Euromoney: New Rules Prompt Vakifbank Landmark

Euromoney, February 2015

It didn’t take long for Turkish banks to start taking advantage of the country’s long-awaited legislation around Basel III bank capital rules. Turkey’s new rules entered law in early January; Vakifbank priced the first ever Basel III compliant tier two bond on January 26.

It has been an interesting month for Turkish banks, for a host of reasons. The economy is suddenly buoyant, fuelled by a low oil price; there is increasing appetite for their credit; and now there’s a new tool in the box for capital raising. “From now on Turkey’s banks will have the green light to issue in tier two, and this language may also potentially be used in tier one instruments,” says Piotr Rejmer, co-head of EMEA capital markets at Bank of America Merrill Lynch, which was joint structuring advisor and joint lead manager along with Standard Chartered (Citi, Deutsche, Goldman Sachs and HSBC were also joint leads). “It’s a timely piece of legislation that will help Turkish banks to keep their capital levels well ahead of where they need to be.”

But at what cost? The $500 million 10-year non-call five Vakifbank deal priced at a 6.95% yield and 6.875% coupon, and although exact comparisons are difficult, it paid about 115 basis points over the most comparable securities, old-style tier two deals maturing in 2022. “The pricing is effectively a construct which starts from their existing tier two, which is a 2022 deal, and incorporates elements of curve extension, premium for the Basel III structure, the call option and an element of new issue premium,” said Karim Movaghar, head of BAML’s CEEMEA debt syndicate.

That combination of elements makes it difficult to work out exactly how much the structure itself is going to cost issuers, something that will presumably become clear as other lenders follow, which they are expected to do.

Assessing the right pricing level for the structure is tricky in a deal like this, particularly because Turkey’s approach to Basel III – and the non-viability language that is at its core – is distinctive. Turkey has sought to integrate Basel III legislation alongside its existing banking law, which already sets a number of steps that come before a bank reaches the point of non-viability. Specifically, Articles 68 to 70 of the banking law outline corrective, rehabilitative and restrictive measures that attempt to recover, or at least stabilize, a troubled bank. Under this code, the regulator can step in before non-viability is reached and insist, for example, upon an increase in the level of core tier one capital, or a rights issue, or even a merger with another institution.

Then, the Banking Regulation and Supervision Agency can declare the issuer non-viable if the bank has its licence revoked, or has its shareholder rights transferred to Turkey’s saving deposit insurance fund, the SDIF. Only then would non-viability be triggered.

All things considered, this looks like an investor-friendly approach, and certainly investors were happy enough to wade through the implications and subscribe. The order book hit a billion dollars, with 78% of the deal eventually going to emerging market asset managers, and 22% from banks and private banks. The UK represented the biggest pool of appetite, taking 34% of the deal, with only 30% in total going outside Europe.

The deal is also interesting because it comes at a time when Turkish banks have slightly contradictory influences on their prospects and behaviour. On one hand, the low oil price helps the Turkish economy enormously. The fall in the oil price, says Selim Yazici, head of Turkish equities at BNP Paribas Investment Partners, “is the best thing that can happen to Turkey. Every $10 drop in the oil price improves the current account deficit by $4.5 billion.” Citi Global Research expects Turkey’s current account deficit to drop from 8% in 2014 to 5% in 2015. Yazici likes the banking sector as much as anything in Turkey, seeing it as a play on improving public finances and national growth prospects. “If you think the oil price at these levels us sustainable, Turkey definitely outperforms.”

Better still, banks are already in decent shape, mostly well ahead of capital adequacy requirements anyway. “It’s not that Turkish banks urgently need to raise capital,” says Olcay Yagci, head of southern CEEMEA debt capital markets at BAML. “However, when you look at their growth prospects and the way they grew over the past few years, they will need to raise capital in the coming two to three years in line with their growth strategies.”

But here’s the rub: will they be allowed to? Turkey’s banking crisis in 2001 has not yet faded from the national memory, and most certainly not at the regulator or the central bank. Banks have faced limitations on retail growth to try to curb aggression; capital ratios are monitored closely; and those familiar with the regulator say that the priority is to curb excessive growth rather than to encourage rapid expansion. Turkish banks face a more inviting confluence of circumstances than they have for many years, but it remains to be seen just how much freedom they will be given to enjoy them.