Turkish banks securitised more than $5bn of electronic remittances and credit card vouchers in 2005, tapping into strong investor demand, and setting a new issuance record for bank future flow deals from a single country.
The high level of activity illustrates the hunger for new funding sources within the Turkish banking sector, which is experiencing rapid growth in parallel with an economy that registered an estimated 5% increase in gross domestic product (GDP) for 2005.
“Last year there was a strong expansion of the Turkish economy, particularly in the export sector. At the same time, domestic interest rates fell and, with the help of low interest rates, banks have been growing their consumer lending and mortgage businesses, as well as their small and medium-sized enterprise (SME) and corporate loan books,” says Noel Edison, managing director in the asset securitisation group at Standard Chartered Bank.
Last June, Standard Chartered joint arranged with WestLB a $750m offering for Vakifbank, which was the largest ever unwrapped deal out of Turkey.
“There has been a mix of placement strategies for Turkish diversified payment rights (DPR) and credit card voucher deals,” says Mr Edison. “A lot of issuance has been done under [SEC rule] 144A, but there is also strong European interest in dollar tranches, so Turkish banks have been taking advantage of the less onerous issuance requirements in the Regulation S market. In addition, some leading Turkish banks have privately placed paper into asset-backed commercial paper conduits.”
Strong credit card business
With the export sector growing strongly, the cashflows underpinning DPR deals – which are electronically transferred hard currency payments from overseas – were able to support a higher level of issuance, while tourism-related credit card business has also been growing.
Turkey is a target for expansion for many foreign financial institutions and in 2005 fresh competition came from new monoline insurers entering the market, which presented Turkish banks with the chance to lock in cheap funding.
With the cost of a monoline wrap falling, the big three banks, Garanti, Isbank and Akbank, all did sizeable offerings of DPRs, wrapped to triple A. These bonds were then typically sold at spreads in the region of Libor plus 25 basis points (bp).
Some deals were so big that they featured multiple monolines, as was the case when MBIA, XLCA, Ambac and CIFG Europe wrapped a $1bn offering from Akbank in June. And in October, Garanti, the country’s third largest private sector bank, launched a $600m deal led by Standard Chartered Bank. Four monolines were involved, including Assured Guaranty Corp, which wrapped a $165m tranche. The paper was sold at a launch spread of Libor plus 25bp. And in December, Financial Guaranty Insurance Company (FGIC) wrapped a credit card deal for Isbank.
For some of the monolines, the breakthrough came in late 2004, when Standard & Poor’s (S&P) upgraded its sovereign rating for Turkey from B plus to BB minus. This allowed the various structural enhancements, which raise DPR deals a few notches higher, to push transactions into investment grade territory.
“For a monoline insurer, there are onerous capital requirements if you wrap something that is below investment grade, but following the sovereign upgrade from S&P, deals that were already attractive from a credit perspective also became attractive from an economic perspective,” says Wynne Morriss, senior managing director at XL Capital Assurance in New York. “So in 2005, XL’s appetite for business in Turkey, and for Turkish banks in particular, increased, and we did four deals.”
Unwrapped tranches
It was not only wrapped issuance that grew last year. Institutional investors in both Europe and the US, plus some in Asia and the Middle East, had a hearty appetite for Turkish risk, enabling Garanti, Isbank and Akbank to place unwrapped tranches alongside their wrapped offerings. Also smaller banks that would find it hard to get monoline cover (in some cases because the monolines require a bank rating from S&P) were able to do unwrapped offerings in a highly receptive market.
“Some smaller Turkish banks do not yet have access to monoline insurance, so during 2005 Merrill used its strong distribution platform to bring sizeable unwrapped deals to the market for these issuers,” explains Alex Von Sponeck, head of debt origination for Central and Eastern Europe, Middle East & Africa at Merrill Lynch.
“Early in 2005 we brought a $500m unwrapped offering from Finansbank to the market, and this was widely distributed to a total of 56 investors under 144A and Reg S,” says Mr Von Sponeck. “A subsequent offering from Denizbank also showed the strong investor appetite for unwrapped Turkish paper, and was sold primarily to US pension funds, although there was also some buying from European institutional investors.”
One of the features of the global securitisation market in the past couple of years has been the relentless tightening of spreads for triple B bonds as ABS investors have become more aggressive in search of yield pick-up.
As recently as 2004, Turkish banks were issuing DPRs at more than 300bp, whereas in 2005 spreads fell below 200bp on some tranches (depending on how well known the institution is because, although investors in DPR deals are looking at the underlying cashflows, they remain dependent on the bank to win customers and generate the cashflows).
“In 2005, many wrapped tranches were put into asset-backed commercial paper conduits or issued through public offerings. But Turkish banks have also shown that they are able to sell unwrapped paper at very competitive prices,” says David Lautier, ABS analyst at Moody’s Investors Service in London. “Turkish banks can fund themselves in the syndicated loan market, but at much shorter maturities of one or two years, whereas with DPR deals they have been able to put in place cheap funding going out to seven or eight years,” he adds.
Syndicated loans
The syndicated loan market looks as though it will be the main challenger to future flow transactions as a source of funding this year. Turkish banks rarely issue unsecured Eurobonds, although there has been a successful hybrid capital deal for Finansbank.
International banks offer competitive pricing in the loan market and bankers report that spreads have been dropping fast. Banks have been jostling to establish relationships in Turkey and with this comes relationship pricing. “Syndicated loan pricing has collapsed,” laments one banker.
Whereas loans used to be over one or two years, banks are now being pushed out to three years by borrowers. This is making loans comparable to the average life of five-year DPR deals, which amortise. Thus, at the short end of the yield curve, Turkish banks may not do so much DPR funding in 2006 and prefer to do fewer securitisations, but at seven or eight-year maturities.
Various estimates of securitisation issuance during 2006 fall between $2.5bn and $3.5bn, to be either placed into conduits or sold to institutional investors. The funding requirements for the Turkish banking sector will continue to be very large this year. The mortgage market, in particular, is booming as never before, and banks will need all the sources of cheap funding that they can find to keep up with demand.
Economic viability
Conditions are favourable for ABS issuers on the global capital markets and some bankers believe that in 2006 unwrapped paper may be more economically viable than wrapped deals, taking into account the cost of the wrap and the differential between triple A and triple B spreads.
Many of these unwrapped deals have gone into conduits, partly because conduits are hungry for scarce assets, but also partly because the banks that own the conduits have used them to win mandates to arrange future flow deals for their Turkish clients. Other bankers complain that the pricing on offer as these triple B tranches are privately placed into conduits is unrealistic, and yet another example of the effects of relationship banking.
This year, Turkish banks may prefer to see this paper widely distributed as a way to broaden their investor base, something that conduit deals do not achieve.
The appetite is there from global ABS investors. “Many investors look to this asset class as a means of picking up additional yield and diversification without the direct assumption of emerging market sovereign risk,” says Mark Heberle, ABS analyst at Wachovia Securities. “And investors in the sector continue to benefit from higher yields than similarly rated securities in both the wrapped and unwrapped forms.”
