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Western EuropeSeptember 1 2015

Turkey's corporates embark on search for capital

The fight to fund Turkey's large corporates is hotting up, as these businesses increasingly turn to capital markets, foreign banks or alternative lenders to fulfil their financial needs.
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Turkey’s economy is characterised by high spending and low savings. This trend has been evident for some years. But as banks are required to invest more capital into the Turkish economy each year, it would seem that gross domestic product (GDP) growth will also have to come through the local and international capital markets – at least in the medium term.

“Deposits are the biggest bottleneck in the Turkish banking system,” says Hüseyin Kadri Samsunlu, chief financial officer at infrastructure investment company Akfen. “The domestic savings ratio is not growing. What that means is that Turkish banks, which are our main funding source, are going to be dependent on international money [to finance economic growth].”

From 2007 to 2014, credit growth in the Turkish banking system was 23% in Turkish lira terms, but only 17 percentage points of that were covered through new deposit growth, according to Mr Samsunlu. The remainder came from international banks. In the same period, Turkey’s GDP grew by 11% in lira terms.

Foreign funding to Turkish banks increased from $50bn in 2007 to $175bn in 2014, and local banks on-lent the funds to Turkey’s economy. “The Turkish banking system facilitated the improvement of the infrastructure in Turkey as well as growth of companies such as Akfen,” says Mr Samsunlu. “Turkish banks are there but they won't be enough in the mid to long term. Everybody should be prepared to look for alternative funding sources.”

And so Akfen did. The business, with a Tl2.11bn ($728.75m) market capitalisation, listed on the Borsa Istanbul, found alternative sources in the local bond market as well as through international transactions for specific projects or portfolio businesses such as its seaport. In 2013, Akfen was the first Turkish corporate to issue an infrastructure bond in the international markets – $450m for its seaport company Mersin International Port.

Battling banks

“A lot of corporates want to borrow in hard currency either [to match their] cash flows or just for seeking a lower cost alternative to Turkish lira funding,” says Sadık Çulcuoğlu, head of capital markets advisory at Yapı Kredı Yatırım. “As they are not permitted to issue hard currency bonds in the domestic market, the only options are to borrow from banks or to issue Eurobonds.”

Traditionally, corporates used to go to their relationship banks to ask for foreign exchange (FX)-denominated loans, as requirements by the Turkish central bank only allow the issuance of domestic bonds in Turkish lira. “The market is very competitive – almost in all products,” says Atıl Ozus, chief financial officer at Akbank, who adds that solving the needs of the customers and relationship management are key priorities at Akbank. “If we were arranging an FX loan, we would also be looking to provide hedging opportunities for the risk related to interest rates and foreign exchange,” he says.

But Akbank is not the only bank in the corporate banking business. Competition is fierce at times, putting pressure on bank margins, while offering attractive lending rates to clients.

Murat Dogan Erden, group chief financial officer at telecommunications provider Turkcell, the country’s largest non-banking business, sees the market’s competitiveness. “The appeal of having a good corporate name such as Turkcell on [banks’] portfolios brings attractive deals to us,” he says. “But we are rather a long-term relationship-oriented organisation. It is crucial for us to establish and maintain long-lasting relations with our business partners – especially with the banks we work with, both locally and internationally.” 

The international edge

As if local banks were not enough competition, international competitors are also seeking to serve Turkey’s corporates. The country’s seven largest businesses – based on a mix of sales, profits, assets and market value by Forbes magazine – are all banks, and they are increasingly seeking international financing sources to meet lending demands.

“In terms of the air finance sector, the local banking sector is keen to work with Turkish Airlines, and we have usually been offered commercial junior loans that constitute 15% of the total financing amount of the asset from the local banking sector,” says Coskun Kilic, the chief financial officer at Turkish Airlines. “Since our Turkish Airlines finance team is working globally with international entities all over the world, there is a huge competition among them, and local banks do try their best in this big competition to be able to take a place in the financing of the company.”

International banks in particular offer attractive deals, he adds, due to their expertise and professionalism in the air finance sector. “We also have open credit facilities in almost all major banks in Turkey, and are keen to keep them live,” says Mr Kilic.

“It is difficult to maintain your corporate clients and satisfy them because there is so much competition,” says Hüseyin Özkaya, chief executive at Bank Audi's Turkish  subsidiary, Odeabank. “And not all banks even have a presence in Turkey. There are a lot of multinational banks, which can lend or provide some trade finance also from outside of Turkey. You have to really work hard to bring a comprehensive package [to a corporate].”

Banking for the segment of slightly smaller commercial clients is comparably easier, says Mr Özkaya, because there are significantly more commercial than corporate businesses in the country, and because there are “fewer banks with the physical presence, products and the balance sheet size to meet the requirements” and to have the “credit assessment skills” to look at these businesses.

Ömer Aras, chairman and group CEO at Finansbank, says: “Corporate banking, especially financing the large infrastructure investment projects, requires a strong capital base that can only be sustained by profitability. The profitability challenge is key for the Turkish banking system because it is a prerequisite for loan growth – which is a prerequisite for economic growth.” 

The riskier end

International financial institutions (IFIs) active in Turkey, such as the European Bank for Reconstruction and Development (EBRD), are also actively seeking to support corporate financing projects such as quasi-equity subordinated debt offerings and infrastructure public-private partnerships.

“Our priorities are at the riskier end of the market,” says Jean-Patrick Marquet, the country director for Turkey at the EBRD. “We will, for example, offer very long-dated loans to big infrastructure projects, subscribe to medium-term lira bonds of corporates such as YDA, or consider equity or quasi-equity investments.”  

Conglomerate YDA placed a Tl200m bond on the Borsa Istanbul in December 2014 through its construction and infrastructure subsidiary. With three years' maturity, the transaction was the longest ever tenor for a local currency bond issued by a mid-size Turkish infrastructure firm at the time. The EBRD supported the transaction with a Tl40m investment, seeking to attract local banks into partnerships in the same projects – with growing success.

“In the past, Turkish banks were not very active in financing infrastructure projects, which inherently require longer term financing,” says Mr Çulcuoğlu at Yapı Kredı Yatırım. “But over the past few years, we have seen multi-billion-dollar projects solely financed by Turkish banks. [The market is] highly competitive for these high-quality infrastructure assets and [Turkish banks] usually beat their international counterparts.” 

A question of competition

And bank finance has its advantages. Banks offer funding of up to 10 years, while interest rates, depending on the business, could also be more competitive. “Getting funding from a Turkish bank is an easier process because they know us, we have a long history with them, our credibility is very high,” says Mr Samsunlu at Akfen. “This makes the due diligence process shorter. That said, the cost base is not cheap. Since the deposit base is scarce, there is a fierce competition among banks to attract deposits from Turks, which is increasing their cost base.”

Apart from loan market products, Türk Ekonomi Bankası (TEB) is offering corporate clients alternative solutions in the international market in co-operation with its parent BNP Paribas, according to Ümit Leblebici, general manager at TEB.

“The openness of Turkish corporates to tap alternative debt capital markets and financial market instruments is a function of what they can and cannot access in the local markets. There is strong liquidity in the domestic market that is deployed to the corporates in relatively borrower-friendly terms – which sometimes [is] a constraint in use of international instruments,” he says. “As we see Turkish corporates and groups expanding their operations outside of Turkey, organically or via acquisitions or partnerships, I believe there is going to be an increase in the use of investment banking products.”

Mr Çulcuoğlu says: “If a company is in the need of hard currency funds and is thinking about capital market solutions, be it just for diversification reasons, we advise them to go to the international bond market if their fundamentals are strong.” However, he adds that Turkish corporates might still find it challenging to access the international Eurobond markets and are more likely to sell international private placements or local currency bonds.

Only in March this year, Turkish Airlines sold its first capital markets deal in the US in the form of an enhanced equity trust certificate, with the aim of diversifying its funding sources, according to Mr Kilic. “Owing to Turkish Airlines’ fleet growth in the past decade and the fleet expansion plans going forward, we are being offered numerous attractive deals from international money and capital markets,” he says. 

Local bond markets

Meanwhile, Turkey's need for local debt financing options outside of the banking sector is growing. Local debt capital markets allow companies to raise Turkish lira-denominated bonds for two to three years, but so far market liquidity is poor.

“At this point in Turkey, there is no secondary market,” says the EBRD’s Mr Marquet. “Banks just buy the paper and hold it to maturity. What we would wish to see is a secondary market, where bond holders can trade the paper.” The majority of bonds listed on the Borsa Istanbul are not public transactions but so-called ‘issues for qualified investors’, requiring minimal disclosure.

Akfen is one of the few issuers that has chosen to sell its bonds publicly, as it already publishes monthly and quarterly results because of its stock market listing. Public listings allow the issuer to sell a percentage of its bonds to individual investors through an intermediary bank. In all its bond issues, Akfen has earmarked 25% of the issue for retail investors.

For the sake of disclosure and a better outlook for secondary market trading, the EBRD is looking to promote issuance of publicly listed bonds over private issues. Average bond sizes in the Turkish market are Tl200m to Tl300m. Still, for the largest of the large corporates, these sizes remain just too small. As of yet, Turkish capital markets still lack the debt and maturity necessary for aircraft financing, according to Mr Kilic, who adds that Turkish Airlines is “very closely following the developments and opportunities".

Overall, the outstanding amount in the Turkish local debt market was about Tl45bn as of mid-August 2015, according to Mr Çulcuoğlu. This compares with Tl2.6bn at the end of 2010, underlining a recent trend to more local bond issuance.

“Every time we diversify our funding sources, we improve our borrowing costs,” says Mr Samsunlu, be it even just because the banks see that other parties are also taking a proportion of debt in the business.

“For a high-quality company, a bank credit might still be about 100 basis points cheaper [than the local debt markets],” says Mr Çulcuoğlu, who adds that this obviously depends on the timing of a bond issue and the volatility of the underlying government bond yields.

A glance at the balance sheets of Turkish companies uncovers that the Turkish bond market is not yet a big source of funding, according to Mr Ozus. The bank loan is still the most used product, but there are widespread hopes that efforts to diversify corporate funding will pay off in the long run.

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Read more about:  Western Europe , Turkey