* Funds could finance long-term loans, large projects
* Would help banks eliminate maturity mismatch
* Banks taking first steps into investment-grade funds
* Investors attracted to higher returns than dollar market
By Nevzat Devranoglu
ISTANBUL, Feb 6 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
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
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.
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.
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.
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.