Spooked Companies Cut Back Issuance on Lira Slide: Turkey Credit

This week’s unexpected interest-rate increase by the Turkish central bank risks weighing on corporate bond issuance, which is off to the worst start in two years as rising currency risk deters foreign investors.

They “will still use the bond market to finance themselves, but they will issue more opportunistically,” Kilian Reber, an emerging-market analyst at UBS AG in Zurich, said by e-mail yesterday. “History has shown time and again that moves in the lira versus the dollar can easily wipe out any gains.”

Turkish companies have sold $1.88 billion of bonds and bills this month, down 16 percent from the same period last year, according to data compiled by Bloomberg. That compares with a 2.4 percent increase for Russian firms in the period, to $1.51 billion.

The jump in borrowing costs threatens to stifle corporate spending, a headwind to policy makers’ efforts to spur economic growth. Yields have climbed in the past six weeks as a Turkish government corruption probe added to investor concern that emerging-market assets are vulnerable as the Federal Reserve scales back its bond-buying program. Lira volatility rose to a two-year high this week as the currency plunged to records.


The yield on two-year lira sovereign notes have climbed 212 basis points since Dec. 16, the biggest increase among 18 emerging markets tracked by Bloomberg. Borrowing costs for Turkish companies in dollars has climbed 2.74 percentage points to 6.69 percent on average from last year’s low on May 9, according to JPMorgan Chase & Co.’s CEMBI indexes as of Jan. 29. The yield for emerging-market debt was 5.90 percent on average and 6.24 percent for Russia, the indexes show.

Car rental firm Hedef Arac Kiralama ve Servis AS is among companies that have regulatory approval to sell debt yet are holding fire.

“It will be difficult to get the yields we would like to have these days,” Chief Executive Officer Onder Erdem said by phone yesterday. “So we are in a wait-and-see mode at the moment because of the conditions in the market. We are not in a hurry to sell bonds. However, for resource diversification we still plan to sell them, but later.”

Long-Term ‘Better’

Changing financial conditions are forcing companies to reconsider plans. Ak Finansal Kiralama AS, or Aklease as the leasing unit of lender Akbank TAS is known, filed to sell as much as 300 million lira ($132 million) of local-currency bonds, the market regulator said on its website Jan. 15. Since then, the government’s two-year note yield has risen above the 10-year rate, with the spread widening to 69 basis points Jan. 29, the most in 24 months.

“When we looked at the plan last week, short-term bonds looked more advantageous, but this week long-term is better because of the inverted curve between 2-year and 10-year bonds,” Devrim Baykent, head of finance at Aklease said in a telephone interview yesterday.

Corporate bond sales are off to the slowest start since 2012, when borrowers raised 120 million lira, data compiled by Bloomberg show.

Companies have favored selling debt in lira, with 75 percent of sales denominated in the local currency, compared with 44 percent in the year-earlier period, according to the data. Turkish corporate dollar bond yields averaged 4.2 percent in January 2013 versus 6.3 percent this year.

Lira Swings

The lira 0.1 percent to 2.2722 against the greenback at 4:31 p.m. in Istanbul today, extending its loss this month to 5.4 percent. The currency has swung between gains and losses since the central bank more than doubled its benchmark repurchase rate to 10 percent after an emergency meeting late on Jan. 28 to rein in inflation and prop up the currency.

“In such a volatile market, banks and corporates will face higher costs to fund via Eurobonds,” said Mariya Gancheva, head of central and eastern Europe, the Middle East and Africa research at Mitsubishi UFJ Securities International Plc in London.

Two-year Turkish government yields jumped in the past month since as a probe into alleged government corruption came to light Dec. 17, in the run-up to local elections scheduled for March 30. The yield has climbed 638 basis points from a record low of 4.79 percent on May 17, five days before the Federal Reserve signaled it could start cutting stimulus. The Fed will trim monthly bond buying by $10 billion to $65 billion, it said Jan. 29.

“With uncertain GDP growth, political tensions and elections ahead of us, corporates and banks are likely to wait until end of March,” Gancheva said, referring to the local elections.

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