A money changer counts Turkish lira bills at a currency exchange office in central Istanbul. The lira has strengthened 13% since touching a record-low of 2.39 per dollar on January 27.
Bloomberg/Istanbul
The post-election rally in Turkish bonds is drawing companies back to sukuk issuance after an 11-month absence. Following almost a year of market turmoil, it is going to cost them more.
Turkiye Finans Katilim Bankasi, the nation’s most profitable Islamic lender, hired banks to arrange investor meetings before the planned sale of dollar-denominated Islamic debt, two people familiar with the matter said on Wednesday. The yield on the company’s sukuk due May 2018 dropped 45 basis points since Prime Minister Recep Tayyip Erdogan’s victory at March 30 local elections. It remains more than 60 basis points higher since it was sold on April 24 last year.
“The timing of the new sukuk is linked to the outcome of the municipal election,” Apostolos Bantis, a credit analyst at Commerzbank AG in London, said in e-mailed comments on Wednesday. “Borrowing costs are not going to be below the pre-May 2013 levels. Issuers, although initially reluctant to accept higher yields, will have to compromise.”
Turkish assets, battered since May when anti-government protests erupted in Istanbul, are bouncing back after a corruption scandal targeting Erdogan became public in December, prompting foreign investors to dump $2.8bn of the nation’s debt in the first quarter. Demand at a sale of 2023 government Eurobonds on April 8 was six times that offered. The lira has strengthened 13% since touching a record-low of 2.39 per dollar on January 27.
The bank plans to sell $500mn of five-year dollar debt, executive vice president Ali Guney said in a phone interview from Istanbul on Wednesday.
“We had thought that if there was a positive mood post-local elections and a recovery in risk perception, we’d go to the market and that scenario came true,” Guney said. “We are expecting high demand.”
Turkiye Finans, which is 66% owned by Jeddah-based National Commercial Bank, raised $500mn last April, paying a rate of 3.95% on the five-year Islamic debt. It received $1.9bn in bids for the sale.
Turkish two-year government notes yielded 10.06%, down from 10.79% on March 28, the biggest drop among 21 emerging markets tracked by Bloomberg. The lira sank 1% on Wednesday to 2.1174 per dollar.
Turkiye Finans posted 237mn liras ($112mn) profit in the third quarter last year, the highest among four Islamic lenders in the nation, according to data published on the Participation Banks Association of Turkey’s website.
Turkish markets plunged on December 17, when the graft probe targeting the government became public. Erdogan responded by purging the police force and judiciary, accusing the opposition of treason and blocking access to Twitter and YouTube. The death of a 15 year-old protester on March 11 set off the largest anti- government rallies since Turks took to the streets in May to protest the redevelopment of Istanbul’s Gezi Park.
“I am struggling to think of any positive developments over the past year,” Doug Bitcon, a Dubai-based fund manager at Rasmala Investment Bank Ltd, said by e-mail on Wednesday. “Political risk is higher. Interest rates are higher, which will lead to a slowdown in growth, and one would expect higher non-performing loans in the financial sector.”
Islamic bond sales fell to $10.4bn in the first three months of the year, the poorest first-quarter performance since 2011, as slower growth in China cast doubt on the global economic recovery and crises from Turkey to Ukraine roiled developing-nation assets.
Damac Real Estate Development sold $650mn of five-year notes on April 2 at a profit rate of 4.97%. Saudi Electricity Co issued $2.5bn of sukuk on April 1 paying 4% on 10-year securities and 5.5% on 30- year bonds.
“The market is facing a dearth of sukuk issuance after a lull in the first quarter, especially a sovereign investment- grade issue,” Asad Khan, head of commodity and fixed-income asset management at Al Rajhi Capital in Riyadh, said by e-mail on Wednesday. Turkiye Finans “is an affiliate of a strong Saudi bank. We will see good demand for this issue,” he said.