Turkey raises $2.5bn on the dollar bond market in its first deal since April

The first dollar bond deal since April raised $2.5bn by Turkey, as its new economic policies have attracted investors who had abandoned Turkish assets.

According to a termsheet, the country received bids of more than $7bn on Tuesday for a five-year dollar sukuk. A sukuk is a debt instrument that conforms with Islamic religious laws.

The high demand for this deal is the latest indication of the improvement in investor sentiment after President Recep Tayyip Erdoan reshuffled his economic team following his re-election May, and set out a path towards ending years of unconventional policies.

“The government is clawing back” . . “Trust in its story,” said Stefan Weiler of JPMorgan, the head of debt markets for Central Europe, Middle East, and Africa. He worked on this deal.

He said that Turkey had been able to negotiate better terms with the EU than it could have done several months earlier because of the reduced anxiety over Turkey’s economic trajectory following its elections.

Weiler added that Turkey has also taken advantage of the recent drop in US bond rates, which was prompted by concern over the health of the American economy. This allows it to lock in lower borrowing prices than were available a few weeks ago.

According to the terms sheet, the five-year sukuk had a yield at 8.5 percent. The Turkish finance ministry refused to comment on this debt issuance.

Turkey will have achieved its goal to raise $10bn in international capital markets by the time it issues $2.5bn of sukuk. A person familiar with the deal stated that the previous $7.5bn raised was in conventional and green-dollar bonds. However, the sukuk attracted both western investors as well as Gulf investors who are interested in Islamic finance. The Turkish government plans to raise $10bn more on the international debt markets in 2019.

The deal was struck at a moment when Turkish assets were gaining in value on the financial markets. The yield on a conventional dollar-denominated debt maturing in October 2020 was 8.1 percent, down from a high of over 10 percent in May.

Investors also demand a lower premium for holding Turkish debt. According to LSEG, the yield gap between Turkish 5-year dollar bonds and US Treasuries is now 3.6 percentage point lower than it was in May.

Turkey’s new management team for economic policy, headed by Finance Minister Mehmet Simsek, and Central Bank Chief Hafize Gaye Erkan has started to undo many of the unorthodox policies Erdogan pursued prior to his election.

Central bank interest rates have risen from 8.5% to 35%, abandoning years of low borrowing costs despite high inflation. The government also increased taxes to try and cool down the rampant consumer demand which was fueling very high imports.

S&P Global Ratings, as well as Fitch Ratings, both increased their outlook for Turkey’s credit ratings to “stable”, in September. This was due to the new economic policies. However, it still remains within the junk-rated territory.

Investors are also deeply concerned about how long Turkey will continue with its economic program.

Charlie Robertson is the chief macro-strategist at FIM Partners, a fund manager that focuses on emerging markets. “Markets like Simsek but don’t trust Erdoan, so the former is more important than the latter for the moment.”

Investors are still concerned about “geopolitical risk”, according to a person familiar with the transaction who declined to be identified. This is especially true given Erdogan’s recent strong criticism of Israel and its allies.

According to the terms sheet, Emirates, HSBC JPMorgan KFH Capital and QNB Capital will be the joint lead managers for the sukuk transaction.