Turkish Banks Price in Sovereign Cut to Junk in Loan Renewal

  • Isbank, TEB agree to pay higher margins if rating cut to junk
  • Moody’s, Fitch reviewing Turkey’s debt after coup attempt

Turkish banks are agreeing to higher funding costs if the country’s credit rating is cut to junk, with the premium paid by some lenders potentially set to rise more than 50 percent.

Turkiye Is Bankasi AS, the country’s biggest listed bank by assets, and Turk Ekonomi Bankasi AS, or TEB, both agreed to pay as much as 40 extra basis points for syndicated loans should Moody’s Investor Service Ltd. and Fitch Ratings cut the sovereign’s rating to junk from the lowest investment grade, according to data compiled by Bloomberg.

Isbank this month signed a two-tranche 367-day loan of 661 million euros ($739 million) and $302 million, while TEB secured a 352 million-euro and $205 million loan in August. If either Moody’s or Fitch cuts Turkey to junk, the basic margin on the euro portion will rise to 60 basis points above the Euribor benchmark from 35 basis points, according to data compiled by Bloomberg. If both do, the margin will climb to 75 basis points.

The banks will pay 40 basis points for other fees regardless of the rating cuts, making the total cost of the loan 115 basis points should the firms cut Turkey to junk, compared with 75 basis points for no cut.

Downgrade Review

Moody’s, which rates Turkey long-term debt at Baa3, said after the July 15 attempt to topple President Recep Tayyip Erdogan that it placed Turkey on review for a downgrade within 90 days from the day of the statement on July 18.

“Beside increased political instability following the coup attempt and risk of sovereign downgrade, higher risk premium also reflects uncertainty about growth and heightened bad debt risk driven by the weak lira,” said Tomasz Noetzel, a Bloomberg Intelligence analyst in London.

Isbank’s total syndicated loans have reached $2.4 billion this year, said Yilmaz Erturk, the lender’s deputy chief executive, in an e-mailed statement. The two-tranche loan it recently signed will be used for financing foreign trade, he said. The banks syndicated borrowing was at Libor and Euribor plus 75 basis points in 2015, according to a report by brokerage Unlu & Co. in Istanbul.

Failed Coup

Moody’s “will continue to assess the medium-term impact of the failed coup and its aftermath on Turkey’s policy-making institutions and business climate,” it said in a statement on Aug. 5. Fitch affirmed Turkey’s long-term foreign debt at the minimum investment grade of BBB- and revised the outlook to negative from stable on Aug. 19, saying the coup attempt presented “heightened risk to political stability.”

“It is a close call and a downgrade would potentially have wide-reaching consequences for Turkish credit, not least the loss of its investment-grade status,” said Trieu Pham, an analyst at MUFG Securities in London, in an e-mailed note on Monday. Still, he said, “we see a decent chance for Turkey to remain at investment-grade.”

Turkiye Vakiflar Bankasi AO, the state-controlled lender known as Vakifbank, is seeking a one-year syndicated loan of about $1 billion, with National Bank of Abu Dhabi PJSC and ING Groep NV acting as global coordinators, according to two people familiar with the plans.

Banks have the option to subscribe in dollars and euros at the cost of Libor plus 85 basis points for the dollar portion and Euribor plus 75 basis points for the euro segment in the Vakifbank loan, the people said. Lenders including Yapi Kredi Bankasi AS and Finansbank AS may also tap the market in 2016 as loans come due later this year, according to Bloomberg data.

Turkish banks, which depend on external financing to boost their lending capacities at home, have about $8.7 billion in syndicated loans maturing in the remainder of this year, according to data compiled by Bloomberg.

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