Istanbul: Expect a flood of bonds from Turkish issuers in coming months.

Already, Turkish banks are on track to issue more than double the amount of foreign bonds this year compared to last year. The surge is likely to continue in 2013, as the country’s expected upgrade to investment status lures investors.

Lenders including Akbank and Isbank have sold some $5.9 billion in foreign currency-denominated bonds so far this year as they look to lengthen their debt maturities and diversify their sources of financing at low cost.

The figure is expected to rise to around $8.5 billion by the end of this year, bankers say, well over twice the $3.4 billion that Turkish banks borrowed abroad last year.

“Turkish banks want to take advantage of the abundant global liquidity. The nominal interest rates that Turkish banks pay are still very attractive for investors,” said Cihan Saraoglu, a banking analyst at Ekspres Invest.

Many of these investors “borrow money from the European Central Bank with a rate close to zero per cent and lend it to the Turkish banks with an interest rate of around 5-6 per cent.”

Firms outside the banking sector, which did not issue any foreign bonds last year, are also seizing the opportunity. Conglomerate Calik Holding and oil refiner Tupras mandated banks this month for planned dollar eurobonds.

AMPLE LIQUIDITY

Global liquidity became cheap and abundant after major central banks launched quantitative easing programmes in the wake of the 2008 financial crisis. On September 14, the Federal Reserve launched another stimulus programme, pledging to pump $40 billion into the US economy each month.

Turkey looks perfectly positioned to attract such money. It is a country which is still rated below investment grade, meaning yields remain relatively high and its supply of bonds to the global market has been moderate; but it has shown its ability to ride out the global financial crisis comfortably, meaning an upgrade appears increasingly likely.

This accounts for the massive investor demand for recent bond issues by Turkish banks. Akbank, Turkey’s fourth-biggest lender by assets, borrowed $1 billion on October 15 in two-part notes with yields of 3.948 per cent and 5.129 per cent. The issues attracted bids of $9 billion.

Isbank, Turkey’s largest bank by assets, borrowed $1 billion via the issue of a 10-year dollar-denominated bond at 6.0 per cent, attracting bids over $10 billion.

“The level of yields offered by Turkish banks and hopes for a credit rating upgrade for Turkey boosted demand for the eurobond issues,” said Kerim Rota, executive vice president in charge of treasury at Akbank.

“Although costs are slightly higher than current short-term borrowings...banks need this type of financing to manage their interest rate and liquidity risks.”

The average maturity of deposits in the Turkish banking system stands at around 70-75 days while the average maturity of mortgage loans is 3.5-4.0 years, leaving lenders with a potential maturity mismatch that they need to plug.

Turkish state-run lender Vakifbank and Finansbank , the Turkish unit of National Bank of Greece , have recently mandated banks for possible long-term bond issues in the overseas market.

Yapi Kredi, the Turkish bank owned by Italy’s Unicredit and Koc Holding, announced on October 22 that it was planning to issue foreign exchange or lira-denominated bonds or debt instruments worth up to $1.5 billion with a maturity of 10 years.

Fitch Ratings raised the long-term foreign currency default ratings of both Isbank and Akbank in December 2009 to BBB-, which is investment grade, helping them to attract larger investor bases.

“I expect the overseas borrowing to accelerate next year on prospects of a credit rating upgrade for Turkey,” said Saraoglu at Ekspres Invest.

Late in August, Fitch said it might raise Turkey’s long-term rating to investment grade if it made progress in restoring the economy’s potential growth rate, trimmed inflation to its target and cut the current account gap to a more sustainable level.

Currently, Fitch rates Turkey at BB+ with a stable outlook, one notch below investment grade. The agency said early in October it would hold a conference on Turkey’s credit outlook in Istanbul on November 8.

Expectations for an upgrade any time soon may be premature. Although the International Monetary Fund said this month that Turkey was on track to return to its long-term growth path after a slowdown, it predicted a current account deficit of 7.5 per cent of gross domestic product this year - high enough to remain a concern.

Annual inflation, around 9.2 per cent in September, is well above the central bank’s year-end target of 5 per cent; on Wednesday the central bank raised its inflation forecast for 2012 to 7.4 per cent from 6.2 per cent, and said inflation would still exceed its 5 per cent target at the end of 2013. Meanwhile, the other two big rating agencies do not appear as close as Fitch to upgrading Turkey.

However, Turkey’s microeconomic strengths may offset macroeconomic weaknesses in the eyes of investors. Turkish banks’ average capital adequacy ratio was 16.5 per cent in June, according to Turkey’s banking sector watchdog BDDK, far above the 8 per cent imposed by the Basel II international standards and the 12 per cent required by the BDDK.

“ Turkish banks overall compare favourably to developed market peers on a standalone basis, on the back of better credit matrices, supervision and corporate governance in particular,” said Gaurav Arora, director of regional debt origination at RBS.

Banks are expected to use proceeds from their international bond issues mostly to buy Turkish government debt and to generate more loans, though the central bank’s efforts to limit loan growth mean the impact on lenders’ profits may be modest.

“These resources can constitute a gain for banks only if the loans increase significantly. But loans will never again grow around 30-35 per cent,” said Recep Demir, banking analyst at Garanti Securities.

Annual loan growth in Turkey hit a spectacular 30 per cent in 2011 but had fallen to 10.6 per cent by early October, because of the central bank’s tight monetary policy to prevent overheating. The more moderate growth rate may also make foreign investors more comfortable with Turkish banks.

Anadolu Efes’ dramatic success with its issue last week was partly due to special factors: it was the first Turkish company outside the banking sector to sell 10-year bonds, and the first such firm with two investment-grade ratings to issue overseas.

“ There haven’t been any big blue chip corporates out of Turkey in the debt capital markets. The rarity value supported by strong fundamentals has captured the investors’ attention and their cash,” sai d Arora of RBS.