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Tuesday, 11 September 2012

Turkey seeks advice on its proposed sovereign sukuk

The announcement by the Turkish Treasury a few days ago that it had mandated Citigroup, HSBC and Liquidity Management House (LMH), the investment bank subsidiary of Kuwait Finance House, “to explore opportunities for a possible Lease Certificate issuance in the international capital markets” could not be more Turkspeak. 

In reality the mandate is to advise and structure the proposed debut sovereign Sukuk Al-Ijara of the country, the first time that secular Turkey would raise funds from the international market through the issuance of Islamic leasing certificates (Sukuk Al-Ijara). 

In this respect, according to the Treasury, a series of investor meetings (road shows) organized in important financial centers in the Middle East and Asia started Monday which will continue till Thursday.

Ankara has been contemplating for the last five years whether to issue a sovereign sukuk, which has over the last decade become an internationally recognized and acceptable financial instrument through which funds can be raised either through a primary issuance or through a securitisation exercise. 

Hitherto, the AK Party government of Prime Minister Recep Tayyip Erdogan has been cautious not to be seen overtly to promote Islamic or participation banking as it is classified in Turkey. But thanks to the subprime crisis, the precipitant global financial crisis and the resultant Eurozone sovereign debt crisis, even the secular bastions in Ankara, Istanbul and Izmir started questioning the excesses and vagaries of market and casino capitalism. While the lessons learnt from the Turkish financial crisis in 2001 stood local banks in good stead to counter the worst effects of the global financial crisis in 2008, the country’s exports to the Eurozone did suffer. But it is to the prowess of the Turkish private sector that the loss of the Eurozone business was quickly mitigated to a growing extent by seeking new markets in Asia, Africa, Latin America and nearer home, for instance, in Kurdish-controlled Northern Iraq, where Turkish businessmen have a lead start on others. 

Turkey’s staunchly secular media started arguing the merits of raising funds through sukuk especially to attract Middle East and Asian investors to the country. This in effect has helped the Erdogan Government to pave the way for starting the preparatory work towards the issuance of a debut sovereign sukuk.

The government in February 2011 passed vital legislation to facilitate the issuance of leasing certificates (Sukuk Al-Ijara) including tax neutrality measures consistent with equivalent conventional products. 

Turkey traditionally, save for a couple of recent years, has raised funds from the IMF or through issuing Eurobonds to meet its external borrowing requirement, which in 2012 was targeted at US$4.5 billion. According to Treasury figures, Ankara has already raised US$4.6 billion in 2012 in this respect, so technically the country does not need to raise additional funding for this financial year. As such, proceeds from the proposed Sukuk will go towards the funding requirements in fiscal year 2013.

Emad Al Monayea, CEO of Liquidity Management House, one of the mandated lead arrangers for the Turkish sukuk, in a recent unrelated interview stressed that the pricing for sukuk has become so tight that it is a very attractive instrument through which funds could be raised currently. However, he cautioned that new issuers may have to pay a slight premium to attract investors. However, Turkish risk is familiar to European, Middle East and now Asian investors. 

For Liquidity Management House, a sister institution of local Turkish participation bank, Kuveyt Turk Participation Bank – both subsidiaries of Kuwait Finance House – the Turkey sovereign sukuk mandate is yet another triumph. It comes on the heels of another important recent mandate it won as part of a six-member consortium to advise and structure on South Africa’s debut sovereign Sukuk Al-Ijara.

Kuwait’s triumph however is Malaysia’s disappointment. Malaysian banks such as CIMB Investment Bank and Maybank Investment Bank have once again lost out both in this Turkish mandate and the earlier South African one. The Malaysian International Islamic Financial Centre (MIFC) initiative has painstakingly spent much resources over the last few years to foster greater cooperation between Malaysia and Turkey especially in the Islamic finance space. This was translated into several MoUs, roadshows, seminars. For Kuala Lumpur, the absence of any Malaysian banks as mandated lead arrangers for both the Turkish and South African mandates must be a major disappointment, and perhaps questions the approach of Malaysian financial institutions to the Middle East markets. 

Kuveyt Turk in fact paved the way for Turkish corporate sukuk issuance with two offerings to date – a 3-year US$100 million Sukuk Al Ijara in 2010 and a 5-year US$350 million Sukuk Al-Ijara offering in November 2011. That latter issue, according to Ufuk Uyan, CEO of Kuveyt Turk was “the first Sukuk to be realized under the provisions of the new Capital Markets Board (CMB) legislation on Lease (Ijara) Certificates, which is the Turkish Participation banking version of Sukuk issuance, and for which also the taxation aspects of asset based securities or Sukuk were equalised to bring them to a level playing field to that of conventional bond issuances.” The proposed Turkey sovereign sukuk will be similarly based on the provisions of the above law. 

Once again using the Kuveyt Turk issuance, the pricing for the Turkish sovereign Sukuk according to bankers involved in the transaction is expected to be competitive. 

Its US$350 million Sukuk was priced at par with a profit rate of 5.875 percent with a spread of 447.5 basis points over MS (Mid Swaps). The good news for the Turkish Sukuk market was that the pricing for the Kuveyt Turk Sukuk was tight and far more competitive than the pricing for then equivalent bonds issued by Turkish conventional banks such as Akbank and Isbankasi which were priced 50 basis points and 20 basis points more respectively.

With Moody’s Investors Service, the international rating agency, a few days ago upgrading its outlook for Turkey’s proposed sukuk issuance to positive and assigned it a “Ba1” investment grade rating, the price guidance for the proposed Turkish sovereign Sukuk similarly is expected to be competitive.

The business case for a sovereign Turkish Sukuk is solid. It will set the benchmark for a spate of anticipated corporate issuances being lined up - both US-dollar denominated and Turkish Lira-denominated issuances. It will familiarize Islamic investors with the Islamic debt and capital market in Turkey. It will contribute to the government funding gap in fiscal year 2013. It will allow Islamic banks and participation banks to diversify their Sukuk holdings. It will allow local Turkish participation banks and funds to invest in Treasury Islamic leasing certificates, something of which they have been bereft thus far. It could be a vehicle for Turkish participation banks to park their reserves in Islamic instruments at the Treasury. It will diversify the base of true sovereign issuers which include Malaysia, Pakistan, Indonesia, Bahrain, Qatar, Dubai, Singapore and Brunei. And perhaps more importantly it could be a useful and competitive alternative source of raising funds to finance the country’s ongoing infrastructure, housing and energy spend which has been exacerbated by a young, dynamic and growing population. 

Turkey is the 17th largest economy in the world; it has a population of 70 million of which the average age is 29, which is the youngest in Europe; it is the 16th largest steel producer in the world; and the country averaged a GDP growth rate of 10.3 per cent for the First half of 2011.

The timing of the Turkish sovereign sukuk, which according to bankers in Istanbul is expected to be in the region of a 5-year US$1 billion to US$1.5 billion S registration US dollar denominated Sukuk Al-Ijara, is also opportune given that there is a surfeit of liquidity in the market chasing investment grade and AAA rated Sukuk issuances. 

Perhaps a Turkish sovereign sukuk will also spur on other major sovereigns in the region especially Saudi Arabia, Kuwait, Iran, Egypt, Morocco to go to the market with debut true sovereign sukuk offerings as opposed to quasi-sovereign issuances.

(Saudi Gazette.Com.SA / 11 Sept 2012)

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