HSBC Sees 2013 Sukuk Sales Doubling to $3 Billion: Turkey Credit

Islamic bond sales in Turkey may double to $3 billion this year as companies join the government in accessing Shariah-compliant investors, according to HSBC Holdings Plc, the world’s biggest underwriter of sukuk.

Sales reached about $1 billion this year, led by banks including Turkiye Finans Katilim Bankasi AS, according to data compiled by Bloomberg. The yield on March 2018 notes, which Turkey sold for the first time in September, fell six basis points this year to 2.68 percent, seven basis points below the global average, the data show.

“We’ll see it across corporates, we’ll see it across the government” as well as state-related entities, Mohammed Dawood, a Dubai-based managing director of debt capital markets at HSBC Amanah, the bank’s Islamic finance unit, said in an interview May 1. “Arguably we can double from last year. That’s a market we’re very excited about.”

The government of Prime Minister Recep Tayyip Erdogan, who heads the Islamic-rooted Justice and Development Party, is promoting Shariah-compliant finance as it boosts ties with the Arab world. Issuance of Islamic bonds in the Gulf Cooperation Council, which includes the United Arab Emirates and Saudi Arabia, tripled to about $21 billion in 2012 from the previous year, according to data compiled by Bloomberg. Investors from the oil-rich region have an “increased appetite” for Turkey, Dawood said.

‘Prolong Maturities’

Turkiye Finans raised $500 million on April 24 in the country’s biggest sukuk sale since last year’s $1.5 billion sovereign issuance, paying a rate of 3.95 percent, according to data compiled by Bloomberg. The bank said yesterday it received $1.9 billion in bids, with the Middle East accounting for 51 percent of demand.

Albaraka Turk Katilim Bankasi AS, the Istanbul-based unit of Bahrain’s Albaraka Banking Group, sold $200 million on April 29, paying a profit rate of 7.75 percent. Asya Katilim Bankasi AS, an Islamic lender, sold $250 million of 10-year notes at 7.5 percent a month earlier.

“We prefer sukuk issues to other methods of funding as it enables us to prolong maturities and bring down costs,” Turkiye Finans Chief Executive Officer Derya Gurerk, said at a conference yesterday in Istanbul.

Global Sales

Global sales of notes that comply with Islam’s ban on interest rose 4 percent this year to $14.8 billion, led by offerings from Saudi Arabia and Dubai, based on data compiled by Bloomberg. The average yield on sovereign sukuk rose 10 basis points, 0.10 percentage point, to 2.75 percent as of yesterday, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index. The rate closed at 2.56 percent on Jan. 23, the lowest since at least 2009, the index shows.

The Turkish government may sell more than 1 billion lira-denominated sukuk in August and a dollar offering of Islamic bonds this year, Dunya newspaper reported May 2, citing people it didn’t identify.

The yield on Turkey’s two-year note fell two basis points to 5.12 percent yesterday, extending the decline in the past 12 months to 432 basis points, the most among 17 emerging markets tracked by Bloomberg. The rate dropped to a record 4.96 percent on May 3 and was unchanged from yesterday at the close in Istanbul today.

“You certainly see the sovereign being more regular,” HSBC’s Dawood said. “The government is very actively involved in promoting Islamic finance.” HSBC helped advise on last year’s sovereign debut, data compiled by Bloomberg show.

Tax Exempt

The government plans to grant Islamic-banking licenses to state-owned lenders, Deputy Prime Minister Ali Babacan said March 29. Sukuk sales outside the country are exempt from income and corporate tax, according to the Official Gazette, a government publication, on April 27.

While the tax law will act as an “incentive” for Turkey’s banks to sell more sukuk, funding costs “are in general on a decreasing trend,” Ovunc Gursoy, an analyst at Yapi Kredi Yatirim Menkul Degerler, an Istanbul-based broker owned by UniCredit SpA, said in e-mailed comments on May 3.

“Unless Islamic banks see a notable decrease in the cost of sukuk, they may opt for using other low-cost alternative funding sources such as deposits or syndicated loans,” Gursoy said.

The interest rate Turkish banks pay for three-month deposits dropped to an all-time low of 5.73 percent yesterday, down from 10.33 percent a year ago, data compiled by Bloomberg show.

The lira fell less than 0.1 percent to 1.7979 against the dollar today, leaving it 0.8 percent lower this year.

Falling Risk

The cost of insuring Turkey’s dollar-denominated bonds for five years using credit-default swaps fell four basis points to 114, data compiled by Bloomberg show. They have fallen 45 basis points since Fitch Ratings gave the country its first investment-grade ranking in 18 years in November.

The contracts, which decline as perceptions of creditworthiness improve, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Turkey’s economy, the biggest in eastern Europe and the Middle East behind Russia, may expand 4 percent this year after growing 2.2 percent in 2012, according to the median estimate of 28 analysts in a Bloomberg survey.

Economic growth may help propel Islamic bond sales beyond the government and banks this year, Martin Spurling, chief executive officer of HSBC’s Turkey unit, said at a conference in Istanbul yesterday.

“We see Turkish non-bank corporates definitely coming into the sukuk market this year as investor demand for Turkish assets increases,” he said.