* Strong Gulf demand for second Turkish sukuk
* Sukuk outperforming conventional bonds in secondary market
* Turkish laws allow attractive structures
* But Turkish non-financial issuers not coming to market
* Sovereign sukuk would be big boost; unclear when it will
By Shaheen Pasha and Rachna Uppal
DUBAI, Nov 3 Strong demand for a sukuk issued by
Turkish bank Kuveyt Turk last month underlines how Turkey may
become a major source of Islamic bonds for Gulf investors who
are keen to diversify geographically.
The $350 million sukuk, issued at par and carrying a profit
rate of 5.875 percent, was only the second sukuk issued from
Turkey. But it attracted orders totalling over $550 million --
and Gulf investors accounted for nearly 70 percent of final
subscribers, according to data released by the lead arrangers.
That may presage an important shift in investor interest.
Traditionally, Gulf investors have not focused on bonds from
Turkey, instead preferring debt from names in the immediate
region with which they are most familiar and comfortable.
Now, however, the relatively comfortable way in which
Turkey's economy is coping with global weakness -- combined with
strong appetite for sukuk in general, since they have proved
less volatile during this year's market instability than
conventional bonds -- may be changing Gulf investors'
"Turkish government USD paper and bank paper have been in
issuance for a number of years now, but have not been a focus of
MENA market players as there have been plenty of more locally-
issued and better-understood names out there," said Mark Watts,
head of fixed income at National Bank of Abu Dhabi.
"There are signs that this is changing as the ever-present
hunt for yield forces investors to widen their horizons. Sukuk
from Turkey is a relatively new phenomena for GCC investors...
Turkey's performance dynamics mean that any smart fund manager
will want to take a look at gaining exposure."
Sentiment towards Turkish debt, like that towards other
countries, has been hit by jitters over the European debt
crisis; five-year Turkish sovereign credit default swaps surged
to 251 basis points, 30 points wider on the day, in response to
news on Monday that Greece would call a referendum on its
But Turkey, which is rated BB, Ba2 and BB+ by the three
major rating agencies, slightly below investment grade, with
positive outlooks from all of them, has not seriously
underperformed Gulf credits. Its CDS are tighter than unrated
Dubai and BBB-rated Bahrain, though wider than AA-rated Abu
Dhabi and Qatar.
Also, the profile of sukuk investors favours a
hold-to-maturity investment which makes secondary market trading
of Islamic bonds less liquid, but also less volatile. This has
helped sukuk in general perform better than many conventional
bonds in recent months.
The yield on the first Turkish sukuk, a $100 million,
three-year bond issued in 2010 by Kuveyt Turk , an
affiliate of Kuwait Finance House , is down about 55
bps since end-2010 and up only 20 bps since the start of
September, when the Greek crisis began worsening further. This
is probably because there is minimal trading in the bond -- but
it still underlines how sukuk, with their more conservative
investor base, are less vulnerable to wide price swings.
By contrast, the yield on Turkey's 7 percent, $1.5 billion
conventional sovereign bond, issued in 2008 and maturing in
March 2019 , is up about 4 bps this year and 30 bps
higher than its level at the start of September.
"The pricing in the (conventional) bond market is difficult.
There is liquidity around in the sukuk market, so there might be
better pricing," said Debashis Dey, partner at law firm Clifford
Chance in Dubai.
A further attraction of Turkish sukuk is that legislative
changes by Turkey this year have created a relatively favourable
environment for Islamic debt issuance -- in some important ways,
more favourable than the environment in the Gulf.
For example, last month's sukuk from Kuveyt Turk was able to
combine asset-backed elements, including the sale and transfer
of tangible real estate to an onshore special purpose vehicle,
with asset-based elements; this increased the perceived safety
of the bond for investors. In the Gulf, factors such as high
land transfer fees make asset-backed deals more expensive and
Turkey's Bank Asya has completed roadshows for a
potential five-year sukuk of up to $300 million, and one United
Arab Emirates-based trader said there was "decent" interest from
Gulf accounts in a deal. The trader said any issue was likely to
come after the Eid al-Adha holidays in the region next week.
Asya has mandated Citi and UBS for the deal.
Another bank, Albaraka Turk , has awarded a
mandate for a sukuk of around $200 million which it wants to
issue before year-end, its general manager Fahrettin Yahsi told
Reuters in September.
For Turkey to become a major issuer of sukuk, however, it
will have to move beyond bank issues of sukuk to issues by a
wide range of companies. This may prove difficult, at least in
the short term with the global economy so weak; the
International Monetary Fund expects Turkey's economic growth to
slow to 2.5 percent next year from 7.5 percent this
"We have recently almost exclusively seen Turkish financial
institutions come to market to raise funds, either through
conventional or Islamic paper," said Rizwan Kanji, debt capital
markets partner at law firm King & Spalding, who advised on the
Kuveyt Turk sukuk.
"One primary reason may be because the Turkish banking
sector is highly regulated and supervised and therefore faring
relatively better than other non-financial sector-related
industries in Turkey."
Another big question is whether the Turkish government will
issue a sovereign sukuk, which could give a big boost to the
market by providing a benchmark off which other Turkish Islamic
debt could price.
"It's time for the Turkish government to issue a sovereign
sukuk as a starter and that will hopefully be followed by other
institutions and banks," said Mohieddine Kronfol, chief
investment officer at Franklin Templeton Investments in Dubai.
"Certainly if that happens it will be very good for Turkey
and very good for the Islamic banking industry."
A sovereign sukuk may be a step the country is not yet ready
to take, however. Prime Minister Tayyip Erdogan's ruling AK
Party, a socially conservative but economically liberal party
with roots in political Islam, might well favour such an issue,
and the government has previously indicated it could issue a
sukuk to diversify its funding options.
But issues such as pricing and Turkey's desire to satisfy
appetite for its conventional debt may continue to delay a
sovereign sukuk. Also, a need to accommodate secular sentiment
-- because of Turkey's secular tradition, Islamic banks are
referred to in the country as "participation banks" -- means the
government may wait a while.
"I think the fact that they are a secular nation and they
made an effort to leave religion out of financial factors has
been a contributing factor" to the lack of a sovereign sukuk so
far, Kronfol said.
"But it doesn't make sense, especially since you have
countries like Luxembourg and France issuing guidelines to issue
Legislation for a Turkish sovereign sukuk is in place but
there has been no clear signal from the government on its
intentions for the past couple of years. The Treasury's new
financing programme for 2012 includes the sentence, "Depending
on market conditions, new external or domestic debt instruments
may be issued."