Banks Race the Clock as Turkey Revives Bond Sales Before Fed

  • Sovereign sale triggers flurry of issuance before Fed decision
  • Banks need cash to support lending as deposits lag credit

Now may not be the best time for Turkish banks to sell bonds internationally, but the flurry of issuers suggests most think conditions aren’t going to get better anytime soon.

Five lenders revealed plans to offer hard-currency debt in quick succession after Turkey tapped Eurobond investors on Oct. 14, ending a drought in issuance that followed a failed coup in July. While borrowing costs are still higher than they were before the crisis, waiting may mean worse terms for lenders, with the Federal Reserve on the cusp of raising interest rates, according to Ram Capital.

"Outflows from Turkey could speed up, so they’d better raise some money now," said Ogeday Topcular, who helps oversee $300 million as managing partner at Ram in Geneva and sold his holdings in Turkish banks last month before Moody’s Investors Service cut the country’s credit rating to junk. “Everybody is trying to be prepared for the worst case."

Turning to global investors for dollars is becoming more critical for lenders as they try to cope with loan-to-deposit ratios that have soared to records just as external funding gets more expensive. They’re also grappling with a worsening bad-debt burden as tourism slumps, while bondholders are waiting to see whether Fitch Ratings will follow its peers in knocking Turkey out of investment grade.

The issuance pick-up comes after two Turkish lenders were forced to cancel plans to market bonds in July as the attempt to depose President Recep Tayyip Erdogan sent borrowing costs surging. The yield on Isbank’s bonds due in 2021 was 5.3 percent on Tuesday, down from peaks surpassing 6.1 percent in the days following the upheaval.

Money managers hunting for yields as a refuge from rates near or below zero have been casting aside domestic risks to maximize returns. Turkey raised $1.5 billion this month at 4.75 percent, less than it paid to sell the same securities in March. In the months following that offering, a power struggle led the prime minister to resign, Turkey survived the coup and joined a military operation in Syria, and the country’s credit returned to junk.

Vakifbank and Isbank seized on the appetite for risk by raising a combined $1.1 billion within six days of the sovereign, taking the total tally of Eurobond offerings by banks since January to $4.9 billion, almost double the annual amount for 2015.

"Turkish banks have a history of issuing in packs," said John Bates, the head of emerging-market corporate research at PineBridge Investments Europe Ltd. in London, which manages almost $81 billion in assets. There’s a "decent window for the Turkish banks" to come to market before the Fed raises rates in December, he said. The next U.S. rate decision is Nov. 2.

Banks’ funding needs are getting more pronounced as credit growth hovers around 5 percent, near the lowest this decade according to a central bank data. The industry’s loan-to-deposit ratio was 124.6 percent in August, meaning that for every 100 liras ($32) of deposits, lenders have extended credit of almost 125 liras.

“For loans to grow at around 15 percent, which is the government’s target, banks need external funding from abroad,” Cagdas Dogan, a banking analyst at BGC Partners in Istanbul said by phone. “The fact that those markets, which were closed after the coup attempt, have now reopened is giving them access to that extra funding they need.”

If Fitch lowers Turkey’s BBB- score during its next review, the financial industry will suffer since banks use Fitch to calculate their risk-weighted assets. A cut to junk, along with lira weakness, would shave as much as 220 basis points from their capital-adequacy ratios, Unlu Menkul Degerler A.S. said in a research note this month.

Lenders may also see their burden of non-performing loans as a percentage of total credit climb by 100 basis points by the end of 2017, according to Moody’s estimates. Interest on foreign-currency deposits jumped to 2.64 percent this month, near the highest since early 2014.

Other banks looking to Eurobond markets for cash include Sekerbank, which is currently marketing a Tier 2 10-year dollar bond at about 10 percent in a debut offering, according to a person familiar with the matter who asked not to be identified because the information is private. Kuveyt Turk is selling $500 million in a five-year sukuk, according to another person. Akbank’s board authorized as much as $4 billion in overseas borrowing within a year.

“The spread is high,” said Lutz Roehmeyer, who helps oversee about $12 billion in assets at Landesbank Berlin Investment. “We are buying really every issue.”

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