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Abu Dhabi, UAETuesday 25 September 2018

Turkey's banks need $6bn refinancing as economic catastrophe looms

Financial industry heavily reliant on overseas funding has little time and few options to conclude deals often involving dozens of global banks

Turkish bank ATM machines in Istanbul. Several of the country's lenders require billions and quickly. Getty
Turkish bank ATM machines in Istanbul. Several of the country's lenders require billions and quickly. Getty

Turkish banks may have to pay up once again as they rush to meet $6 billion (Dh22.04bn) of financing deadlines amid the country’s worst economic crisis in years.

At least nine lenders have to complete annual dollar loan syndications by year-end, leaving an industry heavily reliant on overseas funding little time and few options to conclude deals often involving dozens of global banks. Akbank Turk, Turkiye Is Bankasi and state-owned Export Credit Bank of Turkey are at the head of the queue, as they are yet to finalise deals that entered syndication in July, days before the nation’s crisis began.

“The situation is definitely worse than other crises that Turkey has been through,” said Reza Karim, a London-based credit analyst at Jupiter Asset Management. “Pricing will certainly have to be changed.”

The Turkish bank loans will provide a critical test of the nation’s ability to tap overseas debt markets amid US sanctions that have cooled the economy, driven the lira to record lows and pushed yields on sovereign bonds maturing in March to about 9 per cent, according to Bloomberg. Local crises have previously forced pricing concessions by Turkish banks, which have borrowed at least once or twice a year from the same pool of overseas lenders for decades.

“We expect loan pricings to go up,” said Okan Akin, a London-based credit analyst with AllianceBernstein. “It’s only logical that every Turkish asset would have to be repriced reflecting new market realities.”

The nation’s banks traditionally get dollar loans because rates are lower than in the lira market. Local companies borrowing these funds then face a currency risk as they have to use lira revenues to repay dollar debt.

Akbank, Isbank and Export Credit Bank all marketed loans at an all-in pricing of no more than 165 basis points above benchmark rates before the turmoil began, including a margin of as much as 130 basis points for dollar commitments. The subsequent US-Turkish standoff - centred on a detained American pastor - has since sparked a rout in Turkish assets. The cost of insuring Akbank’s debt using five-year credit-default swaps has doubled since April to 684 basis points, according to CMA data.

Representatives of the three banks did not respond to requests for comments by phone and email.

Lenders may have to seek support from the government or central bank in the event of a “prolonged closure”’ of the wholesale market, or else “materially deleverage”, Moody’s Investors Service said in an August 28 note as it downgraded 20 Turkish financial institutions.

The nation’s lenders had about $186bn of foreign-currency funding as of June, equal to about 75 per cent of total wholesale funds, according to Moody’s. The banks need to refinance $77bn of foreign-currency wholesale bonds and syndicated loans, or 41 per cent of total market funding, within the next year, the ratings provider said.

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Turkey’s crisis also poses risks to European lenders with investments in local banks including Banco Bilbao Vizcaya Argentaria, BNP Paribas, UniCredit and ING Groep. BBVA generates about 14 per cent of profit from a stake in Turkiye Garanti Bankasi.

Turkish banks have previously paid up to get loans done. Last year, the borrowers increased loan margins to more than 100 basis points from around 55 basis points in 2016 after a failed coup and ratings downgrades rattled markets. In 2012, they increased pricing by about 30 basis points to woo European lenders, which were then reducing exposure and increasing capital.

“Turkey has historically been able to muddle through political turmoil and raise funds,” Mr Karim said.

Still, with no sign of relations thawing with the US and continued pressure on the lira, there’s little to suggest that the country’s economic troubles will ease anytime soon. That may prompt overseas banks to reassess what were previously near-automatic rollovers of syndicated loans, Paul McNamara, a London-based fund manager at Gam UK, said on Bloomberg’s Odd Lots podcast.

“What’s really going to change now is when it’s embarrassing for a bank CEO in Europe to explain how much exposure they have to Turkey,” he said.

Separately, the increase in Turkey's energy prices is expected to continue into September, the central bank said on Tuesday, a day after official data showed annual inflation rose to 17.9 per cent in August, Reuters reported.

In its report on monthly price developments, the central bank said basic goods and energy prices were the main driver of inflation in August and there had been significant deterioration in the overall trend of core inflation indicators.

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