 149 basis points over benchmark rates this year from 313 in 2009, according to Bloomberg data.

Garanti’s deal was increased from $700 million after lenders pledged more than double the amount it sought. Its borrowing costs still exceed those for top-tier issuers in Western Europe, which have been set as low as 12.5 basis points above benchmark rates this year for undrawn debt.

“We’re seeing much more interest in the emerging market space where banks are now a lot more comfortable with the underlying risk and there is a lot more value to be had relative to transactions in Western Europe,” said Mark Waters, head of energy & commodities, asset and project finance in BNP Paribas SA’s European loan syndications team in London.

Eurozone Malaise

The MSCI Emerging Europe, Middle East and Africa Index rose 16.2 percent this year, compared with a 6.6 percent increase of Europe’s Dow Jones Stoxx 600 Index.

Russia and Turkey have remained distanced from the sovereign debt problems afflicting some of the more developed European countries with ballooning budget deficits and debt woes. Ireland last month became the second euro country to receive a bailout from the European Union and International Monetary Fund, getting 85 billion euros ($113 billion) of emergency aid just seven months after the Greece got 750 billion euros of emergency international aid.

“The loan market is very, very attractive for borrowers,” Oleg Mukhamedshin, deputy chief executive officer at United Co. Rusal, the world’s largest aluminum producer, said in an interview last week. “The market expects improvement in the Russian sovereign rating so debt market conditions for Russian companies may be even better next year.”

Ratings Upgrades

Russia’s Finance Minister Alexei Kudrin said July 2 he expects the country’s credit rating to be upgraded. Fitch Ratings changed its outlook on its BBB rating to “positive” from “stable” on Sept. 8. Turkey, currently rated Ba3 by Moody’s Investors Service, BB+ by Fitch and BB by Standard & Poor’s, is also likely to get an upgrade should the government put in place “countercyclical” fiscal policy, S&P said in August.

“Emerging markets are very much back on the agenda,” said John Starling, a director in HSBC Holdings Plc’s loan syndicate in London. “There has been a reassessment of those markets relative to the risks that you’re running in some of the Eurozone peripheral markets. Banks know that they really need to be working with clients in these markets but in a more focused and cautious way.”

The cost of protecting Russian debt from default rose 1.4 basis points to 150 at 11:30 a.m. in London, according to data provider CMA, while credit-default swaps on Turkish government bonds increased 1.8 basis points to 132.8. Swaps on Irish debt are priced at 555.3 basis points, while contracts on Greek bonds cost 914.5 basis points.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improving perceptions of credit quality. A basis point is 0.01 percentage point.

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