LONDON, Nov 1 (Reuters) - SC Lowy and Houlihan Lokey are among prospective international players scouting for business opportunities from Turkey’s attempts to clean up its multibillion-dollar bad-loan market.
Turkish banks are scrambling to meet a year-end deadline to prepare loans for sale or restructure them. In September, the government ordered banks to write off $8 billion in bad loans and set aside loss reserves, a move aimed at reviving the spluttering economy.
President Tayyip Erdoğan has frequently pushed Turkish banks, especially those in the private sector, to lend more to help the economy hit his ambitious 5% growth target next year.
Bank need help to clean up their balance sheets. Foreign debt traders and advisory firms have until now seen few openings in a relatively quiet secondary loan market. Much corporate debt is held by local banks, until now unwilling or unable to sell because of regulatory hurdles.
As much as $50 billion in distressed debt is estimated to sit on banks’ balance sheet, roughly 8% of the total loan market.
“I’m hopeful we can do a deal before the end of the year with Turkish banks,” said David Beckett, head of Europe for SC Lowy, a debt trader with a sell-side business which also invests from its own balance sheet. “Banks are taking indications on potential deals and discussing liquidity options with us and that’s a good first step.”
SC Lowy and other traders have already done deals with international banks but not local banks, which hold the largest slice of the debt but have a hard time selling it due to archaic rules. For instance, Turkish banks selling assets at a discount can risk falling foul of embezzlement rules.
Efforts are underway to make it easier for banks to restructure bad debt. In July a draft law was submitted to Turkey’s parliament introducing tax exemptions to loan restructurings and legal protection for bankers.
After years of gorging on cheap foreign credit, Turkish companies, particularly in the construction and energy sectors, began to struggle after sharp falls in the lira 2018 and 2019. That has hit local banks with exposure to those companies.
“FX volatility makes it more pressing for Turkish banks to want to offload,” said Beckett. “That also means that, unlike Europe, amend and extend does not work in Turkey as currency volatility is a big issue.”
Foreign firms see opportunities in Turkey’s energy sector, which accounts for around half of the $8 billion in debt. Creditors in talks to sell chunks of their portfolio to prospective foreign buyers include those of power firm Yeni Elektrik as well as of Gama Holding, a diversified company with an energy business, say sources.
“Electricity tariffs have gone up 30% over the past two quarters since the elections in late March,” said Joseph Julian Co-Head Middle East, Turkey & Africa at Houlihan Lokey, an investment bank. “So, investors are starting to feel like this may not be a bad time to begin to look at distressed assets and loans in the energy sector.”
Some investors remain wary because of Turkey’s increasingly tense relationship with the United States in the wake of Ankara’s military offensive in northern Syria. State-owned lender Halkbank is involved in a U.S. court case over U.S. sanctions on Iran, and the U.S. House of Representatives this week backed legislation calling on President Donald Trump to impose sanctions on Turkey.
Analysts say the Halkbank sanctions underline the risks for other Turkish banks if further penalties materialise that restrict banks’ access to dollar funding.
Sanctions from Washington would add “complexity and diminish the probability of non-resident participation in resolving domestic problem loan issues,” said Regina Argenio, associate director at Standard & Poor’s.
Still, Hermes Investment Management sees the debt clean-up as a potential opening to buy Turkish bank bonds. It currently has most exposure to Akbank and Garanti Bank but sees possible interest in VakifBank if risk can be removed from the portfolio, said Filippo Alloatti, senior credit analyst at the firm.
“In general, the net foreign asset of Turkish banks is increasing and that’s positive for the creditors of those banks,” he said. (Reporting by Tom Arnold; Editing by David Gregorio)