A lot of investors got a piece of Turkey in the second quarter. The country's largest banks produced about $3.05 billion in deals, a gargantuan size in a market where several million from a single issuer used to impress. The volume of transactions - all backed by diversified payment rights (DPR) - dwarfed the handful of deals that popped out of Latin America, where activity centered on a novel transaction from Mexico, a couple of usual suspects in Brazil and a Panamanian toll road.
While Turkey is unlikely to replicate the sheer volume of 2Q05, signs point to activity ahead. The country's economy, for one, is growing briskly, which will continue to stoke demand for banking services, a key ingredient in the recent issuance frenzy. "There was an appetite among Turkish banks to satisfy more demand from borrowers within Turkey," said David McCaig, managing director at WestLB. The International Monetary Fund projects GDP growth in Turkey of 5% for both 2005 and 2006.
Turkey's eventual accession into the European Union remains a boon to issuance as well by improving investors' perception of the country and tightening its links to the wealthier countries that lie west. "Investors are more interested in Turkey; it's become a more stable economy that's less vulnerable to general emerging market risk," said one source well versed in the sovereign. "It's becoming more mainstream Eastern European." In December, the EU provisionally agreed to kick off accession talks with Turkey in October 2005.
Other longer-term factors have also helped nudge Turkey's larger banks into international markets, sources said. Their funding needs have deepened as they have absorbed smaller banks debilitated by the last financial crisis of 2001 and 2002. Meanwhile, M&A activity in Turkey by foreign banks has spoken to increased overseas confidence in the country's banking sector.
Standard & Poor's upgrade of the sovereign last August - to BB-' from B+' - was, for many, the spark that would much later set the market ablaze. Indeed, the rating boost was essential for increased exposure from the leading monoline insurers, which ended up wrapping about $1.5 billion worth of paper in 2Q05. That degree of exposure, however, raises the question: Is there room for more?
"We are open to additional exposure this year in Turkey and also reserving some for next year," said David Stortz, a managing director with XLCA. "We're not tapped out." In the second quarter, the guarantor wrapped $160 million in paper from Akbank and $250 million from Isbank. "These are issuers that have done deals in the past so they've been tested through difficult times," Stortz added.
An official at MBIA declined to comment, while Ambac officials were unavailable for comment, but market sources said that both might be approaching capacity constraints. The former took on $800 million combined of exposure to Akbank, Isbank and Garanti in 2Q05, while the latter assumed $290 million in Akbank risk. But even if these agencies are nearly sated with Turkey, the entry of a new player could pick up some of the slack.
"It's fair to say that we're looking at [emerging-market] regions that have shown the most recent volume in the future flow sector," said Eric Rosensweig, managing director of FGIC. "We are pursuing very selectively some EM business, but only on future flow transactions."
In early June, FGIC poached Rosensweig, an EM veteran, from MBIA. The move underscores the upstart insurer's efforts to extend its reach into future flow EM deals, which remain virgin territory for FGIC. The agency is reportedly working on a transaction in the asset class that could close this quarter.
In addition, potentially weaker demand from one or two active monolines might merely push more Turkish issuers to forego a surety, sources said. Unwrapped deals from the country still draw plenty of interest, they added.
Over the second half of 2005, seasoned issuers from Turkey are expected to tap existing DPR conduits. In addition, a couple of credit card voucher deals are in the works, said one source. Those looking for more asset-class diversity from the country will have to wait, as banking collateral will hold its monopoly for some time.
While outdone by Turkey, Latin America still produced a few respectable deals in the second quarter. A $210 million, two-ranche deal from Mexican housing finance company Metrofinanciera drew particularly avid interest as the first cross-border transaction from the country backed by real estate assets, in this case, bridge loans for construction.
Still, marketing the paper wasn't a walk in the park for sole lead Dresdner Kleinwort Wasserstein, which sold the transaction to an array of investors, mostly established insurance companies, banks and funds with experience in both Emerging Markets and U.S. real estate assets, according to a source familiar with the transaction. As a pioneering deal, investors looked at a variety of comparables, from future flow EM deals - which dominate overseas issuance - to the triple-B, subordinated home equity deals in the U.S.
The transaction has opened the door for additional private-sector real estate companies to issue abroad, which market sources expect before the end of the year. Cross-border mortgage deals, however, are further down the road. A major hurdle is the lack of currency swaps that go out far enough.
Further south in the region, Brazil will continue producing deals this year as issuers seek to refinance debt taken on in 2002 and 2003, according to a market source. For 2002 and part of 2003, corporates were forced to pay a premium due to fears surrounding the election of leftist Jose Inacio Lula da Silva, who took office in early 2003, and proved to be market-friendly. Also, during an issuance flurry in mid 2003, MBIA was the only guarantor willing to take on Brazilian risk, limiting the options of issuers. Brazil's Banco Itau, for instance, is using at least part of the proceeds of a recent $345 million deal to take out outstanding debt (see related story, p. 18).
Issuance is also expected from other, smaller countries. Wachovia Securities is working on a deal for Banco Industrial, Guatemala's largest bank. That transaction promises to be a debut in the DPR market for the country.
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