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Abu Dhabi, UAEMonday 10 December 2018

Lira rout helps Turkish firms buy bonds back on the cheap

Lender Vakifbank TAS bought back $10.5 million of its dollar bonds earlier this month as prices plunged to record lows

Like tourists queuing to buy luxury goods, so are companies taking advantage of the Turkish lira's fall to a record low, by buying back debt. Lefteris Pitarakis / AP
Like tourists queuing to buy luxury goods, so are companies taking advantage of the Turkish lira's fall to a record low, by buying back debt. Lefteris Pitarakis / AP

Some Turkish companies are using this month’s lira meltdown as an opportunity to scale back debt loads built up over years of cheap borrowing costs.

State-owned lender VakifBank TAS bought back US$10.5 million (Dh38.57m) of its dollar bonds earlier this month as prices plunged to record lows. Turkcell AS, the country’s biggest mobile phone operator, bought back $15.5m. Both companies said they are ready to buy more if prices of outstanding debts stay low.

“For any Turkish company which has the freedom in their balance sheet to deploy some cash, this could be the time to do it,” said Reza Karim, a credit analyst at Jupiter Asset Management in London, which has $62 billion under management. “If a company comes and buys back their bonds, I am sure quite a few investors will be willing to sell.”

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This month’s 25 per cent plunge in the lira has pushed the premium investors demand to hold Turkish dollar corporate debt over US treasuries up to 11.75 percentage points, the highest in at least two years.

Some respite came in the sell-off on Tuesday, with some investors saying the rout had fallen far enough to offer buying opportunities. Turkcell’s 2028 bonds surged yesterday by the most since they were issued in April, after six days of losses.

Still, the buybacks so far pale in comparison to the roughly $337bn of hard-currency debt Turkish companies have outstanding, $90bn of which comes due within one year, according to the central bank.

Unlike in resource-rich emerging markets such as Russia and Brazil, the majority of Turkish companies generate revenues in liras and the risk of capital controls may make dollar funding less accessible. The Turkish government has said repeatedly it won’t limit the flow of foreign money in and out of the economy.

Okan Akin, a credit analyst at AllianceBernstein Ltd. in London, said banks in particular should have enough dollar liquidity to repurchase debt. VakifBank said in emailed comments that it may buy back as much as $100m of outstanding debt. Yields on the lender’s 2022 bonds have jumped about 10 percentage points to 21.77 per cent this month.

“The drop in bond prices offers corporates an incredibly profitable deal,” said AB’s Akin. “Investors are expecting corporates and banks to buy back their bonds.”