May was a tough month for Turkey’s capital markets. A slew of long-planned equity sales were postponed or scrapped entirely in a month riven by bond market volatility and stumbling stock prices.
On the 11th of the month, Global Investment Holdings finally gave in to the inevitable, shelving the initial public offering of its ports division.
It had all looked so different just a few months before. In November 2014, that same unit, Global Ports Holding, had sold $250m worth of seven year bonds, in its first international bond sale. Three months later, seven institutions were picked to manage the firm’s landmark stock sale, including Bank of America Merrill Lynch, Citi, Garanti Securities and Renaissance Capital.
Yet by early May, things had gone awry. Institutional investors once tempted to buy shares in the world’s largest cruise port operator had become shy on the sale. The IPO of Global Ports Holding had once been tipped to raise up to $500m; now it was in danger of earning less than half that sum for its main shareholders, a list that included the European Bank for Reconstruction and Development (EBRD).
There was no obloquy in deferring the sale to a later date. The postponement was a frustrating setback for both the firm and its financial promoters. But it was far from the only cancellation sprung on the market that month. Just five days earlier Yildiz Holding, Turkey’s largest food group, scrapped the IPO of its dairy business, Ak Gida, which would have valued the unit at up to TL2.2bn ($807m). Instead, Yildiz opted for an auction of the business; Ak Gida was later bought by French dairy giant Lactalis for €700m ($790m).
ECM struggles
It has been tough going for Turkey’s equity capital market bankers. Just $1.19bn worth of ECM deals were finalised in the current year to June 12, according to data from Dealogic. That may be a marked improvement on the corresponding period a year ago, when just $22m worth of equity sales were completed. But this year’s data hardly improves on closer inspection.
A full 98% of this year’s volumes stem from a single transaction: the sale by Citi of its 9.9% stake in Akbank, a divestment that included the issuance of 396 million common shares in the Turkish lender, at TL7.45 a share.
Nor do the market’s near-term prospects look great. Given the postponement or cancellation of a clutch of key deals, “it seems that 2015 will likely not be a great year on the ECM side,” notes Jean-Patrick Marquet, director, Turkey, at the EBRD. An inconclusive election result has hardly helped matters. Many if not most had expected the former ruling Justice and Development Party (AKP) to garner a majority of votes cast in general elections held on June 7. They did not, leaving Turkey to face weeks if not months of political stability, as well as the need to yield to one or more unpalatable outcomes, ranging from a minority or unstable coalition government, to the threat of a new, snap election by July 22.
For all the hoopla surrounding the election, it’s easy to overlook the fact that Turkey’s economy remains in good shape. Investors may remain on the sidelines, waiting for guidance on the make-up of the next government. But they have not, and likely will not, abandon one of the world’s most systemically important emerging markets. “So far, the election hasn’t hit investment massively,” says Julian Macedo, co-head of CEEMENA ECM at Barclays. “Turkey continues to be a key pillar for emerging market funds.”
He notes that foreign funds still hold more than 60% of the total free float of firms listed on Turkey’s leading stock exchange, the Borsa Istanbul.
Bullish for 2016
There are plenty of other reasons to be bullish about the country’s medium and longer term prospects. The EBRD’s Marquet points to “lots of potential for issuance from 2016 onward”. His employer typically invests in worthy but unlisted corporates across emerging Europe, Asia, and Africa, exiting during or after the listing process. It is currently, he adds, “in discussions with [domestic] companies about pre-IPO investments, helping them on the banking side, helping to improve governance, and typically then looking to exit those companies during or after their future stock listings”.
In late May, the London-based development bank said it had entered into “exclusive negotiations” to buy a 10% stake in Borsa Istanbul, which plans to complete its initial stock offering in 2016, as part of wider plans to turn Turkey’s largest city into a regional financial services hub.
It’s that kind of deal, notes the EBRD’s Marquet, that will make Turkey’s capital markets “more liquid and attractive”.
Bankers insist that interest in the domestic ECM space will prove to be as strong as ever, once political uncertainty subsides, and when investors gain a clearer view of the individuals set to guide domestic economic and financial thinking in the years to come.
Baris Efe, investment banking director, Turkey and CEE, at Barclays, believes the issuance market “has been challenging due to increased volatility. However, at end of day this is an emerging market, so you need to be prepared for moments of sharp volatility”. He added that there is still plenty of “strong potential for ECM transactions across several sectors, including general industrials, infrastructure, consumer goods, and financial institutions.” Other bankers point to a likely wave of IPO-led private equity exits, if and when the capital markets kick back into gear.
Bankers also hope that rising interest rates in the US, likely from September onward, will revive flagging interest in emerging market equities. “Over the past five or six years, US quantitative easing has made debt cheap, reducing demand for equity,” notes Bojan Markovic, lead economist for Turkey at the EBRD. “That will change when the Fed starts raising interest rates, so in the medium term, the demand for equity offerings will increase. It is one of the reasons we expect to see a new surge of ECM offerings, not just in Turkey but globally.”
Others concur. “A tighter monetary policy in the US will benefit equity offerings everywhere, but specifically in Turkey,” says one, high profile Istanbul-based investment banker. After the Federal Reserve raises rates there will, he adds, be “fewer reasons for investors to hold back on putting assets into emerging markets in general. Going forward, we hope to see less interest rate volatility and less cross-border financing volatility, all of which should help equity capital market issuance.”
DCM underwhelms
Turkey’s domestic debt capital markets have also proven to be a source of some frustration. Issuance has had its bright moments. Annual Turkish lira denominated DCM volumes have risen to TL4bn a year, reckons the EBRD’s Markovic, from around TL500m a few years ago. And international deals continue to pepper the market. Privately owned development bank TSKB sold its second bond into the market in mid-April 2015, printing a $350m five year bond at a time when the Turkish lira was flirting with record lows against the US dollar.
Yet the debt markets have still broadly underperformed this year. Total DCM volumes in the year to June 12 totalled $5.89bn, according to data from Dealogic, down 29% on an annualised basis.
This is not so much a reflection of flagging interest in Turkish debt but that issuers opted last year to bring forward a slew of debt sales, in order to lock in low rates while the political environment remained stable. CEEMEA debt capital market issuance as a whole shrank 36% year-on-year in the first five months, figures that are exacerbated by the lack of prints emanating from the sanction and recession hit Russian market.
And while the corporate bond sector continues to broaden and deepen, “more needs to be done”, reckons the EBRD’s Markovic, “both to develop the domestic institutional investor base, to attract more foreign investors by increasing transparency, and to introduce liquid and reliable money market interest rate benchmarks for floating rate bonds.”
So what will drive domestic DCM activity going forward? Investors say the focus must, first and foremost — be the formation of a business focused and reform minded government. Turkey’s economy is dependent on, and constantly hungry for, foreign capital. For the past decade and more, the AKP, for all its occasional faults and foibles, has proven to be largely investor-friendly government. A strong institutional and political framework, encasing an oftentimes vibrant and entrepreneurial economy, sucked in capital from Europe and North America, as well as Asia and the Middle East, and put that money to good use.
Reform was at the heart of the last government’s thinking. Under the AKP, Turkey was transformed into an open and increasingly advanced economy. Investors now want greater visibility on future reforms, but that may have to wait until a new parliament is sworn in. “The resolution of questions around the formation of a new government, and the corresponding difficulties around the implementation of structural reforms are both important for a increase in activity,” says Abdeslam Alaoui, head of DCM, MENA at Barclays.
Islamic finance hope
There are spots of light across the debt market space. Islamic finance is growing apace: six domestic lenders, including Ziraat, Vakifbank and Halkbank, have been granted a license to package and sell Islamic financing products. In 2012, Turkey’s government issued its first Islamic bond, raising $1.5bn, a deal widely seen as a landmark sale for the industry. The sovereign, having raised $3bn this year in the international debt markets, faces the need to raise a further $1.5bn by the end of December.
A large chunk of that funding, bankers say, could come via a sukuk. Turkey’s government is also mulling debt issuances this year denominated in euros and, possibly, Japanese yen. One type of print investors are unlikely to see in the near term is the country’s first corporate sukuk. Laws — particularly regarding taxation issues — that gird and define corporate sukuk remain “less clear than that on bank” sukuk, notes Barclays’ Alaoui. “This is reflected by the fact that there have never been any corporate sukuk out of Turkey. The legislation has to be clearer for the activity in this market to pick up.”