Commerzbank Sees Islamic Market Vexing Babacan: Turkey Credit

Turkey should consider selling more Shariah-compliant sovereign debt as a syndicated Islamic loan taken by the local unit of a Bahrain bank signals strong demand, according to Commerzbank AG.

Investors in Gulf Cooperation Council countries would be lured to such a sale, Apostolos Bantis, a credit analyst at the bank in London, said in an e-mail interview. There is still “plenty of liquidity” in the market amid concern about the pace that the Federal Reserve will trim its stimulus program and the emerging-market selloff that began late May, he said.

“Turkey would not have a hard time issuing new paper,” Bantis said yesterday. Investors in GCC countries “seem to have faith in Turkey’s potential, they just want to get a bit higher spread.”

Following the Fed’s surprise move yesterday to keep its bond-buying program intact, Turkey’s Treasury said today it would hold investor meetings starting next week for a possible sukuk sale. Albaraka Turk Katilim Bankasi AS concluded a $430 million in a dual-currency syndicated financing facility this week, exceeding its $250 million target. Deputy Prime Minister Ali Babacan said yesterday, before the Fed announcement, that market volatility may be delaying use of Islamic finance.

Yields Plunge

The yield on Turkey’s $1.5 billion sukuk due March 2018 tumbled 37 basis points, or 0.37 percentage point, today to 4.06 percent, taking this month’s drop to 89 basis points, data compiled by Bloomberg show. That compares with a decline of nine basis points in September to 4.03 percent yesterday for the average yield on HSBC/Nasdaq Dubai’s U.S. Dollar Sukuk Index.

The yield on Turkey’s Islamic bonds, which were sold at 2.803 percent a year ago, had soared 217 basis points in the three months to Aug. 30 amid speculation the Fed would begin scaling back monetary stimulus and on concern over a U.S.-led military strike in neighboring Syria.

The country will hold investor meetings between Sept. 23 and Oct. 1, starting in the Qatari capital, Doha, the Treasury said today. The plan follows an offering of 1.82 billion liras ($933 million) of two-year local-currency sukuk last month, the government’s biggest Shariah-compliant sale of 2013. Indonesia raised $1.5 billion of Islamic securities last week at 6.125 percent, the highest yield since paying 8.8 percent on its debut dollar sukuk in 2009, data compiled by Bloomberg show.

Syndicated Loans

Albaraka is one of four lenders in Turkey that comply with Shariah, which forbids the payment of interest. It used a facility known as murabaha, where banks buy an asset on behalf of the customer and sell it back at a profit.

ABC Islamic Bank, Barwa Bank QSC, Emirates NBD Capital, Noor Islamic Bank and Standard Chartered Plc managed the dual-currency facility, according to Albaraka. The bank sold $200 million of sukuk on April 29, paying a profit rate of 7.75 percent, nine months after canceling a sale of Islamic bonds because yields were too high.

Investor concern over the pace at which the Fed will taper asset purchases pushed borrowing costs higher and slowed Islamic syndicated-loan issuance in Europe, the Middle East and Africa by more than 50 percent this year, according to data compiled by Bloomberg. A total of $7.26 billion was raised through 15 issues this year through yesterday, down from $15.6 billion in the same period last year.

Loan Demand

The Fed unexpectedly refrained from reducing the $85 billion pace of monthly bond buying yesterday, saying it needs to see more signs of lasting improvement in the economy.

“The loan market has been almost dead in the past couple of years,” according to Samer Mardini, Dubai-based vice president of fixed income at SJS Markets. “Most of the banks are trying to activate the loan markets because this sector in their balance sheet is not performing well, so that’s why we are seeing loan demand from both sides, borrowers and lenders.”

Asya Katilim Bankasi AS, another Islamic lender, applied to Turkey’s market regulator to sell sukuk of different maturities within one year of receiving approval, it said in a statement to Borsa Istanbul on Aug. 26.

Turkey is looking to develop its Islamic banking industry and legislation may be needed, Babacan said at the Istanbul Finance Summit yesterday. Public institutions may buy sukuk issued by the Turkish Treasury, a government decree in the Official Gazette said Sept. 11.

‘Very Benign’

The lira is the most-volatile emerging-market currency in the EMEA region after the South African rand, according to data compiled by Bloomberg yesterday. The currency surged 2.6 percent yesterday to 1.9491 per dollar, compared with a record-low 2.0685 on Sept. 5. It weakened 0.7 percent today. Yields on two-year benchmark notes dropped 83 basis points to 7.82 percent today, the lowest since July 5.

Albaraka’s fundraising comes as the lender’s profit is set to grow 14 percent this year, according to the average estimate of nine analysts surveyed by Bloomberg.

“Demand for this particular loan was driven by the fact that the sukuk primary market has been really very benign over the past few months,” Commerzbank’s Bantis said. “Despite all the fears of tapering and the volatility in emerging-market bonds there is still plenty of liquidity on the market.”

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