The Thai Connection That Tells You Turkish Bank Debt Is Souring

  • SCB cuts Turkish MTN holdings by $800 million on rising risk
  • Politics has "forced us to be more conservative": Kasikorn

Before July, SCB Asset Management Co., part of Thailand’s second-largest bank, held about $2 billion of medium-term notes issued by Turkish lenders. That’s now dropped to about $1.2 billion.

While a fraction of the more than $88 billion of debt due within a year from Turkish banks, the decline in holdings by Thai investors like SCB shows one of the most robust markets for nation’s lenders is waning. Since 2013, when Moody’s Investors Service lifted Turkey from junk status, Thais have become some of the biggest buyers of medium-term notes to capture the highest yields in the universe of investment-grade banks.

Turkey’s “risk has been rising and the return has not been well compensated,” Narongsak Plodmechai, who helps oversee 1 trillion baht ($28 billion) as Managing Director of SCB Asset Management in Bangkok, said last week.

Worsening tensions with Kurds and the second election in five months has made Turkey’s lira this year’s second-worst performer among emerging-market currencies. Only Brazil and Russia have higher 10-year bond yields.

Turkey's lira is second-worst performer in emerging markets this year

The higher rates made debt from Turkish lenders a good fit for Thailand’s “term funds,” which buy investment-grade short-dated international securities. After a currency swap into baht, the notes form part of funds sold to retail clients to hold until maturity, offering higher returns than the banks’ deposits.

Thai investors represent more than two-thirds of the shorter-dated notes issued by Turkish banks, according to Amaury Gosse, the global head of MTN trading at Citigroup Inc. in London.

“They are probably the most active short-dated MTN investor base in the world for high-yielding investment-grade names -- it is very unique,” Gosse said Friday. “I am not aware of any other geography that does that. These are buy-and-hold investors.”

The demand from Thailand has offered some escape from rising debt costs. Turkiye Is Bankasi AS, the third-largest Turkish lender by market capitalization, offered to pay a rate of 1.45 percent on six-month dollar debt on Oct. 15. Yields were more than triple that amount on dollar bonds due 2020 from the lender also known as Isbank, which declined to comment.

After raising a record amount of short-dated dollar and euro-denominated notes last year, Turkish lenders have scaled back issuance to less than $1 billion in the third quarter from $2.5 billion in the same period of 2014, according to data compiled by Bloomberg.

Moody’s Catalyst

The latest twist in the Thai market has again been spurred, at least in part, by Moody’s. It issued a report this month titled "high dependence on foreign funding is a significant risk for credit growth."

“The political uncertainty and Moody’s rating threat have forced us to be more conservative,” said Pramook Malasitt, senior fund manager at Kasikorn Asset Management Co. in Bangkok. “My biggest concern would be a depreciated lira, which would erode the banks’ capital and debt-service ability of corporates.”

Kasikorn has reduced its Turkish MTNs from a peak of about $3 billion, Pramook said, declining to give the current level.

Turks return to the polling booths next month after an inconclusive mid-year election. A double suicide bombing at a peace march in the capital this month marked the country’s deadliest terror attack as the fallout worsens from the war in Syria. Turkey said on Friday its military shot down an unmanned drone near the Syrian border and warned that Russian air operations in Syria may lead to accidents. 

The threat of an eventual U.S. interest-rate increase has weighed further against demand for Turkish assets. Borrowing costs for the nation’s lenders are set to rise, Fuat Erbil, chief executive officer of Turkiye Garanti Bankasi AS, the nation’s largest listed lender, said at banking roundtable event in Istanbul on Wednesday.

China Benefits

Most of the money exiting Turkey is flowing to China as its banks “remain the least vulnerable to a U.S. rate hike,” SCB’s Narongsak said last week.

Waning appetite for their debt could make it harder for Turkey’s banks to expand lending, said Aykut Ahlatcioglu, an analyst at Istanbul-based Oyak Yatirim. 

“Much of the recent growth outpacing deposits was made possible by borrowing through such programs and Eurobonds,” he said.

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