Halkbank’s $2bn eurobond move okayed as officials battle Turkey’s credit crunch

Halkbank’s $2bn eurobond move okayed as officials battle Turkey’s credit crunch
Finance minister Albayrak claims Turkey's economic coordination has been improved lately. The markets are not so sure.
By Akin Nazli in Belgrade January 18, 2019

Turkish state-owned lender Halkbank has received approval from the Capital Markets Board (SPK) to issue up to $2bn worth of subordinated bonds abroad in the year to January 2020, the bank said on January 18 in a filing with the Istanbul stock exchange.

The move will mark the first Halkbank eurobond issuance since its deputy general manager Hakan Atilla was arrested in the US in March 2017 for his role in a scheme to evade US sanctions against Iran. Halkbank remains exposed to potential fines from the US in relation to the case although there have been some signs that Ankara and Washington are resolving the multi-faceted diplomatic rift that upset relations so badly last year.

Halkbank shares were up 2.98% d/d to Turkish lira (TRY) 7.82 as of 16:00 local time on January 18 while the benchmark BIST-100 index on the Borsa Istanbul was up 0.98% to 97,766. The annual loss on Halkbank shares stood at 21% versus the 13% y/y decline on the index.

Stocks rally
The BIST-100 index fell to as low as 87,399 on January 3 from 91,270 at end-2018. However, it has experienced a strong rally since then, driven by the rising banking index. It took off after the central bank eased anxieties over monetary backsliding in Turkey by keeping its policy rate at 24% on January 13.

Turkey’s USD bonds made gains for a fourth straight day on January 18, Reuters reported.

Ankara 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 despite expensive costs.

In years of late, Turkey’s private sector has drawn on FX borrowings with the aim of benefiting from relatively low costs, but the sector’s burdensome FX debt stock has become the Turkish economy’s main woe since the collapse of the lira last year, which reached its worst point in August.

Pension funds and the unemployment fund have also been employed via indirect methods in the financing of public lenders.

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

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.

Flip side of credit crunch
“The flip side of the domestic credit crunch in Turkey is falling external financing to banks. Maturing bonds and loans are not being rolled over. Since July banks have seen $15bn in outflows,” Sergi Lanau of the International Institute of Finance (IIF) said on January 11 in a tweet.

“Banks’ total net debt (loan) redemption since May reached USD12.8bn, with the implied rollover ratio being 56% during this period,” Seker Invest said on January 17 in its equity strategy report for 2019.

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 with tempting real interest rates supported by open market operations.

Credit card ‘cavalry’
With Turkey sliding into a recession by most accounts, early January saw the executive president of Turkey, Recep Tayyip Erdogan, announce a number of ‘cavalry’ measures designed to help people ease their credit card payment and electricity bill burdens. State-run Ziraat Bankasi was to extend loans under favourable conditions to people with problematic credit card debts, Erdogan informed MPs of his ruling Justice and Development Party (AKP). Ziraat specified that it would offer loans for up to two years with a monthly interest rate of 1.1%. That would be half the rate other banks charge for loans with similar maturities.

The USD/TRY rate has returned to the central bank’s undisclosed targeted band of 5.20-5.40 since testing the 5.50 barrier on global worries, jitters over pre-election stimulus moves and renewed tensions with the US over Kurdish forces in Syria since the beginning of 2019.

As of 18:00 local time on January 18, the lira was stronger by 0.24% d/d against the USD, trading at 5.33.

Ziraat Bankasi, commissioned to restructure big Turkish football clubs’ debts as well as the credit card debts of citizens, said on January 18 in a bourse filing that on January 17 it sold TRY242mn worth of 84-day bills via private placement to qualified investors without holding a public offering, under the scope of its TRY17.5bn issue limit.

Another state-owned lender Vakifbank, which has joined Ziraat in restructuring credit card debts and cutting mortgage rates, said on January 14 in a bourse filing that it would hold a public offering over January 21-23 to issue TRY100mn worth of 210-day bills, under the scope of its TRY20bn issue limit.

The finance ministry said on January 16 that it issued €1bn worth of 2-year EUR-denominated domestic bonds with a 6-month coupon rate of 1.55% via direct sale to lenders. It did not elaborate on the composition of buyers.

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.

Raising less than redeeming
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.

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.

Turkey’s Eximbank issued $500mn worth of five-year bonds at an undisclosed cost, the bank said on January 17.

Ziraat Bankasi has, meanwhile, received approval from the Capital Markets Board (SPK) to issue up to $3bn worth of covered bonds abroad, the SPK’s weekly bulletin showed on December 14.

Ziraat has applied to SPK and the banking watchdog BDDK to issue up to $4bn worth of eurobonds, the lender said on January 11 in a bourse filing.

Vakifbank has decided to mandate its headquarters to issue up to $5bn worth of eurobonds, the lender said on December 14 in a bourse filing.

Berat Albayrak, 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 within this month.

‘Lamb barrelling’
“The early CBRT dividend transfer to the govt (TRY37bn) gave the government sufficient ‘lamb’ for plenty of pre-election ‘lamb barrelling’,” Tim Ash of Bluebay Asset Management said on January 16 in a note to investors.

Albayrak said on January 17 that the government was in talks to sell Samurai bonds.

Turkey was obliged to repay a total of $174.5bn in foreign debt within one year as of end-November, up from $173.8bn at end-October due to rising public debt, the central bank said on January 17.

As of the end of November, Turkish public lenders were obliged to pay a total of $28bn in foreign-debt within a one-year period while private lenders were obliged to pay $64bn and non-financial private companies were obliged to redeem $65.5bn.

Some good news is that the IIF has forecast a current account surplus of $5bn for Turkey in 2019, starkly contrasting with an expected deficit of $28bn in 2018, the institute said on January 15 in a research note.

But will the current account in fact bring not such good news? The central bank’s survey of expectations showed on January 11 that participants expected a $25bn deficit in 2019.

All in all, Turkey’s overall external financing needs for 2019 are expected to range between $170bn and $200bn. The market does not yet see the government providing a satisfying plan to dig the economy out of its hole. Rather it is reactive, at times incoherent moves that are being perceived, while the budget and debt metrics deteriorate, fuelled by what appears to be severe recessionary conditions at home and an unfavourable global environment.

“I don’t think there are any secret deals [with the IMF to be announced after the March polls]. But I think it would be the most logical option for Erdogan. It would bring a major positive confidence shock, reduce the cost of borrowing for Turkey and soften the looming hard landing for the Turkish economy,” Ash of Bluebay said on January 3 in a tweet.

Emergency economic powers
Commenting on emergency economic powers granted to Erdogan this week, Liam Carson of Capital Economics wrote on January 18 in a research note: “More than anything... it signifies a further centralisation of power in Turkey, something we have warned about before. And the president’s response to the lira crisis, which largely consisted of a diatribe against foreign speculators, is an indication that he may not take the action needed to stabilise the economy and soothe investors.”

“It’s not exactly clear what new powers have been conferred but it may be a sign that policymakers are increasingly concerned by the economic fallout from last year’s currency crisis—and particularly the lingering threat of problems in the banking sector.”

The move to give Erdogan more economic powers also begs the question of how much more power can he need. Turkey stands at 111th place among 113 countries ranked on the World Justice Project’s 2017-2018 Rule of Law Index’s sub-category for Constraints on Government Powers, released in February 2018 (before the June 24 snap polls, after which constitutional changes made Erdogan executive president, granting him sweeping powers).