MIDEAST DEBT-Turkey's debut Eurolira bond may trigger wave of issues

Wed Feb 6, 2013 9:20am GMT

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* Funds could finance long-term loans, large projects

* Would help banks eliminate maturity mismatch

* Banks taking first steps into investment-grade funds market

* Investors attracted to higher returns than dollar market

By Nevzat Devranoglu

ISTANBUL, Feb 6 (Reuters) - Turkish banks, which doubled their foreign borrowing last year, may issue billions of lira worth of lira-denominated Eurobonds in months ahead after a debut issue from Akbank sparked huge interest from foreign investors.

Turkey's third-largest private bank by assets last week issued the first lira Eurobond by a domestic borrower, raising 1 billion lira ($532 million) with a five-year maturity at 7.5 percent - the cheapest price ever paid by a Turkish bank on a lira bond at that tenor.

"Eurolira" issues are attractive for Turkish banks because they help issuers obtain long-term, cheap lira funding, avoiding maturity mismatches between banks' assets and liabilities. They are attractive for foreign investors as they are a chance to invest in higher-yielding lira assets via a familiar framework.

Foreign investors bought 99 percent of the Akbank issue, with British and U.S. accounts dominating at 46 and 38 percent respectively. Funds took 82 percent, banks and private banks 11 percent, and pension and insurance funds 7 percent.

"This transaction marks a new landmark in the sector. If we take account of the value added in terms of cost, funding and risk management I think we will see more Eurolira deals, firstly by banks and then by corporates," Akbank chief executive Hakan Binbasgil told Reuters.

Akbank issued Turkey's first Eurobond in 2010, and since then Turkish banks have borrowed $15 billion through foreign currency Eurobonds, he said.

"Eurolira issues may show the same performance in the medium term."

Globally in January, emerging markets local currency funds took in a cumulative $4.4 billion of net inflows, including money for Akbank's Eurolira debut, according to EPFR Global.

That accounts for more than 60 percent of overall allocations to emerging markets bond funds over the period, and is double the amount invested in hard currency funds.

MATURITY MISMATCHES

Lira-denominated Eurobonds may enable Turkish banks for the first time to finance long-term loans and large projects without a maturity mismatch, reducing interest rate-related fluctuations on their balance sheets.

Many Turkish bank liabilities are demand deposits and short-term time deposits, while their assets are generally medium- to long-term; their deposits have an average maturity of about 70 days, while loan maturities can be up to 10 years.

Turkey has won its battle against hyperinflation, which touched 125 percent in 1995, but inflation remained in double digits until 2004 and for that reason, Turks still shy away from making longer-term deposits.

Although the Turkish banking system has accessed wholesale funding markets to diversify its funding sources, much of that borrowing has been short- to medium-term, so maturity gaps have not been eliminated. Lira Eurobonds could help banks close the gap without incurring currency risk.

"We think this issue is important and in the coming period we expect other banks and companies to do similar issues," BGC Partners economist Ozgur Altug said of the Akbank bond.

"Longer-term lira funding will alleviate banks' dependency on deposits and reduce deposit competition in the market, which will be positive for the net interest margins of banks and reduce the maturity mismatch."

BGC Partners expects lira and dollar-denominated Turkish bank bond issues to reach $25.2 billion in 2013, including several billion lira worth of Eurolira issues.

REGULATORY ENVIRONMENT

Turkish assets are riding a wave of foreign portfolio investment as the country's deepening capital markets, robust growth and hopes for a second investment-grade credit rating attract fund managers.

Lira Eurobonds are a new option for investors following Turkey's debut sovereign sukuk issue last year, and amid a continuing slew of foreign currency-denominated Eurobonds from Turkish banks and corporations.

Foreign investors' local bond portfolios rose a net $16 billion in 2012 and net inflows to local bonds have already exceeded $1.5 billion this year. Foreigners own more than $60 billion of Turkey's $250 billion local bond market, according to Is Investment fixed income strategist Ugur Kucuk.

"With the Akbank deal we give them the opportunity to invest in lira in a way to which they are well accustomed...Their knowledge of Eurobond legal processes, even including a default, is much better than their knowledge of local bonds," he said.

Garanti and Isbank are widely expected to issue Eurolira bonds in the short term, having already sought authorisation from the Capital Markets Board for Eurobond issues in lira or other currencies. Banking sources say all of Turkey's major banks are at least considering lira Eurobond issues.

PENT-UP DEMAND

Turkey regained a sovereign investment grade rating for the first time in 18 years in November when Fitch raised it to BBB-. It now needs at least one of the two other major ratings agencies to follow suit for it to join benchmark investment grade bond indexes, a status that many funds require before investing in a country.

That means there is pent-up demand for Turkish assets.

"I believe the share of funds Turkey can get from the non-investment grade countries basket is already at the maximum limit. And the Akbank bond has investment grade rating from two agencies," Kucuk said.

"With this issue, Akbank may for the first time in history attract non-junk investors. This is a really important game changer, and this is itself a reason to invest in these funds."

The Akbank Eurolira bond was rated BBB by Fitch and is expected to be raated Baa2 by Moody's, both one notch above the lowest investment grade rating. Turkey's sovereign debt is rated BBB- with a stable outlook by Fitch, Ba1 with a positive outlook by Moody's and BB with a stable outlook by Standard & Poor's.

Akbank is 49 pct owned by Turkish conglomerate Sabanci Holding, affiliated institutions and individuals, and 9.9 percent by Citigroup. The rest of Akbank's shares are publicly traded on the Istanbul stock exchange.

It had mandated Bank of America Merrill Lynch, Deutsche Bank, J.P. Morgan, Citi and HSBC for the Eurolira issue.

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