It has been a groundbreaking week for Islamic finance in Turkey, with Thursday bringing both a $350m benchmark sukuk from Kuveyt Türk Participation Bank, and word that Asya Bank is looking to roadshow its own deal. (source)
Kuveyt Türk, the Turkish arm of Kuwait Finance House, released price talk on Wednesday evening in the 6% profit rate area for the dollar five year sukuk. The $350m deal was the first benchmark sized sukuk for a Turkish bank, although Kuveyt Türk completed a $100m club deal in August last year.
HSBC, Standard Chartered and Kuwait's Liquidity Management House were joint bookrunners on the deal. On Thursday afternoon the new deal was priced at par with a profit rate of 5.875% after receiving a book size of $560m from over 50 orders.
The roadshow for the deal finished on Tuesday, having visited Kuala Lumpur, Singapore, Dubai and Abu Dhabi.
In another first for the Turkish market, some 19% of the allocation came from Asian investors, after extensive marketing to Malaysia and Singapore. The result, say bankers, underscores not only the growing appeal of Turkey to Islamic investors but also the extent of the developing co-operation between Turkey and Malaysia in recent months.
Some 69% of orders came from the Middle East, with 12% from Europe. Banks made up 81% of the allocation, with 8% from fund managers and insurance firms and 10% from sovereigns, supranationals and agencies.
"Islamic banking is a small sector of the total Turkish banking sector but it's one that's growing and accounts buy into that story," said James Nelson, director of syndicate at Standard Chartered. "They bought it not just because of the growth story of Islamic banking in Turkey, but also the structural security that the sukuk asset class offers."
Kuveyt Türk is 62% owned by Kuwait Finance House, which Fitch rates A+. The Islamic Development Bank also has a 9% stake. The sukuk incorporates a change of control put option exercisable if Kuwait Finance house ceases to own at least 51% of Kuveyt Türk.
The perceived strength of the sukuk structure is shown by Kuveyt Türk's deal being priced well inside conventional Turkish banks. At a spread of 447.5bp over mid-swaps it was as much as 50bp inside Akbank, the number one bank in Turkey, and 20bp inside Isbank.
Bankers on the deal said investors viewed sukuk as shielding issuers from the risks that conventional bonds faced from the global financial crisis.
"The pricing for the notes was inside some of Turkey's strongest banks, but wide of the where Middle East banks typically trade because of where the bank operates," said Nelson. Middle East bank debt is typically around 200bp.
"For pricing, investors looked both at Turkish risk and at the sukuk asset class," said Nelson. "All accounts have to be confident with credit, but there is credibility in the sukuk asset class as well. This offers some safety from the volatility. The dearth of sukuk supply as well as growing demand from Islamic funds means that quality credits can achieve good pricing."
Driving this dynamic, Islamic investors are constrained in the investments they are allowed to make, but many also want to diversify away from the local markets in Middle East and Asia. As such the Kuveyt Tأ¼rk sukuk may send a strong signal to other issuers in Turkey – and elsewhere in Europe – to target this investor base instead of conventional issuance.
This market demand also goes some way towards explaining why Kuveyt Türk's deal performed robustly in the secondary market after launch, despite a rocky conventional bond market session.
"Soon after the deal broke it received a good trading interest in the secondary market which took it up to 100¼," said Souhail Mahjour, HSBC emerging markets syndicate. "This was a very strong performance in such challenging market backdrop thanks to the strength of the Islamic investor bid'
While Kuveyt Türk may have held investor focus, fellow Turkish lender Bank Asya said on Thursday that it had mandated UBS and Citi for meetings with investors in a potential five year dollar sukuk.
Whether or not a roadshow goes ahead next week will be subject to market conditions, but if undertaken will involve marketing to investors in the Middle East, Switzerland and UK through to Wednesday October 26.
At the bank level, Asya is rated is Ba3 and B+ by Moody's and Fitch, respectively. If the sukuk launches it is expected to be rated Ba2 and B+ by the same agencies.
Bankers working on the deal say there is as yet no maximum size set. However, ratings given by the agencies specify they are valid up to a maximum $300m.
