Investors take kindly to Isbank's direct approach to $750 bond

To the casual holidaymaker or the nervously inclined business traveller, Turkey is not an obvious destination right now. Flights are cheap and hotel rooms are heavily discounted as the country battles with international concerns about safety and security.

For investors, however, the Turkish story remains appealing, at least when it comes to high-quality issuers such as Isbank, the country’s largest private bank by total assets, loans and deposits.

İşbank was founded in 1924 on the initiative of Mustafa Kemal Atatürk, the first president of Turkey. Deemed a proxy for the Turkish economy, Isbank is 40% owned by its employees’ pension fund and 28% by the opposition Republican People’s Party. It is also considered systemically important to the banking sector.

Until recently, Isbank had not issued a benchmark bond transaction since October 2014. But in the first few months of 2016, the bank launched a $750m 144A/RegS transaction, maturing in October 2021.

Taking an opportunity

“For emerging markets, 2015 was a year with high volatility in the debt capital markets. It was also a year with uncertainties for Turkey, which included two elections in the second half,” says Isbank deputy chief executive Yilmaz Erturk. “The escalated yield levels made it difficult for Turkish banks to go out to the international markets for Eurobond issues. Our bank had a Eurobond issue that matured in February 2016 and, taking into account the prevailing market conditions that had been relatively stable and positive, we wanted to take this opportunity for a new Eurobond issue.”

Unusually, the bank decided to launch the bond without any prior discussion with investors.

“Being an already well-established name in the 144A/RegS Eurobond market from Turkey and having continuously kept in touch with various investors through a number of meetings, we decided to access the market without a roadshow and to launch and price the transaction intraday,” says Mr Erturk.

Nonetheless, considerable thought had gone into the issue beforehand. The bank had been watching the market for months and mandated a blue-chip group of lead managers to advise on investor appetite and run the transaction. These were Deutsche Bank, HSBC, ING, JPMorgan and Société Générale Corporate & Investment Banking, chosen from the bank’s extensive network of relationship banks.

“As always, we had been monitoring the markets closely for an opportunistic transaction and we were confident that it was the right time to go out to the market,” says Mr Erturk.

Popular demand

On the morning of March 30, Isbank released initial price thoughts of about 450 basis points (bps) over mid-swaps for a 5.5-year US dollar offering.

The spread offered a 35bps new issue premium to Isbank's outstanding bonds, a margin that attracted considerable investor interest. By 11am UK time, the orderbook had grown to more than $2bn, allowing the bookrunners to revise the pricing by 15bps to a spread of 435bps.

Even at this level, orders continued to pour in, with investors drawn to Isbank’s robust position in the Turkish banking sector and its investment-grade credit rating – Baa3 from Moody’s and BBB- from Fitch.

By noon, the book had swollen to more than $3bn and guidance was tightened still further to between 420bps and 425bps over mid-swaps. Investor interest remained high and at 4pm, the transaction was officially launched at a spread of 420bps, giving a new issue premium of just 5bps.

Widespread demand

“An impressive tightening of 30bps from initial price thoughts to pricing indicated the fact that the deal was priced with a very limited new issue premium in the end and confirmed once again the strong appetite from international investors for Isbank credit risk,” says Mr Erturk.

Demand for the bonds was widespread too, with 24% of orders coming from the US, just over 60% from the UK and mainland Europe and the remaining 14% from the rest of the world, including Asia and the Middle East. The appeal of Isbank undoubtedly contributed to investor appetite but the timing of the transaction also played a part, as market conditions became more settled and interest in emerging market credits increased.

“We are of the opinion that the decline in risk sentiment towards emerging markets and the relative lack of issuance across emerging markets helped to support the successful execution of our new Eurobond issue,” says Mr Erturk.

Isbank intends to use the capital for general corporate purposes but this latest transaction – the highest nominal amount issued by a Turkish bank since 2014 – confirms the group’s position as a significant bond issuer in Turkey.

“Having issued our first Eurobond in 2011, Isbank is the market leader in the Turkish banking sector with a total nominal issue amount of approximately $10bn, of which $5.9bn represents benchmark issues, including our most recent Eurobond transaction,” says Mr Erturk.