Turkish Corporate Debt Rallies as Lira Rebound Adds Funding Room

(Bloomberg) -- The resurgent lira is giving Turkey’s debt-laden companies a lifeline.

The best rally among emerging-market currencies and a retreat in the nation’s default risk have helped cut the dollar cost of borrowing to the lowest since July 2016 for Turkish corporate issuers. Looking into an abyss only a few months ago, they are now on track to roll over $6.7 billion worth of foreign bonds maturing this year, helped by a change in economic policy.

The new issuance has reopened with four banks, including Turkiye Vakiflar Bankasi TAO and TC Ziraat Bankasi AS, raising $2.2 billion since October. Yields in the $170 billion market have fallen to less than half the rate demanded by investors last year.

“The positive Turkish economic developments have increased demand for Turkish bonds and stocks,” said Fatma Nur Cetinel, the Istanbul-based head of investor relations at Ziraat, Turkey’s biggest bank. “Our policy is to take advantage of favorable conditions for borrowing in the international markets.”

The boon is a result of the lira’s 20% rally since Turkish authorities shifted policy in November, pledging to fight inflation and boost trust in an economy that had fallen out of favor with foreign investors. Issuance by companies had dropped by half in the first nine months of 2020, with weakened demand for the nation’s assets forcing the sovereign wealth fund to postpone its debut Eurobond sale.

As part of the changes, central bank Governor Naci Agbal raised the benchmark interest rate by 675 basis points, while Turkey’s bank regulator abolished rules that compelled lenders to extend credit and buy government debt.

Good Direction

The new economic landscape may allow companies to move past a focus on debt reduction that had been dominant since the currency crash of August 2018. Executives had swelled balance sheets with cash to ensure obligations were met, but some Turkish firms still struggled and had to restructure tens of billions of dollars in foreign debt.

Beyond spearheading issuance, banks have also been handing investors the largest returns. They account for nine out of the 10 top-performing Turkish corporate bonds this year, which have returned 2.1%, according to Bloomberg Barclays indexes. The lira extended this year’s gain to 5.7% on Thursday.

“Turkey’s policy framework has become more mainstream and that is highly welcome,” said Meno Stroemer, the Zurich-based head of corporate bonds at Fisch Asset Management AG, who has a small overweight preference for the nation’s credit in his portfolio. “Turkey can be very unpredictable but the current direction is a good one.”

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