Turkey is a relatively new market for sukuk issuance compared with Malaysia and the Middle East, but its Islamic banks are now at the forefront of subordinated sukuk structures, led by Albaraka Turk and its innovative murabaha issue.

Albaraka Turk is one of the four main Islamic banks in Turkey. It is part of Bahrain-based Al Baraka Banking Group but has an independent listing on the Borsa Istanbul too. Until this year, the Turkish bank had never accessed the debt capital markets, funding its impressive growth primarily through the bank financing market, complying with Islamic principles and subject to sharia law.

“As an Islamic bank, we are restricted in our access to funds, particularly long-term finance. We have been funding ourselves by opening branches and taking in deposits and we have used the banking market but we wanted to tap the capital markets too,” says Ayhan Keser, executive vice-president at Albaraka Turk.

Supporting growth

Under Turkish regulations, banks need a capital adequacy ratio of at least 12%. Albaraka Turk’s ratio was 13% but it was still keen to strengthen its balance sheet. “We are growing very fast and we wanted to boost our capital adequacy ratio to support that growth. We have 137 branches now and we are aiming for 200 by the end of 2015,” says Mr Keser.

Sukuk issuance is well developed in parts of the Middle East and Malaysia but it is relatively new in Turkey. A decree was issued relating to sukuk in 2011 and the Turkish treasury issued a sukuk last year. This paved the way for other institutions to follow suit, but the market is still very young.

In fact, Albaraka Turk first tried to access the sukuk market shortly after regulations were introduced in 2011, but global economic conditions were highly volatile and the bank decided to postpone its transaction until the environment was more benign.

In late 2012, the bank duly began to reconsider the market.  The economic climate had brightened and perceptions of Turkey had improved significantly. “Fitch upgraded Turkey to investment grade and the other rating agencies are likely to follow this year so the perception of our country and its banks was improving. There is also a lot more liquidity in the markets so we were hoping to benefit from that,” says Mr Keser.

The bank was keen to issue Tier 2 notes as these would increase its capital adequacy ratio, extend its long-term funding and facilitate its aggressive growth strategy. This was only the second ever international Tier 2 sukuk, with the market for sharia-compliant subordinated notes having opened in 2012.

The bank started working on the deal in the final quarter of 2012, and after its year-end results, it mandated BNP Paribas as global coordinator and bookrunner. Other lead managers were Abu Dhabi-based Al Hilal Bank, Qatar-based Barwa Bank, leading United Arab Emirates bank Emirates NBD Capital and Japan's Nomura.

“We wanted to have the Islamic banks in the lead manager team but we mandated BNP Paribas as our global coordinator because it has an Islamic fixed-asset team in Bahrain and it is particularly good at structuring and documentation. Nomura also has a fixed-asset team and we liked the fact that it is based in Europe and Asia,” says Mr Keser.

Innovative structure

Most Islamic banks issue so-called sukuk al ijara (lease-backed notes) but Albaraka Turk opted for an innovative murabaha (sale-and-repurchase) structure, which is more commonly used in the loan market. Murabaha sukuk tend to be less liquid than ijara, so there was some scepticism in the market about whether Albaraka Turk – and BNP Paribas – could pull off a successful issue.

Fortunately for the issuer, the sceptics were proved wrong. By the middle of April, once documentation had been completed and sharia approval granted, Albaraka set out on a comprehensive investor roadshow.

“We had held meetings with equity investors before but never with debt investors. They were asking about risk management, the long-term stability of the bank and asset quality. Fortunately, we are a strong, stable bank so were able to reassure them on all these points,” says Mr Keser.

The roadshow took in Geneva, Zurich, London, Abu Dhabi, Bahrain, Dubai and Qatar and discussions were held with Islamic and conventional investors. At the time, the bank was thinking of a $100m to $150m 10-year subordinated Tier 2 sukuk but demand was such that the issue size was raised to $200m and the deal was still twice oversubscribed. The profit rate (equivalent to a conventional coupon) was set at 7.75%, against initial guidance of 8%.

Broad interest

“Islamic investors came from across the Middle East but we also had surprisingly strong interest from private banks buying on behalf of conventional investors in Switzerland and the Netherlands. We also saw demand from some Islamic investors in the UK,” says Mr Keser.

Overall, 56% of the issue went to the Middle East region, 26% to mainland Europe, 10% to the UK, 5% to the Asia-Pacific region and 3% to the rest of the world. “The Asian component was small but we expect to increase trade with Asia so this was a good way of developing relations there,” says Mr Keser.

Albaraka Turk was very pleased with its debut sukuk in the international capital markets and intends to revisit the market soon. “We were particularly pleased with the interest that we saw in Europe and we were very happy with our bankers, particularly BNP Paribas. We intend to return to the market with a larger senior deal later this year or early next,” says Mr Keser.

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