Turkish corporates are printing debut bonds in a flurry at the end of 2024, prompting oversupply concerns. But they have little choice and are tapping a market that is unlikely to get any better for a while.
Emerging markets bond investors have said the bar is high for them to get involved in new issuance from Turkey, and even some syndicate and debt capital markets bankers have said the supply is too much.
But deals are still getting done. Nothing has failed. Books might not be multiple times oversubscribed but then they rarely are for high yield emerging market corporates, and a debutant in Turkey probably isn’t that bothered. They just want to get their foot in the door of the capital markets.
Some deals have drawn only just enough demand. GDZ Elektrik, for example, drew a book of $460m for a $400m trade. Investors said it was a complex credit.
But GDZ got its deal done — and for the past two and half years, that has been enough to be deemed a success in EM. The primary market may be a lot better than it was but these companies are still having to pay close to 10% for new bonds, a sign things are still tough.
Although the widely held expectation is that the US Federal Reserve will keep cutting interest rates, lowering US Treasury yields and therefore dollar borrowing costs, that does not matter for high yielding Turkish corporate bond market debutants.
What does matter to them is where their comps are trading and what their direction of travel is.
If Turkish corporate bond yields were also expected to come down, then it would make sense to wait, particularly for a debutant issuer that may not have much debt to refinance.
But Turkish bond yields may not go much lower for a while. EM bond investors are mostly overweight or marketweight on Turkey, said one fund manager earlier in October.
It is not clear where the catalyst will come from to spur Turkish bond yields lower. The rally over the past 18 months has been prompted by the government’s U-turn to orthodox monetary and economic policy. Another U-turn is possible and would trigger a big sell-off in Turkey credits.
So far, president Recep Tayyip Erdoğan has let his new teams at the central bank and the finance ministry get on with their job of fixing Turkey’s deep-seated economic problems. One of the most visible of those is inflation, which rose to more than 80% last year. Erdoğan had insisted on low interest rates to fight this but has now permitted the central bank to raise them to get inflation down.
Given the number of times Erdogan has changed his mind in the past, there lingers a fear that he might U-turn once again. Using high interest rates to curb inflation will be painful for Erdoğan and Turkey, politically and economically.
One EM analyst said he will “believe it when he sees it” earlier this week, referring to Erdoğan and his government sticking to its disinflation plan and getting to the central bank’s 5% target.
And there are risks outside Turkey. War still rages in the Middle East and Ukraine and a possible new Trump presidency threatens unpredictable foreign policy and inflation-boosting tariffs, which in turn could jeopardise the Fed’s rate cutting.
Whatever complaints investors make about oversupply, Turkish issuers, including corporates, are in a goldilocks period that may not be around much longer. Waiting only has downside risk.
