Efes Bondholders Crying Into Their Beer on Turkish Ad Ban

The Middle East’s biggest beermaker is getting hammered in the credit markets as Turkish Prime Minister Recep Tayyip Erdogan cracks down on alcohol sales and advertising.

The yield on Anadolu Efes Biracilik Malt Sanayi AS’s dollar bonds due November 2022 surged 53 basis points since May 9 to a record 3.99 percent at the end of last week as lawmakers approved legislation restricting alcohol. That’s about 90 basis points above the yield on Denver, Colorado-based Molson Coors Brewing Co.’s May 2022 bonds, which have the same BBB- rating at Standard & Poor’s.

Shares of Istanbul-based Efes slid May 24 as Parliament passed laws to ban the promotion of alcohol, forbid retailers from displaying alcoholic products where they would be visible from outside, add warning labels, restrict scenes on TV that may encourage drinking, outlaw sales within 100 meters (328 feet) of houses of worship or schools and prevent retail sales from 10 p.m. until 6 a.m. Erdogan told lawmakers the steps were in line with a constitutional obligation to protect the nation’s youth.

“These measures are clearly detrimental to Efes’s sales,” Julian Rimmer, a broker who covers Turkey and Russia at CF Global trading in London, said by e-mail on May 24. “The biggest investment risk to Turkey right now would be the pursuit of an overly Islamic agenda by the government.”

Ankara Meetings

Opponents of the legislation said the moves are part of a broader Islamist agenda by Erdogan’s administration. Efes management was in Ankara for meetings with government officials and unable to comment, according to the company’s press office.

The extra yield investors demand to hold Efes bonds over 10-year dollar debt from the Turkish Treasury surged to 52 basis points, or 0.52 percentage point, the highest on record, from an average 13 basis points between January and May, according to data compiled by Bloomberg.

“The rapid introduction of this bill is both surprising and disappointing,” London-based Diageo Plc, the world’s largest distiller of alcoholic beverages, said in an e-mailed statement on May 24. “We believe that a more collaborative approach among industry, government and third parties would have led to a better outcome.”

Salted Yogurt

Diageo paid $2.1 billion in 2011 for Mey Icki, a Turkish producer of the nation’s traditional spirit called raki. The company said then that it didn’t expect “extreme treatment” of alcoholic drinks by the government.

The law takes force when signed by President Abdullah Gul, a former member of Erdogan’s ruling Justice and Development Party. Erdogan banned alcoholic beverages at municipal restaurants when he was Istanbul’s mayor in the 1990s. He said last month that ayran, a salted yogurt drink, was the national beverage rather than anything alcoholic in Turkey, where 99 percent of the population is Muslim. A draft of the alcohol law was submitted by members of his party to parliament two weeks later on May 13.

“We’re not banning alcohol in Turkey,” Erdogan said on May 24. “According to the 58th article of the constitution we’re doing what’s required and in doing this we’re saying that it has to be 100 meters away from mosques, educational facilities and we’re banning advertising, promotion and every kind of media ad.”

Physical Brawling

Turkey doesn’t want “a generation that drinks day and night and wanders around in a haze,” Erdogan said.

Health Minister Mehmet Muezzinoglu said alcohol was a cause of cancer and that about 5,500 people die each year in Turkey in alcohol-related traffic accidents. The measures are similar to others around the world, including in the U.S., Switzerland, Denmark and other European countries, he said, according to the state-run Anatolia news agency.

The law was passed amid physical brawling in parliament, according to Anatolia, which cited opposition lawmakers.

“They passed this law yesterday with an authoritarian mindset and without giving the opposition a voice,” Anatolia quoted Republican People’s Party lawmaker Akif Hamzacebi as saying. “This shows what a great threat, how anti-democratic a mindset Turkey is facing.”

Turkey’s average annual consumption of alcohol among people aged 15 and over is 1.5 liters per person, the lowest among 24 countries measured by the Organization for Economic Cooperation and Development. That compares with 10.2 liters in the U.K. and 11.7 liters in Germany, according to latest data, from 2010, on its website.

Tax Revenue

The measure may cause some erosion in tax revenue, Finance Minister Mehmet Simsek said on May 24. The government earns about 8 billion liras ($4.3 billion) a year from taxes on alcohol, he said.

Efes won an investment-grade rating from Moody’s Investors Service in October and subsequently sold the country’s first investment-grade non-bank corporate bonds the same month. The yield fell as low as 3.46 percent in December.

Efes got the rating about seven months before Turkey did, when Moody’s upgraded the sovereign on May 16. Moody’s didn’t respond to requests for comment made to their offices in London by e-mail and telephone on May 24.

Efes shares dropped 7.6 percent on May 24, the biggest decline since September 2011. Competitor Turk Tuborg Bira & Malt Sanayii AS dropped 2 percent.

Extra Yield

“Measures taken to decrease consumption have created a negative investor sentiment,” Irem Okutgen, an analyst at Garanti Securities in Istanbul, said in a phone interview on May 24. “These may result in some shrinkage in the market, but we have to see how seriously they will be implemented first.”

The yield on Turkish two-year lira notes fell four basis point to 5.23 percent at 4:10 p.m. in Istanbul, while the lira rose 0.1 percent to 1.8442 per dollar.

Efes competes in Turkey with foreign brands including Tuborg.

“Efes, Tuborg and people who find a beer after work refreshing are the obvious losers,” CF Global’s Rimmer said. “Avoid Efes on further alcohol restrictions.”

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