The Turkish trade finance market is facing a problem familiar across the globe: a lack of affordable short-term financing. With the country far better equipped to deal with this economic downturn following its 2001 banking crisis, the hikes in pricing on trade deals are no longer reflecting the real risks of doing business in Turkey, writes Rebecca Spong.

Turkey offers a country risk profile of a developed country but with emerging market growth,” remarked Mehmet Simsek, Turkey’s minister of economy, at a press briefing in mid-October at the British-Turkish Chamber of Commerce’s offices in London.

It is a bold statement to make, but not wholly unjustified. Turkish banks are not experiencing the same fate as Ukraine or Russia. There have been no state bailouts of the banking sector, and it is expected that the Turkish economy will still see a 4% growth rate for 2008.

Turkey’s trade volumes remain healthy, and continue to provide demand for trade finance products. Most Turkish trade finance bankers are using the term “cautiously optimistic”, when talking about the future of the country’s trade and export market.

Simsek went on to dismiss the often-voiced concerns about the country’s current account deficit and its reliance of foreign investment. The current account deficit is approximately 8% of GDP, and in 2007, the country’s foreign debt stood at US$235bn (approximately 45% of GDP).

Simsek acknowledged in his address that Turkey was “not immune” from the crisis, and his government is in talks with the International Monetary Fund (IMF) to discuss a stand-by financing agreement to help support its economy. Turkey previously had a US$10bn IMF stand-by deal which expired in May.

The Turkish prime minister, Tayyip Erdogan, has however defiantly stated Turkey is not in desperate need of an IMF loan. Addressing a press conference in late October, he said his government was not against the IMF, but that Turkey was relatively self-sufficient.

Yet, the country is feeling the effects of the financial turmoil. Its currency has taken a hit, sliding dramatically against foreign currencies, increasing the cost of imports and pushing up inflation. On October 31, the central bank announced it expected inflation to rise by 0.5% to 11.1% by the end of 2008.

At a micro-level in the trade finance market, within just two months bankers have seen pricing almost double on trade-related syndicated loans. In turn, the cost of funding is pushing up the costs of trade finance instruments. As the crisis tightens its grip on the emerging markets, Turkey’s newly strengthened financial armament is being put to the test.

Lack of funding stalls bank deals
As many Turkish bankers remark to GTR, the country has learnt important lessons from its banking crisis in 2001. Since then, the banking sector has been reorganised, consolidated and recapitalised. Bank balances generally have strong deposits, and high asset quality with no exposure to the so-called toxic assets afflicting banks in Western Europe and the US. There have as yet been no requirements for capital injections. “The capital adequacy ratio of the banks’ is 15.4% as of June 2008 which is well above the legal limit,” remarks Ayse Tuna, group manager, correspondent banking, at Isbank.

Another banker remarks: “Throughout this crisis, the Turkish stock market has never been closed, unlike what has happened in Russia, for example. The country has always been open for business.”
Yet, the crisis is seeping into the economy. As Isbank’s Tuna remarks: “We are living in such extraordinary days,” days that require all the banks to follow very cautious credit and risk management policies.

The soaring cost of funding, and the fluctuating rate of Libor is the main effect of the crisis. In Turkey, most European banks are presently only happy to fund deals in euros, given the lack of US dollar liquidity.
Pricing on trade-related syndicated loans has almost doubled, in some cases exceeding 1.5% over Libor. One banker remarked it has even hit 2% on occasions, as a number of banks enter the market looking to renew previous syndicated deals.

Looking back at the end of 2007, the top Turkish banks were able to raise syndicated trade-related loans purely in dollars at roughly 47.5 basis points.

Jump forward to September and October this year, when some banks were looking to refinance these deals, and the costs are far higher but still manageable. In mid-September this year, Yapi Kredi signed a US$1bn dual-tranche multicurrency loan paying 75bp to refinance its previous single tranche US$800mn facility signed in 2007 at a cost of 47.5bp.

Isbank closed a dual tranche syndicated one-year loan in late September consisting of a US$484.5mn tranche and a €236mn portion. The facility was to fund trade finance activities, and the all-in syndication cost, including participation fees, was 75bp.

Vakifbank also closed a US$750mn one-year loan in August. Again this facility was divided into a euro and dollar tranche, and the all-in cost was 77bp, over 40bp higher than the bank’s previous loan. The deal was a roll-over of a syndicated US$700mn loan signed in 2007 and it was raised to fund pre-export finance.

Further back in the year in May, Garanti Bank became the first Turkish bank to tap the syndicated market in 2008 and managed to raise a €600mn self-arranged club facility to support its trade finance contracts. This facility paid a margin of 67.5bp, and was even oversubscribed.

Yet, Garanti’s loan was raised in a different financial world, in a market where Lehman Brothers was still a functioning entity.

Even just back in September, the hike in pricing was referred to by one banker as a “normalisation of Turkish risk pricing”. This is now far from the case, as prices are said to be “incredibly high and irrelevant to the risk”.

The secondary market for Turkish risk has almost completely dried up, with bankers saying there is no correct pricing on offer.

Akbank is one of the Turkish banks in the market for refinancing, and is in the market with a US$1bn syndicated loan, which it still hopes to close in December. The deal is said to be a self-arranged deal, and follows a previous self-arranged €1bn syndicated one-year trade-related loan signed in August this year with a margin of 75bp over Euribor (its 2007 syndicated loan facility paid 47.5bp).

However, as yet, the Turkish market has not followed Russia’s example, where a number of second tier banks are pulling their syndicated loans after failing to find participants, and postponing them until markets improve.

There is also a line of thought that it wouldn’t be a complete disaster if a Turkish syndicated deal did fail. One banker remarks that most major Turkish banks already have enough cash to pay off their syndicated loans without having to renew them. Lenders to Turkish banks are also unlikely to want to call a default on a Turkish institution which is unable to fully repay loans.

What is more likely is that there will be tougher negotiations on the terms of transactions, spreads will increase, and banks may even pay off a certain proportion of their previous syndications before renewing them.

“It won’t be the end of the world if a bank’s syndication is not renewed, as a US$1bn syndication won’t matter that much within a US$60bn balance sheet. Banks can finance it from domestic sources,” remarks one Istanbul-based banker.
Turkish banks struggling to find liquidity have also been thrown a few lifelines in recent weeks. The Islamic Trade Finance Corporation (ITFC) has just signed an agreement to extend US$60mn, initially, to four participation or Islamic banks in Turkey. The recipients of this financing are: Turkey Finance, Al Baraka Turk, Bank Asya and Kuwait Turk Bank. The ITFC is an autonomous arm of the Islamic Development Bank (IsDB) set up to help support trade finance within the Islamic world.

Even the European Bank of Reconstruction and Development (EBRD) could be looking to improve access to liquidity. The development bank announced in September that Turkey should be a recipient of EBRD investments.

Trade perseveres
“Trade finance is at the heart of the Turkish economy and will not disappear,” remarks Yonca Sarp at the London Forfaiting Company (LFC) in Istanbul. Underlying this business is a growing volume of trade being conducted in and out of Turkey. In just the first eight months of 2007, Turkish foreign trade volumes reached US$238bn, compared to US$174bn recorded in the same time period in 2007.

Trade flows remain steady, and as yet, no one is reporting a huge surge in demand for trade finance among Turkish importers or exporters. Yapi Kredi’s trade finance team reported rising volumes of business, with the bank set to close US$45bn-worth of foreign trade in 2008, and US$41bn-worth of foreign trade the previous year.

“Import and export letters of credit (LCs) are the trade finance division’s main source of income,” remarks Elyem Ekmerkci, head of trade finance at Yapi Kredi.

Most banks report that it is “business as usual” for unfunded business. “As yet we have not seen any increase or decrease in demand for trade finance business. In terms of our unfunded business, we are not facing any major difficulties. It is our funded and discounted business that is suffering from increasing costs,” comments Alper Nalbant, assistant vice-president, financial institutions, at Bank Asya. LFC’s Sarp adds: “of course we are being more selective with funded business.”

Similarly, although LCs are getting more expensive, a spokesperson from Garanti Bank trade finance remarks that: “there is no correlating decline in demand for LCs since they are still a widely-known and internationally accepted payment tool.”
However, the majority of exports from Turkey are for developed markets such as Germany, UK, Italy, France and Spain, and much of this trade is done on an open account basis. According to Turkstat, undersecretariat of foreign trade, in 2007, US$65,655mn-worth of exports went to OECD countries, while US$43,808mn went to other counties.

The spokesperson adds: “Since more than 50% of exports are on cash against goods basis in Turkey, trade finance products that serve this area become increasingly popular.

“Providing supply chain solutions for transactions under cash against goods terms enables banks to offer higher added value and thus generate higher yields.”

Garanti works with the Swift’s Trade Services Utility (TSU) to order to help support customers’ trade flows. Reflecting on opportunities in this sphere, the bank reports that revolving insured receivables purchase facilities for Turkish exporters are an area of development.

“In that principle we are in contact with insurance companies and our correspondent banks. The other innovative product might be the securitisation of export receivables of the corporates, which has not been applied yet,” the bank states.
In light of the ensuing credit crisis, Garanti believes, “The liquidity squeeze will affect traders globally and force them to find longer terms of financing. However, our customers rely more now on supply chain financing to monitor their payments and collection schemes, since the credit risk may be structured as tailor-made according to the customers’ needs, especially for longer terms of financing.”

Diversifying export markets
However, this area of trade finance could theoretically be threatened if there is a severe slump in demand in its key European export markets, particularly as a number of developed economies teeter on the edge of recession.
Speaking at a press conference in Istanbul at the end of October, industry and trade minister Zafer Caglayan commented “it is quite obvious that a likely recession in Europe would definitely impact Turkey’s economy to a certain extent.”
In order to avoid a severe drop in exports, the government is keenly encouraging exporters to look to new markets, and will be helping SMEs enter new markets by providing zero-interest loans to them.

Trade bankers have also remarked that markets in the Middle East and North Africa are being to show real potential as alternative export markets. Similarly, Asia is a strong market exporters are tapping into.
However, diversifying exports won’t necessarily keep Turkey out of financial crisis if there is a slowdown at home. LFC’s Sarp explains: “Turkish exporters are diversifying their markets towards regions such as Asia and the Middle East, particularly in light of recession in the EU. However, if companies can not sell to the domestic market, there is still a big problem.”

Lack of funding stalls infrastructure
The lack of affordable funding is beginning to affect Turkey’s wider economy, potentially stalling the government’s privatisation programme and infrastructure investments.
“I am convinced that the turbulence in the financial markets will have a serious impact on the real economy,” remarks Riza Kadilar, investment banker and visiting professor at Izmir University of Economics MBA programme.

“Like in the rest of the world there is a credit drought in Turkey since early October, and without an efficient credit market it is very difficult to see a healthy real economy. And with growth rates decreasing, the year of 2009 will be much more difficult.”

Already, it has been reported that an energy sector privatisation has been delayed as the buyer could not secure funding. Similarly, the €600mn sale of cement firm Ciments Francais Turkey, the subsidiary of Italcementi, to the Russian cement producer Sibirskiy has been cancelled.

Yapi Kredi Bank has abandoned its plans to sell its insurance arm Yapi Kredi Sigorta, as it could not secure favourable pricing. Just two weeks before, the company had insisted it would pursue the sale despite financial turmoil.
However, before the recent acceleration of the global crisis, Turkish corporates had successfully raised funds. Energisa, the energy company jointly owned by Turkey’s Sabanci and Austria’s Verbund, secured a €865mn financing package in July to support its €1.44bn investment programme. The financing package was the largest international transaction for a private company in Turkey that will sell into the country’s deregulated power market.

The investment programme is aimed at developing the company’s capacity to generate 12,000GW-hours of electricity a year, potentially reaching 5.7mn consumers. The project will involve the construction of 10 hydroelectric power plants in Cambasi, Ceyhan and Seyhan basins, and a natural gas-fired thermal plant in Bandirma, with a total capacity of 1,900MW.
The debt facility was arranged by coordinating banks Akbank and WestLB along with the IFC. The deal was structured into two tranches, with IFC arranging the €513mn A tranche, which includes senior and subordinated loans of €158mn carried on its account.

Returning to a more turbulent October, at the London press briefing, minister Simsek outlined ambitious plans to pump approximately US$120mn-125mn worth of investments in the energy sector, such as oil and gas pipelines. He also spoke optimistically of seeing significant development in the construction of hydropower plants, wind energy and geothermal projects.

The improvement and expansion of the rail and road network in Turkey is also on the government’s agenda with approximately TL12.5bn (just over US$8bn) of investments planned to improve rail infrastructure and a planned 15,000km of roads to be built by 2012.

Who will help?
To ensure there is liquidity to fulfil these investment plans, Turkey’s government is implementing a number of policies.

It is considering an amnesty for undeclared funds of Turkish citizens which have been kept abroad. A draft law on this is about to be submitted to parliament.

It will also be looking to increase the level of research and development (R&D) taking place with Turkish borders. Companies conducting this kind of work in Turkey, are offered “extremely generous tax advantages,” remarked Simsek in his briefing.

Also stepping in to fill the liquidity gap are the multilaterals and the export credit agencies (ECAs). Previously thought as an expensive funding option, ECA premiums are now far more appealing compared to the soaring costs of other financing facilities.

The municipality of Istanbul opted for ECA-backed funding to support its 20km Kadikoy-Katal metro. It is being constructed on the Asian side of Istanbul with the aim of freeing up Istanbul’s most important road axis, the D-100 and will play a vital role in unclogging the capital’s heavily congested roads.

The €776mn deal was signed in June, and the initial mandated lead arrangers were: ABN Amro Bank, Calyon, Depfa bank, Dexia/Denizbank, Fortis Bank, Société Générale, Unicredit Corporate Banking, and WestLB. Fortis was the global coordinator. Mandated lead arrangers were Black Sea Trade and Development Bank, Turkiye Vakiflar Bankasi and Banca Infrastrutture Innovazione Sviluppo.

The World Bank’s IFC also joined this transaction, although at a later stage of the deal process. It extended a €50mn senior loan to the municipality as part of the commercial financing package.

The construction contract was awarded at the beginning of 2008 to a consortium led by the Italian Astaldi SpA and comprising the local companies Gulermak and Makyol.

Italians keen to support Turkish trade
The involvement of an Italian company in the metro project attracted the Italian ECA, Sace, who provided cover for a 14-year €250mn facility. The other tranche, a €526mn commercial facility, was fully underwritten by the initial mandated lead arrangers, and partially underwritten by the Black Sea Trade and Development Bank.

The Italian ECA Sace has been particularly pro-active in Turkey, and at the end of September it signed an agreement with PFS Finance, an Istanbul-based export credit and structured finance specialist, with the aim of extending Sace’s Turkish operations. Italy is Turkey’s third largest commercial partner after Germany and the UK, and last year Italian exports in Turkey increased by 6.6%.

Sace has just been involved with a landmark export credit deal with the Turkish municipality of Kayseri. The €29.8mn deal, signed in October, was arranged by Fortis Turkey, and involved the delivery of 16 tramcars from the Italian company Ansaldo. It is an important transaction as it is rare for foreign banks and ECAs to take on the risk of a municipality outside of Istanbul. Fortis Turkey is expecting to sign yet another Sace-backed deal within November.

However, despite the success of these deals, inevitably some future projects may well be stalled due to struggles to find financing. There are plans to build a bridge over the Golden Horn in Istanbul, but in current unpredictable markets, financing for this may be hard to secure, one banker familiar with the project remarks.

But, there is still optimism in the market. Erwin Boon, head of global export and project finance, at Fortis in Turkey, comments: “Of course it is clear everybody is at the moment holding back for any new challenges, but on the other hand I also still see investments, such as those in the power sector to continue. I am quite positive for 2009 for Turkey.”

His bright outlook is supported by continued high levels of foreign direct investment (FDI) into the country. During the first eight months of 2008, foreign direct investment inflows to Turkey stood at US$9bn dollars. Over the last three years, approximately US$50bn of FDI has flowed into the country.

With foreign investors’ interests so entrenched in Turkey’s economy, it is hoped that investors will not flee from its long-term endeavours in the country due to what many anticipate is a short-term funding crisis.