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Never write off Turkey

Turkey has long been the European comeback king of trade and project borrowing. And against all the economic odds, the cost of debt in both markets appears to be falling back again. But is there a ceiling to that progress without a ratings upgrade?

Forget Turkish sovereign and bank ratings downgrades; forget the lira crash; forget newly imposed US sanctions over Syria (which do not touch Turkish banks) – international lender confidence, in the Turkish bank sector at least, remains intact. And against all traditional funding logic Turkish banks are getting margin cuts in their latest biannual round of dollar and euro denominated trade finance on-lending facility refinancings.

Akbank, the accepted benchmark-setter for these facilities, closed a $810 million dual currency one-year loan last month at a reduced cost of borrowing of 50bp on the US dollar tranche and 55bp on the euro tranche compared with its September 2018 facility. Pricing on the new deal is 225bp over Libor all-in (185bp margin) and 210bp over Euribor (170bp margin); and despite all the economic and political turbulence that has hindered Turkey in recent years, Akbank increased the number of participant banks from 23 to 31, pulling strong interest from lenders in Qatar, Kuwait and Russia. Following Akbank’s success, Isbank, TEB, Denizbank and Vakifbank are also out to market with deals that mirror the Akbank benchmark.

The lower cost of international borrowing for Turkish banks will enable them to more easily meet demands from President Erdogan for greater domestic trade and project finance liquidity at lower interest rates. Although characterised as short-term trade finance on-lending facilities, Turkish lenders have long used such deals to also fund long-term domestic project loans (arguably taking a degree of refinancing risk on themselves).

Turkey has some major project deals in the pipeline – for example the upcoming $3.5 billion Grand Istanbul Tunnel tender and the extremely ambitious Kanal Istanbul project – and Erdogan has also been pressuring lenders to sell off past project loans to free up liquidity for new deals.

Given the recent refinancing and margin cut on the North Marmara project (two roads sections that connect via the third Bosphorus Bridge in Istanbul), a few of the President’s aspirations may yet be met, albeit persuading international lenders and sponsors of the value of Turkish sovereign guarantees for PPP projects is likely to still require a sovereign ratings upgrade.

The original $2.6 billion nine-year North Marmara roads financing closed in early 2018. The single funding package backed sponsors of both the European and Asian parts of the project – in effect two separate 10-year BOT concessions. Limak and Cengiz are sponsors on the 169km Kurtkoy-Akyazi four-lane section on the Asian side and Kolin and Kalyon are developing the 88km Kinali-Odayeri stretch on the European side.

State-owned banks provided more than half the debt: Ziraat Bankasi ($720 million), Vakifbank ($720 million) and Halkbank ($143 million); with Turkish private sector banks putting up the remainder: Isbank ($446 million), Garanti ($436 million) and QNB Finansbank ($200 million).

At $4.4 billion, the debt refinancing is much bigger than the original deal, due largely to a 93% change order request from the Turkish government for route changes and additional works. But the new facility, which matures in 2029 when Limak/Cengiz’s Asian concession ends (Kolin/Kalyon’s contract lasts until 2030), is significantly cheaper (a minimum 75bp cut) than the previous financing, despite the additional $1.8 billion in debt volume.

The original bank list remains in place: Vakifbank and Ziraat took $1.1 billion each; Garanti and Isbank $527 million each; Halkbank $437 million and QNB Finansbank $237 million. Joing as new lenders are Kuveyt Turk with $200 million, and Albaraka, ICBC and Bank of China with $100 million each.

The project benefits from a minimum revenue guarantee from the Turkish government and Turkey’s debt assumption scheme for PPP projects. Under the debt assumption model, in a default scenario the Treasury (or the relevant administrative body if the project is carried out under BOT law) takes on the debt owed to the project lenders. The Treasury has the option to repay the debt in accordance with repayment terms under the original financing or on a lump-sum basis.

But these sovereign comforts are only as strong as the sovereign itself, and with Turkey’s credit rating at junk lenders are relying on the fact that it has never defaulted or reneged on past government guarantees for projects. Furthermore, there are only two foreign lenders in the North Marmara financing, both Chinese and both under BRI auspices.

So are recent bank borrowings and the North Marmara refinancing symptomatic of an ongoing trade and project turnaround? Unlikely – Turkey has almost certainly hit the ceiling of what can be achieved without a sovereign upgrade (for example, the majority of the debt on North Marmara is from state-owned banks).

Furthermore, although the Turkish project sector continues to get significant DFI support, particularly from the EBRD, the deadlines for tender launches for new projects keep slipping: the prequalification for the $2.5 billion Sancaktepe hospital PPP concession has recently been postponed again from the original July 2018 launch date to 11 November 2019. And with no explanation from the government, speculation is that Turkey simply cannot afford to continue to proffer support for PPP schemes without more economic certainty – the kind of long-term certainty that Erdogan’s credit-fuelled economic policy is unlikely to deliver.

But it would be foolish to write Turkey off, particularly in the project finance sector. Most EU-domiciled banks do not appear to want to take the risk (Basel etc), but Turkish domestic banks have always had strong liquidity, and for GCC-based and Chinese lenders there are clear opportunities for complementing Turkish bank loans at very competitive (by Turkish standards), but also lucrative, margins.


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