With the field of active bond insurers having thinned out and credit spreads still blown out, leading Turkish banks have yet to revive their structured finance programs.
But they have the luxury of waiting, as the likes of Akbank, Denizbank, Turkiye Garanti Bankasi, Turkiye Is Bankasi, Yapi ve Kredi Bankasi and Turkiye Vakiflar Bankasi generally enjoy a reliable deposit base. What's more, they've built a cushion from borrowings of the last few years.
Still, these banks will return, and when they do re-tap their diversified payment rights (DPRs), volumes, tenors and the investor audience will likely be another world from the all-you-can eat buffet that was `06 and early `07.
And while there's still hope that existing assets will spawn their own kind of deals, the disruptions of the liquidity crisis are likely to further delay the emergence of the sector.
Nothing so encouraged Turkish issuers to bang out DPR paper as the combination of monoline and conduit appetite in `06. "The most competitive prices were provided by conduits when compared to public offering," said a source at the first Turkish bank interviewed for this article.
In 2006, Turkish issuers publicly placed $5.7 billion in DPR paper, according to ASR. Deal size hit new heights, with Yapi Kredi, for instance, floating a record $1.2 billion transaction. Maturities edged out as far as 10 years.
The boom quieted down in the first half of 2007 and then, along with many other markets, went bust in the second half. The full year's figure for Turkish DPR placements was $2.3 billion. There have been no DPR deals this year.
Predictably, the main issue is pricing. Turkish banks aren't comfortable with the terms they can get today for this asset class, and they don't appear to be in any rush to issue. What used to amount to an all-in cost in the 100-basis-point range is now four to five times that. "We aren't in a position to pay that much pricing," said a source at a second Turkish bank.
All the sources said their DPR programs are still alive. Over the next couple of years, however, they won't yield the volumes and tenors of the last two years. "For this year and probably next year, we are not expecting to see big-sized issuances [from] Turkish banks, such as the hundreds of millions of dollars the Turkish issuers are used to [placing]," said the source at the first Turkish bank.
If pricing does attract Turkish issuers back to the DPR market later this year or next year, tenors are likely to shorten from the eight to 10 years in the recent wave of paper to closer to five years, sources said. And the sizes are likely to drop to between $150 million and $200 million - tiny compared with the deal volumes of 2006.
Sources said private placements are the most probable vehicle for the first deals after the liquidity crunch has eased. "[DPR] bonds are impossible right now," said a London banker familiar with the sector. He said banks underwriting loan notes from Turkish issuers are the likely next step, but a Turkish source was dubious that there would be serious efforts from Western banks to take DPR exposure onto their balance sheets in the current climate.
Multilaterals might end up supporting deals, but none of the Turkish sources interviewed thought they could make a meaningful difference in volumes. "Multilaterals are an alternative for achieving triple-A levels; however, their resources are limited, [and] they cannot underwrite big issuances," a source at a third Turkish bank said.
Monoline insurers are entirely out of the question, and not only because of the spreads on the more embattled guarantors. The two that have a good chance in having their wrapped paper placed - Assured Guaranty and FSA - told ASR a month and a half ago that Turkey was off their radar for the time being (ASR, 3/31/08). Officials at both monolines reiterated that view for this article.
And there is scant hope for conduit demand, sources said. ABCP programs are trying to woo investors back, and they're unlikely to do that with triple-B paper from an emerging market, no matter how well the asset class in question has performed through crises (or whether the financial future flows' track record is impeccable).
There will be exceptions, such as Brazilian bank Unibanco's $200 million DPR transaction, which is reportedly being sunk into Sumitomo's Manhattan Asset Funding conduit. But DPR notes from top Brazilian banks are rated higher than their Turkish counterparts, which makes them better candidates for conduit placement. A once-formidable conduit that used to take unwrapped future flows paper, Panterra, closed down late last year.
Turkish banks haven't been leery of all foreign funding. In a sign of where pricing stands for other top-tier banks in the country, Garantibank rolled over a 600 million ($928 million) one-year loan with 31 banks on May 8. The yield came to 67.5 basis points over Euribor, a bump up of 20 basis points from last year.
"The pricing is a good indicator of investor confidence in the Turkish markets," said a source at one of Garantibank's peers, who added that it was also a good indicator of where pricing will end up for other Turkish banks facing one-year rollovers.
Lira deposits make up the main source of funding for Turkish banks. In the case of an entity like Isbank, deposits were 61% of liabilities at the end of 2007. The average length of deposits in the system is three months, but about 90% of them are rolled over. The London banker pointed out that since the Northern Rock disaster, players in developed markets are taking deposits more seriously as a viable source of origination, even with the inevitable duration mismatch. Furthermore, in Turkey, this mismatch isn't as striking as it is in more developed markets, as the longest-term assets such as mortgages tend to be concentrated in the seven- to eight-year range, with an average duration of about three years. Also, Turkish banks use cross-currency and interest-rate swaps as hedges against the maturity and interest-rate risks incurred by mortgage financing.
While the duration mismatch may not be pressing among Turkish banks originating mortgages, collateralizing this asset class is on the minds of players. In fact, it's been on their minds for a few years now, and it remains unclear when mortgages - or other existing asset classes - will lead to a new generation of covered bonds or ABS in Turkey.
The consensus appears to be that, after years of development, the legislation governing covered bonds and securitization of existing assets is now effective. But Burak Cerrahoglu, an analyst of structured finance business development at Moody's Investors Service, said the banks are still working to standardize their origination procedures, which would enable them to have their existing asset deals rated. He noted that Moody's is seeing growing potential for existing-asset securitization in Turkey given the improvement of the regulatory framework last year, particularly for covered bonds and RMBS.
A source at the second Turkish bank said that the originator would go forward with an existing asset deal only if it could secure pricing on better terms than the Turkish government. "[Whether] we could price below the sovereign is a big debate," he added.
Enthusiasm for covered bonds might end up ushering in that instrument first. The fact that covered bonds have performed better than RMBS during the liquidity crisis hasn't been lost on Turkish issuers.
Whatever issuers end up focusing on, if they want to attract cross-border investors wary of emerging market currency risk, they'll have to factor in the cost of a swap. The overwhelming majority of consumer debt and mortgages in the country is in Turkish lira.
While higher interest rates have slowed down the origination of existing assets in Turkey, originations are still increasing. The most recent figures for Akbank, for instance, show that consumer lending, excluding credit cards, rose 43% to 8.7 billion Turkish lira ($7.0 billion), with a 13.2% market share. At Isbank, the category of consumer loans, which include auto loans and mortgages, rose 33% in 2007 to 7.9 billion Turkish lira.
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