Last month, Turkey's Sekerbank debuted the country's first covered bond, backed by SME loans as collateral. The TL230 million ($135 million), 8-year final deal was purchased by Dutch Development Bank the FMO, which took a €25-million equivalent tranche; the International Finance Corp. ($25 million) and sole arranger Unicredit (€50 million).

All three investors have already signed off on the bond, rated a provisional '(P)A3' by Moody's Investors Service. It will formally close once the Capital Markets Board of Turkey has given its formal approval, expected within two weeks.

While the first covered bond out of Turkey was a club transaction, once the market cuts its teeth and the overseas climate improves, the potential for private investor interest will no doubt emerge. Unicredit is already planning for that moment.

For those keen on the credit risk without the currency, an SPV-issued bond in hard currency might be the answer.

"We are setting up an SPV that can then swap the Turkish lira bonds into euro notes or other hard currency, potentially opening up the covered bond market to hard currency investors as well," said Wasif Kazi, director of emerging Europe structured capital markets at Unicredit.

As envisaged, the SPV would take the currency risk by entering into a swap agreement, and then issue the hard currency notes, which can also be floating rate.

While pure credit investors would be put off by the currency risk, those seeking currency risk, on the other hand, might not want it through a local covered bond since Turkish treasurys are an easier, more liquid alternative.

The SPV is being planned for the Sekerbank program, but the bank may not need to issue much more given that the money raised in the initial tranche already exceeded the amount it was after for its debut, Kazi said. "We are setting up this SPV so they have the flexibility to make an issuance in any currency," he added, saying that the concept would also work in future covered bond programs for other issuers.

The total amount of Sekerbank's covered bond program is TL800 million.

Just how far out a Turkish lira-euro swap can go will, of course, determine the maturity of a hard currency bond issued off an SPV. It's not clear that eight years, for instance, would be possible.

The investors for a hard currency issue would likely come from the EM world, Kazi said. "We would expect that people happy to buy unsecured bonds from the Turkish banks would also consider this, because this has an 'A' rating and at the same time legislative security."

The Turkish Capital Markets board drafted the legislation that covers this deal. It uses the mortgage covered bond template and expands it to include all kinds of financial assets.

At the cut-off date, Sekerbank's debut deal was backed by about 38,648 short-term loans totaling TL854 million, according to the Moody's pre-sale. Most of the loans are secured. Both the bond and cover assets bear a fixed rate of interest in Turkish lira.

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