As part of its 2019 external borrowing programme, Turkey’s Ministry of Treasury and Finance has mandated BNP Paribas, Citigroup and HSBC in order to issue US dollar-denominated eurobonds due 2024, the ministry said on July 2 in a written statement.
Turkey has also launched on July 2 bookbuilding to sell the papers, with the initial price guidance set at 6.65%, unnamed bankers told Reuters on July 2.
The bookbuilding was expected to be completed on the same day, they added.
“Turkey 10Y in dollars is up 8 price points since mid May, rallying 120bps in yield, to just over 7%. And given the limited FX reserve buffer, Turkey could do with some additional FX liquidity. Hearing lots of unsubstantiated rumours of potential management changes at the CBRT - or names being touted to replace incumbent governor Cetinkaya. Some of the names being mentioned seem to be wishful thinking/pie in the sky. One such name was Ceyla Pazarbasioglu, the ex-IMF official, and former BRSA official. This would be totally brilliant if true, and could be worth another 100bps+ off Turkey's borrowing costs,” Tim Ash of Bluebay Asset Management said on July 2 in an emailed note to investors.
The Turkish Treasury last sold $1bn worth of 10-year US dollar-denominated eurobonds at a coupon rate of 7.625% back in March (see table below) before the Erdogan government shut down the lira swap market in London with the aim of defending the local currency prior to the March 31 local polls.
Consequently, the Turkish Treasury and corporates have lost their access to the eurobonds market for a while.
The initial signal of the revival of foreign borrowing channels for Turkish issuers came on June 24 from a Global Capital report suggesting that President Recep Tayyip Erdogan’s Istanbul revote defeat could open a bond issuance window for Turkish borrowers.
On June 25, Turkish state-run lender Vakifbank announced it had completed the issuance of $150mn worth of five-year eurobonds via private placement to qualified institutional investors abroad.
Although the latest meeting held between Erdogan and his US counterpart Donald Trump in Osaka has triggered a rally in Turkish assets, Bloomberg reported on July 1 that the Turkish government has stockpiled crucial spare parts for the Turkish army’s US-made weapons in case Congress imposes sanctions over the purchase of S-400 missiles from Russia.
Meanwhile, on July 1 Moody’s Investor Services kept its negative tone on Turkey with a report suggesting that the outlook for Turkey's banking system remains negative, reflecting banks' funding vulnerabilities and difficult operating conditions that will put downward pressure on their financial strength over the next 12 to 18 months.
Moody’s expects Turkey's weakening economy will cause banks' profitability to deteriorate, driven by higher loan-loss provisions and slower loan growth.
The downside risk of more extreme policy measures in a stressed scenario, such as restricted access to foreign currency for depositors, has increased, the rating agency also said, adding: “The banks' funding is vulnerable, as it depends on short-term wholesale funding in foreign currency, with $64bn maturing in 12 months. Deposits in foreign currencies have risen to 54% of total deposits ($209bn), driven by local currency depreciation. Government policy has been unpredictable and the downside risk of more extreme policy measures in a stressed scenario, such as restricted access to foreign currency for depositors, has increased. Liquid assets ($100bn) and central bank foreign currency reserves ($27bn) are insufficient to withstand severe funding stress.”
Moody's expects financial difficulties at some large corporate borrowers and problems in the construction and energy sectors in the current recessionary environment. This will lead to a deterioration of the banks' asset quality, driven by higher loan-loss provisions and slower loan growth.
Banks are the key driver of economic growth in Turkey, but the capacity of the government to provide support in a crisis is limited, as indicated by the B1 sovereign debt rating, which has a negative outlook, the rating agency also noted.