Wednesday, January 19

Defeat of the lira jeopardizes one of the best bets in emerging bond markets

The lira’s slide this month threatens to derail a rally in Turkish corporate bonds that has delivered investors some of the richest returns in emerging markets.

The debt, which gave investors a 4.4% return in 2021, was the second worst performing in developing countries, after President Recep Tayyip Erdogan fired three central bankers last week. As the lira fell, the average yield on Turkish corporate bonds rose to a more than five-month high of 4.82%.

Prior to that, Turkish corporate lending costs had largely weathered the impact of China’s Evergrande Group crisis and growing concern over the shrinking US Federal Reserve, curbing appetite for more pervasive by riskier emerging market assets.

Turkey’s $ 40 billion corporate market has rewarded risk takers this year amid optimism about the export boom, returning tourists and the reopening of European markets. Meanwhile, emerging market credit lost 2.5% in total return in the period.

Now bondholders say the lira’s depreciation is too extreme to leave corporate debt intact.

“The larger the magnitude and the faster it happens, the more it can hurt companies,” said Omotunde Lawal, director of emerging markets corporate debt at Barings, referring to the falling Turkish lira. While some companies have hedged their currency risks, none were forecasting the lira at 9 to the dollar, he added. “It will take a while for companies to be able to raise prices to recover the impact of depreciation.”

Are there cuts coming?

The central bank is expected to cut rates on Thursday after the firing of Lieutenant Governors Semih Tumen and Ugur Namik Kucuk, along with Monetary Policy Committee member Abdullah Yavas, who were seen as opponents of a looser policy. The ouster followed a meeting between the Turkish president and central bank chief Sahap Kavcioglu on Wednesday night.

The lira tumbled to record lows, extending this year’s depreciation to more than 20%, the worst among emerging market currencies. Erdogan, whose ruling AK Party has for decades based its electoral success on rapid levels of economic growth, argues that higher interest rates actually drive up prices rather than the orthodox view that they contain them.

International borrowers and lenders have tried to adapt to Turkish market crises in the past.

Lenders like Akbank TAS and Ziraat Bankasi AS, who use the market at least twice a year to refinance, sweetened their external loan prices in March when the lira plummeted following the removal of the former central bank chief.

Akbank and Turkiye Ihracat Kredi Bankasi AS (Turk Eximbank) are currently on the market for refinancing, and at least three more issuers are expected to replace their previous loans. Akbank declined to comment, and Turk Eximbank did not return a phone call or email seeking comment.

“An extreme depreciation would damage confidence and Turkey could face a currency liquidity crisis,” said Okan Akin, a credit analyst at AllianceBernstein in London. “This is a very important risk when the Fed’s downsizing is a real possibility. A large devaluation would weaken the capital ratios of banks and cause a massive sale of bank bonds. ”

Mobile operator Turkcell Iletisim Hizmetleri AS’s $ 500 million in debt due April 2028 rose five basis points to 4.84% on Thursday, the highest level in five months. Similarly, the $ 700 million bonds of glass maker Turkiye Sise ve Cam Fabrikalari and the $ 650 million bonds of cookie, chocolate and candy maker Ulker Biskuvi Sanayi AS due in October 2025 reached their highest level in almost six months.

© 2021 Bloomberg

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