Witch Hunt Burning Turkish Bonds as Erdogan Lashes at Koc

Investors are driving up bond yields of Turkish companies as concern mounts that Prime Minister Recep Tayyip Erdogan will take action against some for their alleged complicity in the unrest that spread this month in the nation.

The yield on dollar debt due April 2020 by Koc Holding AS, a group of companies with annual sales equivalent to about 6 percent of Turkey’s economic output, rose 210 basis points since protests ignited on May 31 to 6.27 percent today. That compares with a 100 basis-point increase to 5.04 percent for similar-maturity debt by higher-rated Vale SA of Brazil, a country that has also been roiled by anti-government protests. Koc traded at a premium of six basis points at the end of May.

While Brazil’s President Dilma Rousseff said she’d listen to the voice of the streets and pledged to give citizens a stronger say in government, Erdogan lashed out against what he says is a pre-planned effort to undermine Turkey’s economy. The Koc-owned Divan Hotel in Istanbul will be investigated for “providing shelter” to demonstrators fleeing police, Erdogan said June 25.

“It is most likely that there will be a witch hunt,” Haydar Acun, chief executive officer of Sardis Securities in Istanbul, said in e-mailed comments yesterday. “It is a risk which should be priced in.”

Koc’s press office in Istanbul declined to comment. Lutfullah Goktas, an adviser to the prime minister, did not answer calls to his cell phone seeking comment yesterday.

Foreign Media

Erdogan has blamed foreign media this month for instigating and exaggerating the protests, naming companies including the BBC, and says the government will investigate the role of an “interest rates lobby” and “provocateurs” on social media.

The BBC said it is “very concerned by the continued campaign of the Turkish authorities to discredit the BBC and intimidate its journalists,” according to a statement on its website.

“It is clear that only one politician is currently driving the agenda in Turkey, and that is the prime minister,” Timothy Ash, chief emerging-markets economist for Standard Bank Plc in London, said by e-mail yesterday. “Rationality seems to have gone out of the window in the search for scapegoats.”

The protests, which spread into a nationwide movement after police cracked down on a group of environmentalists opposed to the redevelopment of Gezi Park in Istanbul, were planned years in advance, Egemen Bagis, Turkey’s negotiator with the European Union, said June 25.

Market Probe

“The worrying thing is that many in the Erdogan administration actually believe this idea that there has been some foreign plot against Turkey,” Ash said. “Foreign investors are nervous given the global setting, and don’t need to be given another reason to reduce exposure.”

Turkey’s Capital Markets Board is carrying out a probe into trades preceding and during the protests. The investigation into trades encompassing the time of the Gezi Park protests constitute a “routine” probe into market volatility, Capital Markets Board chief Vahdettin Ertas was quoted by BloombergHT television as saying yesterday.

“This moves the issue beyond pure rhetoric and to the extent that the investigation is into the buy and sell orders of foreign customers of the local banks, it raises question marks about the safety of one’s investments,” Alexander Perjessy, a senior Eastern Europe, Middle East and Africa economist and strategist at AllianceBernstein Holding LP in New York, said by e-mail yesterday. “The risk is that this turns away even those investors who are long-term Turkey bulls.”

Investment Outflows

Foreign investors sold $1.7 billion in Turkish bonds and $993 million in Turkish equities in the three weeks to June 14, according to central bank data published on June 20.

The yield on Turkey’s two-year lira note fell 54 basis points to 7.60 percent at the close in Istanbul today amid speculation that the U.S. Fed may not be quick to reduce monetary stimulus. That pared the increase since clashes with police broke at the end of May to 153 basis points, or 1.53 percentage points. The increase is the biggest for local-currency debt among major emerging markets, which has sold off globally in anticipation that the U.S. would curb stimulus.

Federal Reserve Chairman Ben S. Bernanke said June 19 policy makers may curb monthly assets purchases of $85 billion this year and stop them in 2014 should risks to the U.S. economy continue to abate. A report yesterday showed gross domestic product expanded less than earlier projected in the first quarter.

Rising Yields

The yield on Turkish companies’ dollar debt climbed 208 basis points this month to 6.42 percent on June 25, according to JPMorgan Chase & Co. indexes. That widened the yield spread with high-grade, emerging-market corporate debt to 127 basis points, within 26 basis points of a 17-month high reached a day earlier, the indexes show.

The lira rose 0.6 percent to 1.9241 per dollar at 6:50 p.m. in Istanbul, leaving it 2.5 percent weaker this month, the second biggest depreciation among emerging markets in Europe, the Middle East and Africa, following Russia.

Koc won’t be the only corporate credit to suffer from a combination of Fed tapering fears and domestic political unrest, according to Sergey Dergachev, who helps oversee about $9 billion as a senior portfolio manager at Union Investment in Frankfurt.

The yield on September 2022 dollar bonds from Turkiye Garanti Bankasi AS, Turkey’s largest bank by market value, rose 189 basis points this month to 6.46 percent yesterday. After the first week of protests, Erdogan singled out Garanti’s Chief Executive Officer Ergun Ozen, saying he would oppose any bank manager who stood with the protesters.

Risk Premium

The yield on November 2022 debt from Anadolu Efes Biracilik Malt Sanayii AS, the nation’s biggest brewer, increased 124 basis points to 5.55 percent as government regulations restricting the sale and advertising of alcohol were signed into law on June 10.

The “situation in Turkey dealt a heavy blow to the political risk premium for Turkish debt, since this dimension of protests and the reaction of Erdogan towards it had not been expected,” Dergachev said by e-mail yesterday. “If the perception for Turkey and emerging markets changes for the worse, all Turkish credits will be hit.”

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