LONDON, July 22 (IFR) - Yapi Kredi’s decision to cancel a bond issue this week following an attempted coup in Turkey has divided bankers, with some questioning the advice the lender was given, and others arguing that canning the deal was a sensible call.
Yapi called off its proposed US$550m 4.5% July 2023 issue last Tuesday, the day the notes were due to settle, and a week after they priced. The decision will have come as a major relief to those who bought the bonds as they were sitting on a five-point loss by the time the decision was made.
While the cancellation of a bond deal between pricing and settlement dates is not unprecedented, it is rare. Earlier this year Bahrain pulled a transaction following a downgrade of the sovereign, while Panama’s Tocumen Airport took the same action in the wake of money-laundering allegations against the owners of its largest duty-free shops.
Yapi’s case was different, with the decision to cancel based not on specific credit concerns about the issuer itself but because of a political crisis in the country, where President Erdogan on Wednesday declared a State of Emergency and re-asserted his authority after the failed putsch.
The attempted coup and its aftermath triggered a wave of selling in Turkish assets throughout last week with the lira hitting a record low against the US dollar and bond spreads ballooning.
The sovereign’s October 2026s widened by nearly 100bp before recovering to be about 65bp wider by Friday. Some bank and corporate bonds fared much worse. A decision by Moody’s to place the sovereign on review for a downgrade, which would take it into junk territory, and a one-notch cut by S&P to BB intensified the selling.
While these events did not trigger a material adverse change clause, Yapi decided the prudent decision was to cancel the deal. It cited “the recent negative developments and the ensuing market volatility” in a statement.
Yapi’s move followed discussions between lawyers involved in the transaction who believed that the disclosures in the original offering memorandum no longer accurately reflected the risks.
As such, for any deal to go through, a supplementary document detailing the new risks would have had to be sent to investors. Once sent, investors would have the right to reconfirm their orders for the transaction - or pull out. Given the circumstances, it was considered likely that many investors would have walked away.
Bank of America Merrill Lynch, Deutsche Bank, HSBC, ING and UniCredit were the leads.
Some bankers away from the deal, however, questioned the decision-making. “I don’t think this is the right thing to do,” said one, who believed the whole thing left a bad taste.
Another banker agreed the deal didn’t have to be pulled. “The key question is whether this is a MAC-type event. I’m not necessarily convinced they had to cancel it,” he said.
But he felt that Yapi took “the pragmatic decision” given it is a regular issuer, adding the bank’s actions “were very considered for the market”. He said bankers within his firm felt it was “the right thing to do.”
A third banker agreed the decision to pull was correct but said that while “you can’t really fault anyone, it was still embarrassing.”
Adding to the controversy was the fact that the bonds were underperforming even before the coup attempt on July 15 and then widened significantly thereafter. “Investors will be quite happy with the result,” said an asset manager who did not participate in the deal. “They saved five points.”
But other market players will be less pleased. “Net it is a small positive for the credit and investors got their money back,” said a trader. “But some dealers had been shorting [the bonds]. So it would have been a real disappointment for them to see [the deal] torn up.”
Even though the notes were cancelled, any trading losses or gains will be crystallised. “The key issue is if you are trading to balance net positions. That’s where you have issues as there’s nothing you can do,” said the second banker.
Yapi’s cancellation followed a decision by Sekerbank to postpone a roadshow that was due to begin on July 17 for a potential Basel-III compliant Tier 2 deal.
It also came following Moody’s announcement that it will review Turkey rating, which is currently Baa3. If the agency does downgrade the sovereign then its average rating will fall below investment grade, potentially triggering a wave of forced selling.
JP Morgan said this week that Turkey’s place in its key investment-grade indices would be at risk. It estimated that a cut could lead to investors dumping more than US$8bn of Turkish sovereign and corporate bonds.
A Moody’s downgrade of the sovereign could also have a significant knock-on effect on the banks, despite them being well-capitalised.
“The banks look pretty solid and have withstood other volatile periods. However, if the sovereign is downgraded then the banks will get crushed. It’s all looking a little ugly,” said a DCM banker. (Reporting by Sudip Roy and Robert Hogg; Editing by Matthew Davies)