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Capital Markets Weekly: Turkey revives adverse market focus increasing country-specific risks

26 March 2021 Brian Lawson

Emerging markets

Turkey has been a focus of adverse attention this week.

Turkish President Recep Tayyip Erdoğan abruptly dismissed the Turkish Central Bank governor, Naci Ağbal, on 19 March, four months after his appointment. He replaced him with Sahap Kavcioğlu, an academic and a former MP from the ruling Justice and Development Party (AKP) who previously has advocated a policy of lower interest rates, aligning with Erdogan's own preferred unorthodox position. Ağbal was removed a day after the Turkish Central Bank increased interest rates by 200 basis-points, from 17% to 19% (versus annual CPI inflation of 15.6% and core "goods" inflation of 17.3% in February)

After the removal of Naci Agbal, the Turkish Lira initially weakened as much as 14% in Asian markets, trading around 8.4 against the US dollar, and Turkey's 2031 bond fell eight percentage points, before recovering after a pledge by Finance Minister Lutfi Elvan to continue efforts to control inflation.

In response to these developments, Turkey's international bond spreads have worsened sharply, with the average margin of its dollar bonds rising on 22 March from 427 to 533 basis points over comparable US Treasuries according to its EMBI+ index. Yields on domestic 2030 government bonds widened by four full percentage points to above 18%.

Elsewhere, Liberty Latin America sold USD820 million of 8.25-year debt for its Puerto Rican subsidiary. The deal was priced at 5.125% versus guidance of 5.25-5.5%, at a spread of 366 basis points over US treasuries. Proceeds will refinance existing bank debt.

Banco de Crédito del Peru sold USD500 million of 10.5-year Tier 2 subordinated debt at 3.267%, 245 basis points over US treasuries versus initial price talk of 280 basis points. Demand reached USD1.9 billion.

Indonesia's Bank Negara raised USD500 million of Tier 2 debt at 3.75%, versus 4.2% initial guidance. The bank is majority owned by the Indonesian government.

Several Chinese borrowers also have been active raising finance, with three deals on 23 March (from GLP China Holdings, Science City Investment Group and SCE Group Holdings).

On 25 March, Power Construction Corporation of China marketed perpetual debt, gaining over USD2.2 billion of interest for the issue at price guidance of 3.55% to the initial call after five years, with final pricing set at 3.08%.

According to an (unconfirmed) media report, Laos has pulled its planned dollar bond for the third time, citing unfavorable market conditions, despite offering an 11% coupon.

Pakistan is reported to have mandated banks to arrange a three-tranche dollar bond. The local The News website previously suggested Pakistan would seek a USD750-1000 million volume, with the deal replacing prior plans for sukuk issuance. The report also suggested Pakistan is preparing a USD500 million Green Bond sale to fund hydropower development.

The Maldives is reported to be preparing a five-year dollar sukuk sale. , while Pakistan is also reportedly considering dollar issuance in the near future.

Kuwaiti Islamic bank Boubyan Bank sold an unrated USD500 million perpetual deal, with a 3.95% coupon to the initial call after 5.5 years, versus 4.25% guidance.


Indian renewables energy firm Greenko sold USD940 million of 3.85% five-year Green bonds on 22 March, with demand reaching over USD2.5 billion. A Mint website source described the offering as "the lowest priced and largest bond in non-investment grade" by an Indian corporate issuer. The firm operates wind, solar, hydro and other renewable facilities in 14 Indian states.

The EU arranged another SURE facility sale, this time targeting 5 and 25-year maturities for its third deal in 2021 (having already issued earlier in March). This time it sold EUR13 billion of which EUR5 billion was for the longer tenor, with the two tranches priced at -0.488% and 0.476%.

Demand reached EUR46.5 billion and EUR50 billion respectively for the two tranches with involvement of over 600 investors. Fund managers and official buyers dominated demand for the five-year tranche, taking 45% and 42%: by geography the UK (27%) and Asia (27%) were most prominent. For the 25-year debt, asset managers took 44%, followed by banks, central banks/official institutions and pension funds with 17%, 15% and 13% respectively: Germany, the UK and Benelux led demand with 28%, 18% and 15% respectively.

In its statement, the European Commission noted it has raised EUR36 billion within 2021 for the program, within total SURE issuance of EUR75.5 billion. It flagged that it has EUR13-14 billion projected for Q2 2021, before starting on funding for its EUR800 billion Next Generation EU program.

Portuguese gas and electricity grid operator REN plans a debut Green Bond issue "in March or April". The offering is slated to be for seven to 10 years and for EUR300-500 million.

South Korean internet form Naver has conducted its debut bond issue by way of a sustainable issue. It raised USD500 million of 1.5% five-year debt priced at 68 basis points over comparable US Treasuries, versus initial guidance of 90 basis points.

Other debt

Oracle sold a USD15 billion six-part package on 22 March, the second-largest corporate offering this year. The package included 30 and 40-year tranches, priced at margins of 155 and 170 basis points respectively.

Following its acquisition of Refinitiv the London Stock Exchange Group is arranging a large, multi-currency bond financing spanning US dollars, Euro and sterling, with maturities of 3-20 years, 4-12 years and nine years slated for the three currencies. The dollar sale on 25 March raised USD4.5 billion in five tranches.

Cruise line Royal Caribbean has sold USD1.5 billion of high yield debt: the seven-year sale was priced at 5.5% versus guidance of 5.5-5.75%. The issue will cover debt maturities in 2021 and 2022, along with general corporate purposes.

The UK's Debt Management Office arranged the country's second sukuk issue on 25 March. It placed GBP500 million of July 2026 instruments with a profit rate of 0.333%, in line with its outstanding 1.5% 2026 gilt. Demand reached over GBP 625 million. The issue is underpinned by rental income from government owned office properties.

Implications and outlook

Turkey's latest move is part of a long politically driven process, stemming from President Erdoğan's view that high interest rates are both inflationary and damaging to Turkey's economy. The replacement of the central bank governor came after Turkey had followed a more orthodox policy to control inflation and support its currency, which had encouraged positive portfolio inflows, needed to fund Turkey's persistent current account deficits and replenish its foreign exchange reserves.

Even if Turkey holds rates stable at its next monetary policy meeting - which it may well do to avoid exacerbating market nervousness - the longer-term position points to increased risk of currency weakness, higher borrowing costs and reduced market access. Prior suggestions that Turkey would raise more sovereign dollar debt soon would now seem ambitious, with the risk of major financial dislocation having increased. Given the government's refusal to seek IMF support, eventual default risks appear to have worsened.

If Laos has failed for a third time to access bond finance, the feasibility of public debt finance seems increasingly in doubt. Its external solvency would then be heavily dependent on China's support. However, Laos is a small borrower and its plight is unlikely to impact broader conditions in Asia.

Conversely, this week's supply - particularly that from Asia - further reinforces our prior message that despite increases in key reference bond yields, financial markets have suffered only limited supply disruption. This week's Greenko deal took Indian dollar bond sales in 2021 to USD10.7 billion, up 70% versus the same period in 2020. Aggregate non-Japanese Asian sales have reached USD70 billion, USD4 billion above corresponding levels in 2020. The iTraxx Asia ex-Japan CDS Index recently reached a spread of 58 basis points, more than a full percentage point below levels in March 2020 and close to all-time lows.

Longer-term US bond yields have deteriorated sharply within 2021, but the US authorities appear relaxed as evidenced by the ending as scheduled on the exemption for bank holdings of US treasury bonds as scheduled at end-March. By contrast, the European Central Bank appears keener to preserve the prevailing yield environment, having stepped up its asset purchases and pledged increased intervention to assist market stability, leading to some recent market divergence.

Posted 26 March 2021 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence


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