“Expensive”: Turkey raises $2bn from 10-year eurobond at 7.68% yield

“Expensive”: Turkey raises $2bn from 10-year eurobond at 7.68% yield
Turkey's FX borrowing costs have reached the highest level seen since the 2008 financial crisis (Image source: Turkish Ministry of Treasury and Finance).
By Akin Nazli in Belgrade January 10, 2019

The Turkish Treasury has raised $2bn from a USD-denominated eurobond due April 2029 with a coupon rate of 7.625% and a yield to the investor of 7.68%, it said on January 10 in a written statement.

Turkey’s current 10-year bonds, due October 2028, traded with a yield of around 7.35% before the deal was announced, according to Bloomberg data.

Spreads over market rates continued to widen, reaching 497bp over the US Treasury yield. Some 40% of the eurobonds were sold to investors in the US, while 27% of buyers were in Turkey, 20% were in the UK, 8% were in other Europe and 5% were in other regions.

“The Turks probably know the excrement is rammed in the ventilation system just waiting to be switched on which is probably why they raised $2bn of 10-yr debt yesterday at 7.625%. It's expensive alright, UST +500bp, but they were right to seize the moment because geopolitics are about to deteriorate further and US relations are nosediving,” Julian Rimmer of Investec said in a note to investors.

The total amount of the USD bond issuance was converted into an equivalent EUR liability and, as a result of this swap transaction, the total EUR funding cost of the bond issuance was realised as 4.965%, the Treasury also said, without providing any further details.

“Treasury probably had EUR obligations but thought USD demand would be higher, attractive. So sold $ bond and swapped with EUR,” Fercan Yalinkilic of Bloomberg said on Twitter.

First eurobond sale since lira’s low
The issue marked the first 10-year eurobond sale made by Turkey since the lira currency crisis hit its nadir last August.

Turkey is rated BB/negative by Fitch and Ba3/negative by Moody’s while S&P’s unsolicited rating for Turkey is B+/stable, according to a January 7-dated investor presentation on the Turkish Treasury’s revamped website.

Turkey has lately cut its lira borrowings with the aim of supressing interest rates on the domestic market amid the country’s substantial liquidity and credit crunch, while the Treasury, public lenders and the country’s wealth fund have been pushing for FX borrowings.

Some private corporates are also seeking debt issues to overcome the domestic credit crunch while private lenders Akbank and Yapi Kredi have turned to shareholders with capital increase and subordinated bonds, respectively.

Not rewarding
The government’s attempts to encourage public and private lenders to tap international markets with asset-backed bonds while also tapping into local lenders’ FX deposits by selling foreign currency bonds to individual investors have not proven rewarding.

Albayrak said on January 3 during a televised interview with public broadcaster TRT that the government had sold TRY1.1bn (€175mn) worth of foreign currency bonds to locals.

“It was announced that book building [for foreign currency bonds] was extended upon request, however, I think it was due to low demand… Citizens are still concerned whether the government will confiscate FX [deposits] at lenders. Therefore, under-the-mattress money does not head towards government bonds,” Mert Yilmaz of NoorCM told daily Cumhuriyet on January 10.

Meanwhile, the government has already launched a chunky pre-local election stimulus package (the poll is due on March 31) while the central bank has been trying to curb local currency depreciation via open market operations on the Borsa Istanbul derivatives market.

Lira breaks 5.20-5.40
However, the USD/TRY rate has broken out of the central bank’s undisclosed 5.20-5.40 band, which was sustained from the middle of November through the end of the year. The breach has been seen since the beginning of 2019 on global worries, pre-election stimulus woes and renewed tensions with the US over Kurdish forces in Syria.

The TRY strengthened 1.40% d/d against the USD to trade at 5.4043 as of 18:00 local time on January 10, but the rate of 5.50 could be made the central bank’s new unofficial threshold under the changed circumstances.

Berat Albayrak, Turkish President Recep Tayyip Erdogan’s son-in-law, who as finance minister is in charge of the Turkish economy, said on January 9 that the government previously expected to receive TRY20bn from the central bank’s profits but that it would in fact obtain TRY37bn.

The earlier-than-usual transfer [from the central bank] is related to cash management and market liquidity,” Albayrak also said, according to Bloomberg. Plenty of observers see it as a manoeuvre timed to help secure the pre-election economy.

Turkey’s public net debt stock jumped to TRY489bn at end-September, equivalent to 14% of GDP, from TRY303bn, or 9% of GDP, at end-June, the Treasury said on December 31. The public net debt stock stood at TRY262bn at end-2017, or 8% of GDP.

Turkey plans to raise the equivalent of $8bn of external funding in 2019 through bond issuances on international capital markets. It raised $7.7bn in financing from such markets in 2018, as opposed to its $6.5bn annual target. Turkey raised $9.1bn from international markets in 2017 versus the planned $6bn.

“Having experienced capital inflows of almost $150bn in 2017, we estimate that EMs suffered capital outflows of around $70bn in 2018. Our Tracker suggests that the pace of capital outflows eased sharply towards the end of the year,” Edward Glossop of Capital Economics said on January 9 in a research note, adding: “Outflows are still likely in 2019.”

Turkey is planning to raise less cash through local-currency debt sales than it redeems in 2019 for the first time since 2016, according to the Treasury’s 2019 borrowing strategy.

Domestic debt rollover ratio heads for 93.5%
The country plans to borrow TRY153.9bn from the domestic market and redeem TRY164.6bn. That would take the debt rollover ratio to 93.5%, down from 107% in 2018, and 126% in 2017.

In November 2018, the Treasury raised €1.5bn from a euro-denominated eurobond due February 2026 with a coupon rate of 5.20% and a yield to the investor of 5.25%. The spread over market rates stood at 456.4bp over Mid-Swaps (MS).

In June 2017, at the previous EUR-denominated eurobond auction, Turkey borrowed €1bn through a EUR-denominated bond due June 2025. The bond had a coupon rate of 3.25% and a yield to investor of 3.337% while the spread over MS stood at 285bp.

In October 2018, the Turkish treasury raised $2bn from a USD-denominated eurobond due December 2023 with a coupon rate of 7.25% and a yield to the investor of 7.50%. That was better than the initial expectations for 7.75%.

The spread over US bonds reached 447.5bp at the auction, marking a jump from 336.8bp in the April 2018 auction and 266.7bp in the January 2018 auction.

In April last year, the Treasury issued $2bn worth of 10-year eurobonds at an annual cost of 6.20% against three-times-higher demand. In January last year, the Treasury raised $2bn via 10-year bonds but at the lower cost of 5.20%.

Turkish Treasury's Eurobond Issues in 2019
Issue Date Currency Size Maturity CouponRate (%) Price
Yield to Investor
Yield to Investor (Spread) Euro Cost (%)
16.01.2019 USD 2bn 26.04.2029 7.625 99.555 7.68 UST + 497bp 4.965
Turkish Treasury's Eurobond Issues in 2018
17.01.2018 USD 2bn 17.02.2028 5.125 99.411 5.20 UST + 266.7 bp  
24.04.2018 USD 2bn 24.10.2028 6.125 99.427 6.20 UST + 336.8 bp  
23.10.2018 USD 2bn 23.12.2023 7.25 98.917 7.50 UST + 447.5 bp  
14.11.2018 EUR 1.5bn 16.02.2026 5.2 99.73 5.25 MS + 456.4 bp  
Turkish Treasury's Eurobond Issues in 2017
23.01.2017 USD 2bn 25.03.2027 6 99 6.15 UST + 375.7 bp  
23.02.2017 USD 1.25bn 25.03.2027 6 103 5.65 UST + 320.5 bp  
11.05.2017 USD 1.75bn 11.05.2047 5.75 98 5.875 UST + 286.7 bp  
14.06.2017 EUR 1bn 14.06.2025 3.25 99 3.377 MS + 285 bp  
13.09.2017 USD 1.75bn 11.05.2047 5.75 101 5.70 UST + 300.5 bp  
Turkish Treasury's Lease Certificate Issues in International Markets in 2017
06.04.2017 USD 1.25bn 06.04.2023 5 100 5 MS + 285 bp  
source: treasury