Not too long ago, Turkey's Sekerbank was a name with no resonance in the structured finance world. Then, in mid-summer, the bank issued a covered bond deal that broke two barriers. It was the first of its kind from Turkey and the first covered bond globally to be backed by SME loans. Some covered bond purists even questioned whether SME collateral disqualified an instrument from being called a covered bond, which are overwhelmingly secured by mortgage pools. Turkish law has two separate regulations, one for covered bonds backed by mortgages and another for those secured by any of a wide range of other assets.
As a first tap off a TL800 million ($432 million) program, Sekerbank's deal was sized at TL228 million. It was a club deal, with arranger UniCredit taking around €50 million, Dutch development bank FMO buying €25 million and Washington-based multilateral International Finance Corp. investing $25 million. The expected maturity was five years for the FMO and IFC tranches, and one year for the UnicCredit notes. The final maturity was eight years for all pieces.
Moody's Investors Service rated the deal 'A3', a notch below the agency's local-currency ceiling for Turkey of 'A2'. The three tranches priced in the range of 200-250 basis points over Euribor.
At the cutoff date the value of Sekerbank's cover pool reached TL854 million. The initial portfolio consists of 2,096 loans with a weighted average life of 0.63 years.
Sekerbank, which has an issuer rating from Moody's of 'Ba1' in local currency, boasts a strong regional franchise with a track record in micro- and SME loans. Its earning diversification, however, is modest, and forays into retail activities have so far proved unprofitable, according to Moody's. The bank was established in 1953 in the northwestern city of Eskisehir as the Sugar Beet Cooperative Bank and has since built a network of 266 branches. At the end of last year assets totaled TL11.37 billion.
In light of the bank's covered bond issue, ASR had a chat with Zeki Onder, executive vice president of Sekerbank. The exchange touched on several issues, including future plans with the covered bond program, the prospects for private investor interest and the lag between the time participants signed off on the first deal (July 26) and when it funded, Sept. 14.
ASR: The total amount of your covered bond program is TL800 million, and you've issued TL227.5 million so far. How many issuances do you expect will comprise the remaining TL572 million? What is the timetable for the program (i.e., do you expect to tap it fully by the end of 2012 or 2013, etc.)? Will you use different arrangers for each deal?
Onder: As you have mentioned, the amount of the program is TL800 million. Within the time schedule of the program we plan to utilize the whole amount, but it is not a target. In 2011 we will do three to four further issuances, and for the coming years we plan to tap markets other than IFIs [International Financial Institutions] in line with the global economic conditions. We have recently closed our deal in a very smooth way; we were very happy to work with the related parties. Moreover, this is a program, so the more SME loans we book with the pool, the more issuances we can make in the coming years.
ASR: When do you expect to do the second transaction in your program and for how much will it be? I've heard that the European Bank of Reconstruction and Development may buy a portion. Could you confirm this? Are there other investors (potentially) involved?
Onder: We expect to do the new issuance by the end of October. Besides the EBRD, there will be other IFIs to invest in the program. The amount of the coming issuances will be higher than the ones we've closed.
ASR: The club investors signed off on the deal July 26 and yet it didn't fund until Sept. 14. What was the delay?
Onder: This deal is the first covered bond transaction for Turkey, and with respect to the backed assets, the first deal in the global market. After the signing there had been several technical issues outstanding, like domestic and investor-related legislative and internal procedures. It was totally acceptable for both sides.
ASR: Could you discuss why you chose to do an SME-backed covered bond? How does it dovetail with Sekerbank's business strategy?
Onder: Sekerbank is one of the most established SME and small banks in Turkey. Keeping that in mind, Sekerbank has a niche expertise in SME financing; it was a perfect match, issuing covered bonds backed by SME loans. That is in line with our past, current and future business strategies.
ASR: Would you consider doing a covered bond backed with other assets? The law in Turkey allows for not only SMEs but also consumer loans, commercial loans, financial and operational leasing agreements, and other assets.
Onder: If our needs meet with the requirements of the issuance backed by other asset classes, we would be happy to do further tranches.
ASR: What kind of market response, if any, have you had after using SME loans to back a covered bond? For instance, have any other originators either inside or outside of Turkey contacted you about the mechanics of using this asset class for covered bonds?
Onder: Very positive. It has been highly attractive among the Turkish originators. It drew lots of attention from the domestic and international markets. We've received positive comments from issuers, originators and also from other related parties.
The main reason for this attention is that Sekerbank used a structure that is backed by SME loans. Sekerbank's SME portfolio is well diversified, so the investors were happy to have them as collateral in the program. With the existence of such a program, we are building a strong and solid financial bridge between IFIs and Anatolia's small-scale enterprises. [Anatolia here refers to Turkey outside the bigger cities.] The funding through the covered bond program will be disbursed wholly to the small-scale enterprises - those that wouldn't be able to access IFIs directly otherwise.
ASR: Many mainstream investors see covered bonds only as mortgage-backed. Do you think it will be difficult to convince them that covered bonds with SME loans in the pool are just as valid?
Onder: It is a good opportunity for us to tap the markets. They are familiar with the product - only the asset class differs. This also sets an example for the markets in general to expand covered bond structures.
ASR: Could you address the potential for covered bonds in Turkey eventually going out to foreign market investors (perhaps by swapping out the local currency risk) or attracting foreign investors into the Turkish market to buy covered bonds, either yours or from the market in general? Basically, I'd be interested to hear when and how you think covered bonds in Turkey will be able to move beyond multilateral investors.
Onder: Given the current conditions in the global economy, IFIs are the main investors in these types of first-time issuances. Investments of IFIs increase the confidence level of the program and give us the opportunity to tap other investors. Please keep in mind that this was a first of its kind. If one looks at the structure in detail, it combines the features of covered bond and securitization structures. It is important to note that Turkish legislation is well developed and received very positively by the investors. This was one of the most important facts that made this transaction come true.
