Mystery Grows Over Turkey State Banks' Rushed Private Debt Sales

(Bloomberg) -- Who bought 10.9 billion liras ($1.8 billion) of Turkish state banks’ subordinated debt in hurried sales last week?

That’s the question that’s been dominating talk among local economists and investors, with speculation focusing on whether assets from the nation’s unemployment fund were deployed to boost the lenders’ capital buffers. The banks haven’t provided many details, saying the sales were private.

State-controlled Turkiye Vakiflar Bankasi TAO sold 4.99 billion liras of Tier-1 notes with a fixed-rate coupon payment on a semi-annual basis. Turkiye Halk Bankasi AS sold 2.98 billion liras in Tier-2 debt and Turkiye Ihracat Kredi Bankasi AS, known as Eximbank, sold 2.9 billion liras Tier-2 debt last week with a 10-year maturity, completing the sale on the same day it received regulatory approval. All three were sold through private placements and yields haven’t been announced.

The large transactions come just before the banks reveal their third-quarter accounts, and could be an effort to beef up capital adequacy ratios hit by the lira’s plunge, according to local analysts who asked not to be named, citing the sensitivity of the issue.

Unemployment Fund

Since there was no transparency in the sales, “speculation has spread that the unemployment fund bought those bonds,” Ugur Gurses, an independent economy columnist and former central bank official, wrote on his blog on Sunday. He said regulations should have prevented the fund from investing directly in the state banks’ bonds, but it could have loaned some of its bond holdings to the banks.

Since the bonds were sold through a private placement, Halkbank wouldn’t be able to provide information about the investors and the yield will be announced later, when coupon payments are made, the lender said in response to Bloomberg’s questions. Vakifbank said it couldn’t provide further information beyond its public statement. Eximbank didn’t respond to requests for comment.

The unemployment fund referred questions to Iskur, the government agency it reports to, which declined to comment. The Ministry of Family, Labor and Social Service also declined comment on the transactions.

The fund was established in March 2002, and as of August, had 124 billion in lira assets, which accumulate through mandatory contributions from employees, employers and the state, according to the most recent official data. Bonds make up 89 percent of those assets while the rest is deposits. Politicians have bickered frequently over whether those funds should be deployed for purposes other than funding unemployment benefits.

Banks across Turkey are being forced to strengthen their capital bases in response to the lira’s nearly 40 percent depreciation against the dollar this year, which also threatens to increase defaults by borrowers who took out foreign-currency loans. A sharp raise in interest rates by the central bank has helped the lira pare losses in recent weeks, but also makes it more difficult for local-currency borrowers to service those debts.

In total, the regulator has approved the sale of 18 billion liras in subordinated debt by various banks, with Turkiye Is Bankasi AS receiving approval to sell 5 billion liras and Halkbank with approval to issue another 2 billion liras.

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