Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    4 July 2019
    Published by

    In Focus: Turkish banks – Never a dull moment  

    Up, up and away! About half of the Turkish bank bonds we track have tightened by 100bps or more since June 21. At least three factors have contributed to this stellar performance: 

    1. President Erdogan's acceptance of the Istanbul election result, which appears to have been enough for markets to ignore reports that some within the AKP may form a breakaway party, and reports that further limits are being placed on mayoral powers
    2. News that Hakan Atilla, former Deputy General Manager of Halkbank, is to be released later this month, and 
    3. Comments from US President Trump during the recently-concluded G20 Summit, which have helped address concerns about sanctions (in part).

    Still wider than many similarly rated comps: Looking at percentage changes in mid z-spreads versus June 21 levels, bonds including the Vakifbank (VAKBN) 6.875% 2025, Yapi Kredi (YKBNK) 4% 2020, Isbank (ISCTR) 5% 2021 and Halkbank (HALKBK) 3.875% 2020 have performed particularly well. Conversely, bonds issued by Albaraka Turk, Odeabank and Fibabanka appear to have lagged (but almost all bonds are tighter than was the case before the Istanbul election re-run). Turkish bank bonds are still quoted wider than many similarly rated comps. As one example, the Akbank 5.5% 2022 bond is quoted more than 100bps wider than the Zenith Bank 7.375% 2022 security. Valuations suggest strong performance could continue, but we acknowledge that there are risks. 

    Q2 results season starts soon: Overall, performance in the latter part of 2018 and in the first quarter of this year was better than anticipated. In Q1 19, all but one of the banks we follow reported a profit. The second quarter was clearly another challenging period for Turkish banks. It began and ended with elections. However, previous FY 19 guidance from management at Turkey’s major banks suggests that issuers anticipated these challenges. As such, we would not be too surprised to see many major Turkish lenders report above-consensus results again, 

    Primary market activity is expected to pick up: Following the G20 Summit, Turkey has placed a US$2.25bn 5-year bond and QNB Finansbank has tapped its 2024 issue. We expect more issuance from banks including Isbank, which have been absent from the bond market for some time. Focusing on the banks we track, almost US$4.8bn has been redeemed this year while just over US$3bn has been issued so far. 

    Some risks remain: There is still some uncertainty about how the US will react to the S-400 delivery. President Erdogan is reported to have said that President Trump did not mention sanctions during the G20 meeting. However, a Republican Senator was quoted in an interview saying ‘sanctions would be required under law’ if Turkey activates the S-400 missile battery. At least one report has suggested that President Trump may seek to ‘issue a waiver and postpone sanctions.’

    Read the full report here.

    Recap of the week’s key credit developments

    Saudi Arabia (KSA): On Tuesday, Saudi Arabia (A1/A-/A+) priced EUR3bn of senior unsecured sovereign bonds in a dual tranche offering, its first issuance in euros, amid low euro rates following the ECB’s recent hints at loosening monetary policy. It is the latest in heavy eurobond issuance recently, as eurozone sovereign bonds have been trading at negative yields.  

    Pakistan (PKSTAN): On Wednesday, the IMF Executive Board approved a 39-month Extended Fund Facility (EFF) for cUS$6bn (210% of quota) for Pakistan, with immediate disbursement of SDR716mn (cUS$1bn). We think there are two key takeaways. Firstly, the programme seems to imply only a modest upfront fiscal effort – we thought the IMF may have demanded more. And secondly, the programme is expected to unlock over US$38bn from official sector creditors (multilateral and bilateral), according to the press release. This is huge, amounting to nearly 14% of GDP, or 1330% of the IMF quota. It is not clear how much of this has already been pledged and disbursed, but we know there have been commitments from Qatar, Saudi Arabia, UAE and China. It will be interesting to see the phasing of such official sector money and how it is tied to meeting IMF performance reviews.  

    Pampa Energia SA (PAMPAR): The Argentine electricity company and hydrocarbons explorer priced its latest US$ bond on Tuesday. The US$300mn 9 1/8% semi-annual paying bond was priced at 98.449%, to yield 9 3/8%. The Primaries of the Argentine Presidential election scheduled for 11 August has been adding some urgency to corporates to issue debt. Last week, state oil firm YPF SA issued US$500mn 10-year bonds, and this week, agriculture firm Cresud raised US$200mn.  

    Ukrainian Railways (RAILUA): On Monday, the 100% government-owned railway monopoly rated CCC+ by S&P and B- by Fitch, priced its latest bond issue, a US$500mn 5-year bond to refinance short-term debt, with initial price talk (IPT) of 8.5-625%, according to Bloomberg. Final pricing was 8 1/4%, issued at par. While the new deal will materially improve the company’s liquidity profile, addressing a bulk of short-term maturities, the final pricing looks aggressive, given the challenges posed by cost inflation, FX mismatch and further refinancing needs. We have a Hold recommendation on the RAILUA 9.88% 21s.

    QNB Finansbank (QNBFB): QNB Finansbank has tapped its 2024 US$-denominated bond, adding US$150mn to the total issue amount (now US$650mn). According to Bloomberg, the tap was done at 102.159. Separately, the issuer’s parent company, QNB, has converted US$525mn in subordinated loans to an AT1 loan, boosting QNBFB’s Tier 1 ratio. The tap of the 2024 issue came after the G20 Summit at which President Trump and President Erdogan met. As discussed in a recent report, we expect increased primary market activity from Turkish banks.  

    Sekerbank (SKBNK): Fitch has downgraded Sekerbank to B- from B. The outlook on the new, lower rating is negative. Sekerbank has the unenviable accolade of being the only Turkish bank we track which reported a loss for the first quarter. Fitch highlights this weak performance, and sees ‘heightened pressures on Sekerbank’s business model.’ Comments from Fitch highlight the importance of parental support, especially at smaller Turkish lenders.  

    Ecobank Transnational (ETINL): Moody’s has revised the outlook on the B2 rating assigned to Ecobank Transnational Inc to negative from stable. This is based on concerns about double leverage at the holding company and about ‘financial challenges’ at the Nigerian subsidiary. Further, capital buffers are seen as ‘modest’. Moody’s has assigned a B2 rating (negative outlook) to the ETINL 2024 bond.  

    Al Hilal Bank (ALHILA): Following the merger with Abu Dhabi Commercial Bank (ADCB), the US$500mn ALHILA 4.375% 2023 bond is now guaranteed by ADCB. As a result, Moody’s has upgraded its rating on the bond to A1 from A2. There has been no change to the A+ rating assigned by Fitch, which is at the same level as ADCB’s rating.