www.saudigazette.com.sa -LONDON – 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). (source)
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.
Source: http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20120911135722 - Sept 11, 2012
