Turkey is extending this year’s $35 billion market for Shariah-compliant debt to the borders of the European Union, selling its debut sukuk issue just as yields on Islamic bonds worldwide hit the lowest since 2009.
Turkey’s dollar-denominated 2018 Islamic bonds will yield between 190 and 200 basis points over mid-swap rates, or about 3 per cent, according to a banker involved in the deal who declined to be identified because terms aren’t public. Average yields on sovereign Islamic debt has fallen 102 basis points in 2012 to 2.88 per cent, the lowest in three years, according to the HSBC/NASDAQ Dubai Sovereign US Dollar Sukuk Index.
The only Muslim-majority country that’s also a candidate for European Union membership, Turkey has been diversifying international borrowing as European banks cut lending amid the debt crisis. Turkey, with an almost $800 billion economy, is also expanding into the Islamic debt market as Prime Minister Recep Tayyip Erdogan seeks to boost trade and diplomatic relations with Muslim countries.
“Options are limited for Islamic investors and this one would be attractive for diversification,” Thomas Christie, a fixed-income trader at Rasmala Investment Bank Ltd in Dubai, said in e-mailed comments on Monday. “Islamic investors will look to this in order to diversify holdings outside the usual” space of Gulf Cooperation Council nations, he said.
Interest Ban
Turkey’s issuance taps into increased demand for Shariah-compliant debt, or debt conforming with Islamic law. Sukuk sales worldwide have jumped to $35 billion this year, double the $17.5 billion raised in the same period of 2011, according to data compiled by Bloomberg.
At 190 basis points, or 1.9 percentage points, above mid- swap rates, Turkey’s sukuk bonds are priced to yield around 20 basis points more than its similarly dated non-Islamic debt, according to bankers including Yaser Abushaban, director of asset management at Emirates Investment Bank in Dubai. Turkey’s 2017 dollar bonds yielded 2.65 per cent at the close yesterday.
“This will be oversubscribed because it’s the first of its kind,” Abu Shaban said by e-mail yesterday. Turkey’s debt is likely to trade better than its BB ranking by credit rating agencies because “Turkey’s rating is not reflective of the market’s assessment of its credit quality,” he said.
The sale has been more than a year in the making. The Turkish government passed a law in February 2011 cutting the withholding tax on corporate sukuk to 10 per cent and exempting the sales from value-added, stamp and corporate taxes, which put them on a par with non-Islamic bonds.
Parliament then passed a law in June this year allowing the government to sell its first Islamic bonds, and the Treasury held meetings on the dollar-denominated issue with investors in the Middle East and Asia since September 10.
Turkey’s debt is rated BB by Standard & Poor’s, two levels below investment grade. Fitch Ratings and Moody’s rank the nation one step higher at BB+ and Ba1 respectively, their top junk grades. Its rating is five levels below Malaysia’s A- and eight levels below Saudi Arabia’s AA- at S&P.
“It’s by no means the deal of the century,” Ahmad Al Anani, a Dubai-based director for the Middle East at investment bank Exotix Ltd, said in a report on Monday. “We may be confusing rarity for diversity.”
Turkey suffers from a “double whammy effect” of being both sensitive to volatility from the EU, its largest trading partner, and to “political contamination” from its neighbours in the Middle East, Al Aanani said. He recommended Bahrain’s higher-yielding BBB-rated debt, which yields 290 basis points above mid-swaps, or 100 more than Turkey, as an alternative.
The extra yield investors demand to hold Turkey’s dollar- denominated bonds over US Treasuries rose eight basis point to 207 on Monday, according to JPMorgan Chase & Co’s EMBI Global Index. The emerging market average was 285.
Five-year credit-default swaps on Turkey rose four basis points to 144. That compares with 128 for Russia, 110 for Poland and 133 for South Africa. The contracts pay the buyer face value in exchange for the underlying securities or cash, and falling prices signal improving investor perceptions of a borrower’s creditworthiness.
Yields on benchmark two-year government bonds in liras rose 10 basis points to 7.33 per cent on Monday, paring their drop this year to 368 basis points. The lira was little changed at 1.7968 per dollar at 8:30pm in Istanbul.
Turkey is also planning a sale of lira-denominated sukuk. The government may sell 2 billion liras ($4 billion) of the debt this month, following the dollar-denominated issue, Ayhan Keser, deputy chief executive of Islamic lender Albaraka Turk Katilim Bankasi, said in an interview.
The sovereign sukuk issues are likely to be followed by similar sales by the nation’s Islamic banks. Asya Katilim Bankasi will sell sukuk bonds “in a short time,” Chief Executive Officer Abdullah Celik said in an interview with Bloomberg HT television in Istanbul on Sept. 5. Albaraka will raise as much as $750 million through syndicated financing and an Islamic bond this year, group Chief Executive Officer Adnan Yousif said in a telephone interview from Alexandria, Egypt last month.
“I believe the sukuk will be priced at the lower end and would not be surprised if there’s another downward revision.” Apostolos Bantis, a credit analyst at Commerzbank in London, said. “I expect demand to be strong because it’s a relatively small-size issue, and Middle Eastern and Asian investors will be willing to take on this risk.”
