When fears over a Chinese slowdown and the US interest rate cycle coupled with domestic political uncertainty to hit the Turkish lira, BNP Paribas proposed a long-term bond to re-establish the sovereign's credentials.

Emerging markets wobbled in January, as emerging markets do, and one of the worst affected was Turkey, with its sizeable current account deficit and its political troubles. Rather than cowering in the shadows, however, Turkey responded by issuing its longest ever bond, in an audacious transaction masterminded by BNP Paribas.

Emerging market securities have had a good run since the financial crisis, reflecting rates of economic growth that were painfully lacking in more developed economies. If bond investors were not attracted by the growth itself, they certainly were by the yields, which compared very favourably with anything on offer in the developing world.

Former US Federal Reserve chairman Ben Bernanke upset that particular apple cart in May 2013, when he said that the quantitative easing (QE) taps could start to be turned off soon. Since QE tapering would push US interest rates higher and strengthen the dollar, the news prompted a sell-off in emerging market stocks and currencies.

Mixed picture

By the end of 2013, it had proved a mixed year for emerging market debt. While investors suffered the first year of negative returns since 2008, it was a record year in the primary market, with total emerging market bond issuance of $463bn (in 2012 it had been $454bn), according to Dealogic. Investors continued to be attracted by yields and, in general, improving fundamentals.

Though few bankers expect this year to be quite as busy in terms of new issuance, 2014 got off to a flying start with many emerging market sovereigns choosing to move early. One was Turkey, which priced its biggest ever issue, a $2.5bn 10-year bond yielding 5.85%. It was four times oversubscribed. The very next day (January 23), however, it was trading two points lower thanks to bad news from China.

Weak Chinese purchasing data was compounded by the start of QE tapering, an Argentine devaluation and political worries in Thailand, Turkey and Ukraine, to set off a fresh flight to quality. The Turkish lira, among others, took another battering, and the Turkish central bank more than doubled its repo rate to 10%.

“There was a whiff of panic in the markets,” recalls Nick Darrant, head of the central and eastern Europe, Middle East and Africa syndicate at BNP Paribas. “So BNP Paribas went out on a limb.”

Emerging market headwinds

The bank had been a vocal proponent of the appeal of emerging market debt throughout 2013, Mr Darrant notes. “Yes, emerging market growth was under pressure, as in most parts of the world, and some very high forecasts had been revised down,” he says. “But emerging markets still offered a lot versus the developed world.”

Rudyard Kipling’s poem, If, sprang to mind, he says. (It lauds the virtue of keeping your head when all about are losing theirs.) “We felt that now was not the time to write off an entire asset class.” This was not like 1998, when emerging markets were, to a large extent, still defined by contagion, Mr Darrant maintains. “The name of the game now is differentiation within emerging markets.”

Turkey has one of the more vulnerable economies due to current account deficits, and growing suggestions of political instability. However, Mr Darrant argues that it remains a vibrant, young, growing economy, in a pivotal position on the bridge between Europe and Asia. “To suggest that overnight it is no longer a place to invest is absurd,” he says.

Alexis Taffin de Tilques, BNP Paribas’ head of central and eastern Europe, the near East and Africa debt capital markets (DCM), points out that Turkey is a member of the North Atlantic Treaty Organisation and is host to a number of US air bases. “It has borders with Iraq, Iran and Syria, and is critical for the stability of the region,” he says. “It’s too important to the world community to be allowed to get into serious trouble.”

The prospect of Turkey being denied access to the financial markets would qualify as serious trouble. Turkey and Poland are the region’s largest borrowers (excluding Russia) in international markets. “So don’t underestimate the importance of their access to market,” says Mr Darrant. “If Turkey has no access, that casts a shadow over the broader asset class.”

Matters were not helped by news that ratings agency Standard & Poor’s, which has given Turkey an unsolicited BB+ rating, had placed the sovereign on 'negative' outlook. Turkey is rated Baa3 and BBB- by Moody’s and Fitch respectively. What’s more, this is very much an election year in Turkey, with local elections in March, presidential elections in the summer and a general election later in the year.

Appetite for Turkey

In spite of all this, appetite for Turkey’s bonds seemed to be returning. BNP Paribas is an active secondary market trader in Turkish debt and it could see some very strong buying from institutional investors at the long end. Turkey normally issues at two- to three-month intervals, but in the first week of February, BNP Paribas pitched the idea of returning to market almost immediately.

“We made a presentation to the Turkish Treasury, saying we were confident that we could place a 30-year issue in the market, and recommending that we proceed the following week,“ says Mr Darrant. The Treasury not only agreed but decided to extend by one extra year, thereby making this Turkey’s longest ever issue. Bank of America Merrill Lynch and Goldman Sachs were mandated as joint bookrunners alongside BNP Paribas.

“We went out against all the headwinds, with the most prestigious possible transaction – only the crème de la crème of issuers can do a 30-year,” says Mr Taffin de Tilques. “It was a bold gesture, but we felt the sweet spot would be a super-long-term deal in dollars.”

The team was banking on the following week providing a receptive window and, on the heels of a pretty awful week, so it proved. “We could only go out if there was a clement market, and if we had clarity and confidence over the stickiness of the investor base,” says Christopher Marks, BNP Paribas’ global head of DCM. “They had to understand Turkey’s underlying strength in market terms and fundamentals, in spite of its current account problems.”

Support from the US

It was the flows in the secondary market that provided the confidence to proceed. The chosen date was February 12, subject to a positive market reaction to Janet Yellen’s first Congressional testimony as Fed chairman the day before. Reaction was positive and, as an added bonus, the Republican house speaker John Boehner chose the same day to agree to the raising of the US debt ceiling.

Slovenia had successfully issued five- and 10-year paper in dollars on the Monday, and that was still providing a positive tailwind. “Timing was key,” recalls Mr Darrant. “We did not announce until New York opened, to ensure there were no nasty surprises. Failure was not an option.”

Bookbuilding for the 31-year dollar deal began in the London afternoon with initial price thoughts of 6.75% to 6.875%. An order book of more than $6bn built up, with most of the demand coming from the US and UK, and final guidance was tightened to 6.7% to 6.75%. The Turkish Treasury was looking for a maximum target size of $1.5bn, and this was what was finally printed, with a 6.625% coupon, priced to yield 6.7%. The US took 45%, the UK 33%, Turkey 12% and Switzerland 3%. “The international participation was pleasing,” says Mr Darrant. “Historically, up to one-third of Turkish sovereign issues go to Turkish banks, but nearly 90% of this went to international investors.”

Mr Marks describes it as a very important trade. “The ill-defined notion of emerging markets is a source of volatility,” he says. “So this was fundamentally constructive.”

Mr Taffin de Tilques agrees. “This was a historical transaction which restored the grandeur of Turkey worldwide,” he says.


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