Another sign of how the dynamics of the global financial crisis, especially the on-going euro zone debt crisis and the credit crunch, are affecting more stable economies in the emerging countries and where relevant including their Islamic finance and especially sukuk market, is the postponement of the proposed sukuk offerings of two of Turkey's participation banks, Al Baraka Turk Katilim Bankasi (Albaraka Turk Participation Bank (ATPB) and Bank Asya.
Both were supposed to close their sukuk offerings by the end of 2012. The general reason for the postponement was adverse market conditions, but in reality they differed for each institution. (source)
ATPB, which is a subsidiary of the Bahrain-incorporated Albaraka Banking Group (ABG), headed by Saudi businessman, Saleh Kamel, one of the pioneers of the contemporary Islamic finance industry, is likely to return to the market much quicker in early 2012.
An ATPB source confirmed that "if the market conditions are available, we may re-announce the (sukuk) transaction within this month (January 2012), probably in 2 weeks time."
It was in mid-December 2011 that ABG announced that ATPB is hoping to raise $200 million through a 5-year Sukuk Al-Ijarah offering within a week and citing keen interest from Asian and GCC investors and the yield to market (YTM) price guidance within the 6 percent range, which some bankers stressed is reasonable and competitive in today's tough financial environment.
ATPB had mandated Deutsche Bank, Emirates NBD, Noor Islamic Bank and QInvest to lead manage the sukuk offering which would be issued through a special purpose vehicle, Bereket Varlık Kiralama Anonim Sirketi, which is incorporated in Turkey as a joint stock company. International rating agency, Standard & Poor's in November 2011 assigned a "BB" rating to the proposed Sukuk issue which is based on the "BB" long-term counterparty credit rating on ATPB and the draft documentation of the planned issuance dated Nov. 20, 2011 received from the bank. Application was also made to the UK listing authority for the certificates to be admitted to the official list and to the London Stock Exchange for such certificates to be admitted for trading on the regulated market. The governing laws for the issuance would be Turkish law and English law respectively for different components.
As is usual with these structures, the rating also reflects ATPB's position was obligor and managing agent (Wakil) for the issuance. The rating, stressed Standard & Poor's, mainly "reflects Albaraka Turk's irrevocable undertaking to purchase the assets held by the issuer at the redemption date of the sukuk at the exercise price which will be equal to the aggregate face value of certificates outstanding. This obligation will also rank pari passu with all the bank's other senior unsecured obligations."
In contrast, Bank Asya issued an official statement at the end of November 2011 to the Istanbul Stock Exchange (ISE) that it "is no longer going ahead with the sukuk issuance due to adverse developments in international markets. In this context, Fitch Ratings has withdrawn its B+ rating for the proposed issuance."
Fellow international credit ratings agency, Moody's Investor Service, had also assigned a Ba2 rating to the proposed 5-year $300 million Bank Asya sukuk issuance. The proceeds of the issuance would have been used to finance balance sheet activities of the Bank and to diversify its sources of funding. Bank Asya in fact had mandated Citigroup Global Markets Limited and UBS AG to arrange investor meetings and to lead manage the offering.
According to Turkish banking sources, the real reason for the postponement was a restructuring taking place at Bank Asya including a possible change in the equity ownership structure and therefore shareholder structure of the Bank, in which Saudi Arabia's National Commercial Bank has a substantial stake. There are also suggestions that Bank Asya may have been over-extending itself through its ambitious overseas activities, which includes a stake in Tamweel Africa and opening offices in India. The bank also has a correspondent bank network of over 1,000 banks worldwide.
However, the bank is financially sound as underlined by the affirmation in November 2011 by Fitch Ratings of Bank Asya's Long-term Foreign and Local Currency Issuer Default Ratings of “B+”, and of its short-term Foreign and Local Currency Issuer Default Ratings of “B”.
These above developments follow the successful closure in November 2011 of Kuveyt Turk Participation Bank (KTPB's) $350 million 5-year Sukuk Al-Ijara, its second issuance to date. KTPB, which is majority owned by Kuwait Finance House (KFH), one of the largest Islamic banks in the world, has confirmed that it is interested in further forays into the global financial market to raise even longer term funding subject to the usual caveats of timing and market conditions.
But any talk about a domestic Turkish sukuk market is premature because of structural reasons. "Sukuk," explains Meliksah Utku, assistant general manager of Albaraka Turk Participation Bank (ATPB), "is a long term borrowing instrument and would be useful to meet the long term loan demands of our corporate clients. On the other hand, it is difficult to provide a remedy for asset-liability mismatch based on (short-term) customer deposits. Sukuk is supposed to allow the Bank to diversify long-term funding sources. On the other hand, it is an important tool for the global recognition of the Turkish securities. We don't have local investors that are ready to invest in long-term securities. For this reason, the Turkish originators would prefer to realize the issues in global markets. Thus, the (domestic) Turkish sukuk market does not exist as yet."
The proposed ATPB issuance is a hybrid model where the underlying sukuk assets are composed of both the bank's pool of Ijara assets (not less than 51 percent) and part of its Murabaha portfolio (not exceeding 49 percent). The sukuk will be issued under the provisions of the Turkish Capital Markets Board (CMB's) "Communiqué on the Principles About the Lease Certificates and Asset Leasing Corporations" which sets out the principles on the listing, issuance and sale of the lease certificates as well as the establishment and activities of the asset leasing corporations, including the sale and lease-back structure.
According to Utku, the proceeds of the proposed sukuk would be used to finance long-term projects like infrastructure or energy investments. The aim is to attract the "abundant liquidity in Middle East" to Turkey by means of sukuk issuance.
According to Standard & Poor's rating rationale for the ATPB's proposed issuance, under the transaction, the issuer will hold the property of the sukuk assets for the benefit of the certificate holders. The issuer will invest at least 51 percent of the proceeds received from the issuance of the sukuk certificates in a pool of selected real estate assets owned by ATPB, namely its headquarters and 19 branches, and the remaining amount in a pool of non-real-estate-based assets, receivables from ATPB's customers known as Murabaha, for a period of time corresponding to the duration of the sukuk.
The issuer, as "the lessor", will lease back the real estate assets to ATPB, as "the lessee" for a period equal to the lifetime of the transaction. ATPB will then make lease payments every six months to the issuer. These lease payments will serve as the sole basis for the periodic distribution payments payable on the certificates, as the pool of non-real-estate-based Murabaha assets will not contribute to the periodic distributions to the certificate holders.
The structure, added Standard & Poor's, does not include a stand-by liquidity facility, which would otherwise kick in if ATPB failed to make a lease payment to the issuer to fund the periodic distribution amount due. However, non-payment would force the issuer to redeem the certificates early in compliance with the terms of the purchase undertaking included in the structure. "We believe that failure on the part of Albaraka Turk to fulfill its periodic rental payment obligations would also be detrimental to its reputation, business, and ratings," stressed the rating agency.
On the dissolution of the special purpose vehicle at the sukuk's maturity date or earlier in the event of an early termination, ATPB undertakes to purchase the assets held by the issuer at the exercise price. This payment will fund the dissolution distribution amount that is payable to the certificate holders, and be equal to the aggregate face amount of certificates outstanding.
"The ratings on Albaraka Turk," added Standard & Poor's, "reflect our view of the bank's good track record in Turkey's participation banking market, adequate funding coming from a strong but short-term deposit base, and limited market risk."
However, the rating agency warns of the weaknesses for the ratings are the high-risk operating environment in the Turkey; the bank's small size and market share, and above-average credit risk owing to its large exposure to small and midsize enterprises (SMEs) and the construction sector. In addition, rapid loan growth constrains the bank's capitalization.
Utku remains ambivalent about a Turkish debut sovereign benchmark sukuk. Currently the Treasury in Turkey is constrained by the country's outmoded Constitution which prohibits any selling of state owned real estate or land assets to non-Turkish. As such, in order for sukuk to become an important monetary and liquidity management instrument for Turkish Treasury, the government of Prime Minister Recep Tayyip Erdogan will first have to amend the existing constitution and then introduce the necessary legislative change.
Erdogan last year won a resounding referendum in support of his moves to introduce a new modern constitution for the Turkish Republic. The current Constitution was written and introduced by the Turkish military regime of General Kenan Evren in the early 1980s following the country's last military coup in 1980. The government is indeed in all-party talks on drafting a new constitution.
Albaraka Turk's Utku is confident that once a Turkish debut sovereign Sukuk is issued, it could be helpful to establish primary and secondary markets in the Turkish financial sector and capital market.
He believes that extending tax neutrality measures to other types of sukuk structures other than the Sukuk Al-Ijarah is not necessarily the priority. In fact, the Turkish government would like to encourage the financial institutions to extend long term financings not only in the form of sukuk but also through other types of bond issues.
"Apart from the Shariah compliance problems raised by the Bahrain-based Accounting and Auditing Board for Islamic Financial Institutions (AAOIFI), the tradability of the sukuk is the first concern for most of the investors. Thus, whatever the structure is, the tradability of the sukuk is our priority," he explained.
The outlook for the Turkish participation banking sector in 2012 in general and for Albaraka Turk in particular is promising. "If you make a comparison between the participation and conventional banking sectors for the past ten years," stressed Utku, "you will realize that the growth rates are much higher in the participation banking sector. For example, in 2002, the market share of the participation banks of the total banking sector was around 2 percent while the same ratio is 5 percent as of today. Depending on the past performance, the participation banking sector may be expected to have a better progress when compared to the conventional banking. Due to the ongoing global crisis, the prospective impact on the Turkish economy might have some hurdles for the anticipated growth in terms of asset size and profitability in 2012."
Albaraka Turk remains confident that once its debut sukuk is closed then as long as the bank has a sufficient Ijarah and Murabaha portfolio, there bare no reasons why it should not realize new deals.
