Oct 10 2012
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Turkey Issued First Lira-Denominated Two-Year Sukuk
Turkey's Islamic bond market is gathering momentum as local corporates plan sukuk offerings after the Turkish government raised its first lira-denominated sukuk on 3 October 2012. The 2-year TRY1.62bln (USD904mln) sukuk attracted strong demand, with a bid-to-cover ratio of 2.02 times. The lira-denominated sukuk issue followed the debut of an international Turkish sovereign issue of 5-year USD1.5bln sukuk sold on 18 September 2012. The USD sukuk offering was oversubscribed by five times, priced at a profit rate of 2.803%. Middle Eastern investors accounted for 58% of the subscription, followed by European investors with 18%, Asian investors with 14% and US and other investors with the remaining 10%. The government's USD and lira-denominated sukuk sales set benchmarks for Turkish companies that are interested in tapping the Islamic capital market as a source of financing.
Potential sukuk issuers will benefit from declining borrowing costs for Islamic debt. The yield on the Turkish sovereign USD sukuk tightened by 7bps since its issuance date to 2.95% on 3 October 2012. This compared to the average yields of 3.15% for comparable GCC papers. According to the HSBC/ NASDAQ Dubai Sovereign USD Sukuk Index, the yield on the benchmark global sovereign sukuk index plunged by 102bps year-to-date to a record low of 2.88% as at end-September 2012, closing a tad higher at 2.91% on 1 October 2012. Declining sukuk yields reflect the combination of several factors i.e. strong demand looking for rare and good quality investment papers amidst global economic uncertainty as well as low interest rates across major economies.
In the past, the only Turkish corporate that has tapped the sukuk market was Kuveyt Turk Katilim Bankasi AS, a banking subsidiary of Kuwait Finance House (Kuwait) in Turkey. Kuveyt Turk issued its first sukuk issue of 2-year USD100mln paper yield 5.25% in 2010, followed by a second issue of 5-year USD350mln sukuk yielding 5.875% in 2011. Possible sukuk pipelines from Turkish corporates in 2012/ 2013 include the following:
- Albaraka Turk Katilim Bankasi AS - Albaraka Turk plans to raise as much as USD250mln of 7-year USD sukuk in 2012.
- Bank Asya Katilim Bankasi AS -Bank Asya announced its plan lan to issue lira-denominated sukuk amounted to USD83.7mln equivalent in 2012.
- Turkish Airlines plans to issue sukuk to finance aircraft purchases.
- Turk Telekomunikasyon AS is considering sukuk issuance to fund capital expenditure.
Turkish corporates is expected benefit from a growing appetite of sukuk and Turkish assets among Middle East investors, further supported by the government's push to strengthen trade ties with the MENA region. In the past two years, Middle Eastern investors have become more familiar with Turkish corporates, and this will bode well for Turkish corporate sukuk issuances into the MENA region. As of July 2012, excess liquidity in the GCC banking system amounted to USD85.0bln, representing vast liquidity searching for good quality investment papers.
Turkish sovereign is rated BB at S&P, the second highest non-investment grade rating, and one level higher at both Moody's and Fitch Ratings. As a regular debt issuer in global emerging markets, Turkey cannot be viewed with the same standard of judgement as other sukuk issuers in the region. The cost of insuring the country's debt against default for five years tightened by 139bps year-to-date to 148bps on 3 October 2012, reflecting improved credit risk. This compared to a decline of 20bps to 107bps for Qatar's CDS, which is rated nine levels higher at AA at S&P. The extra yield investors demand to hold Turkey's USD-denominated debt over US Treasuries dropped 8bps to 216bps on 3 October 2012. Equivalent maturities of the emerging market bond spread over the US Treasuries averaged higher at 301bps. The Central of Turkey expects the Turkish economy to grow by 4.0% in 2012, more than double the pace of the Group of 10 advanced economies. Turkey's USD772bln economy is the biggest in Eastern Europe and the Middle East (excluding Russia).
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