Turkey’s capital markets "rehabilitation" continues as QNB Finansbank sells $500mn eurobond at 6.95%

Turkey’s capital markets
Economic imbalance? What economic imbalance? Devotees of President Erdogan seen at a campaign rally in Ardahan, northeastern Turkey, on March 1.
By Akin Nazli in Belgrade March 1, 2019

Turkish private lender QNB Finansbank has sold $500mn worth of eurobonds due 2024 at a final yield of 6.95% against $1.7bn of demand, Reuters reported on March 1.

On February 28, it was reported that initial price guidance at a roadshow for QNB Finansbank’s 5.5-year eurobond was in the low 7%s.

The lender’s senior bond issue is the first from a Turkish bank since March last year.

Qatar National Bank (QNB) owns 99.88% of QNB Finansbank with just 0.12% of the bank’s shares on free-float, according to the KAP public disclosure platform. The National Bank of Greece (NBG) agreed to sell its shares in Finansbank to QNB for €2.7bn in 2015NBG bought Finansbank for $2.8bn from local businessman Husnu Ozyegin in 2006.

QNB Finansbank was Turkey’s fifth largest private bank by assets as of end-September while Moody’s Ratings rates the lender at Ba3/Negative and Fitch Ratings rates it at BB-/Negativeaccording to an investor presentation on the lender’s 2018 financials.

The bank was Turkey’s eighth largest lender with TRY181bn worth of total assets at end-September, according to latest data from Turkish banking association TBB.

QNB Finansbank’s shares were down by 0.90% d/d to TRY7.74 as of 14:00 local time on March 1 while the Borsa Istanbul’s benchmark BIST-100 was down 0.24% to 104,278. The annual gain on QNB Finansbank shares stood at 24% versus the 14% y/y increase on the BIST-100.

Lira tests the 5.36s
The Turkish lira (TRY) tested the 5.36s against the USD on March 1 during a global sell-off in emerging market currencies. The USD/TRY rate saw as low as the 5.17s on January 31 and lira has weakened since then. It remains around one-third weaker against the dollar compared to where it stood at the outset of 2018. Lira bears have since February 18 been pushing against the Turkish central bank’s 5.30 barrier set via open market operations on the Borsa Istanbul’s derivatives market.

“After a dearth of supply of Turkish paper in the last half of 2018 as political problems turned into financial problems, issuance from the country has 
been staging a revival in 2019. Two Turkish issuers were back on screens this week as the country continues its rehabilitation in the capital markets. QNB Finansbank printed with a 10bp new issue premium, according to one lead manager, a level which he said shows how far Turkey has come since the sovereign paid up 50bp for its post-volatility return to market trade in October,” Francesca Young of Global Capital commented on February 28 in a report entitled “Turkish bond space springing back to life”.

Also on February 28, Turkey’s largest conglomerate Koc Holding said in a bourse filing that it has mandated BofA Merrill Lynch, Citigroup Global Markets and JP Morgan Securities to arrange a series of investor meetings in Europe and the US, to start from March 1, for a eurobond issue worth up to $1bn.

Koc is seeking to sell five- or seven-year dollar RegS/144A benchmarks, Global Capital reported on February 28. An unnamed EM investor told the publication that given recent Turkey volatility, he would want to see a much larger premium over the Turkey curve for the longer of those two options.

On March 1, Adnan Yildirim, general manager of Turk Eximbank, said in a press release that across February 26-28 he held a series of investor meetings coordinated by Citibank in London with Alliance Bernstein, Bluebay, Wellington, Ashmore, J.P. Morgan Investment Management, Franklin Templeton, Investec, Pictet and Insight. Investors showed high interest in Turk Eximbank’s upcoming eurobond sale, Yildirim added.

Last month, Turk Eximbank issued $500mn worth of 5-year eurobonds.

On February 28, Turkcell said in a bourse filing that it has applied to the Capital Markets Board (SPK) to issue up to $750mn worth of eurobonds.

Watchdog knocks back Isbank’s dividend request
Meanwhile, the Turkish economy keeps throwing up idiosyncrasies. On February 28, private lender Isbank said in a bourse filing that banking watchdog BDDK has not approved its application to distribute dividends from its 2018 profit.

Many Borsa Istanbul-listed companies are deciding not to distribute dividends this year. They are instead aiming to strengthen their capital structures in advance of the worst of what is expected to be a tough year. However, the Isbank case was the first in which the BDDK directly intervened in a financially healthy lender’s dividend distribution decision.

Also on February 28, Ugur Gurses, a former central bank official and a famous economist no longer welcomed by the Turkish mainstream media that is heavily biased in favour of the Erdogan administration, wrote in a news analysis for Deutsche Welle Turkish that the BDDK last week summoned top managers of 13 lenders and “requested” that they employ annual credit growth at a minimum 15%. Gurses also noted that Turkish lenders are under pressure to cut lending rates, not to fire personnel and to boost lending.

Local lenders have cut lending rates due to pressure from government officials but they were hesitating to extend loans at those “lowered” rates. However, it seems the government is solving that problem by specifying a loan growth target for the bankers.

Gurses also claimed that around 10 deputy general managers and board members of local lenders had to resign recently since they had not obeyed the BDDK’s ‘requests’.

The Turkish government, and lately private companies, have been pleasing global bond investors with incredible returns, with nobody bothered by rising FX and interest rate risks faced by the Turks because they have apparently proven themselves by not clocking up defaults on their borrowings from abroad.

However, the easing in global liquidity seen since the beginning of this year could be coming to an end. Data from the Institute of International Finance (IIF) shows investor money flows into emerging markets have slowed in recent days after scaling dizzying heights in mid-February thanks to Chinese equities attracting foreign funds, Reuters reported on February 28.

Major asset managers and investment banks such as JPMorgan, Citi and BlueBay Asset Management have ramped up their exposure to emerging markets in recent weeks. However, the IFF found that flows to emerging market assets in mid-February after a dovish turn by the US Federal Reserve had soared close to levels last seen in late January 2018—days before emerging and global markets suffered hefty falls. Flows have now cooled, IIF chief economist Robin Brooks told Reuters.

Taking China equity flows out of the mix, recent inflows look a lot less dramatic, with mid-February levels coming in at around half the total enjoyed in January 2018, the IIF found.

Not joined the party
Foreign investors have not joined the party in lira bonds which led the rally in emerging market bonds in recent months, although they offered plenty of praise for that rally, Fercan Yalinkilic of Bloomberg tweeted, sharing quotations from Bloomberg’s Turkish terminal.

Recapping on how events have played out since a year ago, in February 2018, the IMF warned that the Turkish central bank’s monetary policy should be tightened to deal with rising inflation while the current account deficit was growing and the budget metrics were deteriorating. Vulnerabilities included large external financing needs, limited foreign exchange reserves, increased reliance on short-term capital inflows, and high corporate exposure to foreign exchange risk, the Fund pointed out.

“They tell us to slow down growth,” Cemil Ertem, an advisor to Turkish President Recep Tayyip Erdogan, said in a response to the IMF’s warnings. “We’re going to do the exact opposite,” Ertem added.

In March 2018, then Deputy PM Mehmet Simsek, a former Merrill Lynch and UBS banker, joined the IMF and rating agencies in warning that winter was coming. Simsek caught a harsh reaction from Erdogan.

By April 2018, the governing coalition had been convinced that the economy was close to a meltdown and called snap parliamentary and presidential elections for June.

In August 2018, with Erdogan safely re-elected, and indeed enjoying sweeping new powers as the country’s first ever executive president following referendum-approved constitutional changes, the Turkish lira was crushed. At the beginning of September, newly-appointed economy chief and Erdogan’s son-in-law, Berat Albayrak, convinced London investors that Turkey would see a hike interest rates. The central bank then employed a huge 625bp rate increase on September 14.

Main difference
The Erdogan government and global finance have more or less been in harmony ever since despite some question marks over the election economy prepared in advance of the local polls scheduled for March 31. The main difference between February 2018 and February 2019 is that the Erdogan government is currently offering really high real rates at double the EM average to foreign investors. The cost of that is a choking of the domestic economy. The current account was in surplus between August to December last year but the price is a deep recession. After official inflation hit 25%, elements of the free market were dismantled to deal with it.

Since October, finance minister Albayrak has made big moves for eurobonds while cutting domestic borrowings. Exchange rates and lira borrowing rates are under pressure; that’s maybe a reason behind the limited foreign investor interest in lira bonds. Liquidity has lately been eased but without a rate cut and fiscal spending is booming in the election build-up.

Currently, official inflation stands at around 20%, the budget metrics are deteriorating further and the external financing needs for 2019 remain at around +$200bn at least.

On top of that, the FX reserves are still limited compared to the scheduled foreign debt redemptions of more than $170bn across the next 12 months despite a limited rise thanks to the Treasury’s eurobond sales, reliance on short-term capital inflows is still high and a possible Nato row with the US over S-400 missile purchases from Russia, or some other external global political risks, could easily hit sentiment. Corporate exposure to FX risk is expanding following a limited decline seen after the August currency nadir.

With or without an IMF deal following the local elections at the end of the month, the cost to be paid by regular Turks for the skewed economic calculus will prove far higher compared to what they have been paying since last year—no scheduled election looms on the horizon to push the government to grant some stimulation.

No IMF deal to make for an interesting experience
The option of there being no deal from the IMF—Erdogan makes steering clear of the IMF a point of pride—will be an interesting experience both for Turks and global observers. Moreover, there is a big question mark of how the option of an IMF deal could even be in play as Erdogan is not open to any external auditor having a good look at the books.

“In addition to Argentina and Turkey, other countries including Chile, Indonesia, India, Mexico, the Philippines, Russia, South Africa and Thailand raised rates in 2018. The moves represented an attempt to stabilize their currencies as financial inflows to emerging market countries dried up. The pause in the Fed’s interest rate cycle may give some of these countries room to tailor monetary policy to domestic economic conditions,” Moody’s Investor Services said on February 28 in its Global Macro Outlook 2019-20.

The rating agency expects the Turkish economy to contract by 2% y/y in 2019.