The Capital Markets Board (CMB) of Turkey has revised the framework governing asset covered bonds (ACBs), after Şekerbank inaugurated the market two weeks ago, and an official at the regulator told The Covered Bond Report that this could ease issuance. However, market participants cited several other factors they expect to be key determinants of interest in the instrument.

According to Turkish law firm Eryürekli Law Office, the amendment, published in the official gazette dated July 20, has diversified the potential issuer base for ACBs and brought in new investor protection measures. (See at bottom of article for key aspects of the amendment – which has not yet been officially translated.)

Eser Şagar, specialist at the CMB, told The Covered Bond Report that the amendment could help the market develop.

“I think interest in covered bonds is not dependent on the recent amendment,” he said, “though it has dealt with some of the problems that hindered the growth of covered bond issuance.

“It has mainly made issuance clearer, so it may have a positive effect – but the main factors driving issuance are the state of the economy and interest rates.”

Şagar acknowledged the Turkish legislation is more liberal than covered bond legislation seen in Europe, permitting two kinds of covered bonds: mortgage backed and asset backed. He added that the mortgage covered bonds are more in line with traditional standards.

“The mortgage backed covered bond legislation is much stricter,” he said. “I think the issuers have to create strict portfolios and that will take time to do.

“But, if you look at the recent financial crisis, covered bonds have proven themselves resilient. Because of that, we will see more issuance in Turkey.”

Şagar said that the CMB has heard via advisory firms of further interest in the issuance of asset covered bonds. However, there have not yet been further applications to issue.

Wasif Kazi, director, structured capital markets at UniCredit, said the amendment had clarified several issues that arose during Şekerbank’s transaction. UniCredit was the arranger and a buyer of the issue.

“One of the changes, which is helpful in the amended legislation, is that it clarifies that the CMB would have the right to appoint a servicer specifically for the asset pool in the event of issuer bankruptcy,” he said, “which should be helpful with the rating of future covered bonds.

“We did have a long dialogue with the CMB and these changes have clarified a few issues that were not in the original legislation.”

Although the amendment is very recent, Turkey’s covered bond law was introduced in 2007.

“One of the reasons we haven’t seen covered bond issuance really take off in Turkey,” said David Barwise, partner at White & Case, “is the question of how to deal with Turkish lira, because international investors like to be paid in euros or dollars. Obviously, a Turkish lira denominated transaction was not going to appeal to everyone.

“Şekerbank was the first issuer to market for this type of issuance, so other banks now have a precedent as to how particular things are done,” he added.

Batuhan Tufan, vice president of Garanti Bank, welcomed the transaction but said his bank would not be following Şekerbank’s lead anytime soon.

“We’ve been having discussions for a very long time,” he said. “We know the product very well and the feedback we’ve learned from the market is that investors would still price a Turkish covered bond wide of the Turkish sovereign.

“Garanti has had several preparations internally but the ultimate conclusion is – given the uncertainty of the ratings, lack of local investor demand, proper commercial investor demand, and the uncertainty in the financing cost – we will probably keep this project running in the background but we will not be taking action sometime soon.”

Tufan said he knew of other banks preparing in the background, but questioned whether they could come to the market.

“I think banks will still choose to go on the unsecured financing market before actually looking at the covered bond space.

Other market participants were more positive about future issuance.

Asked whether he believed more issuance would come, Fazel Ahmed, managing director structured capital markets at UniCredit, answered: “An emphatic yes.”

He did not expect Şekerbank to be a one-off, with other potential issuers also looking into the product.

“Over time, it is likely that the market will develop a multitude of issuers.”

Key aspects of the amendment:

• Factoring companies are included in the list of entities that may issue ACBs and thus, have obtained an additional funding option for their activities. In line with the above, receivables arising from all type of factoring transactions has been classified as cover assets for ACB offerings conducted by factoring companies.
• The Amendment has envisaged that cash flows arising from redemption of cover assets shall be deposited in the name of the investors with a separate bank account in case the issuer violates cover matching principles or fails to fulfill its obligations arising from ACBs. The principle stating that the net present value ( the “NPV”) of cover assets must at all times be at least 2% more than the NPV of the ACBs has been revised to reflect the risk of different types of cover assets. Under the new framework, the minimum positive difference between the NPVs of cover assets and of the ACBs has been increased to a range up to 8%-46% depending on the type of cover assets. The Amendment also authorizes the CMB to revise these percentages where it deems necessary and thus create flexibility for adaptation to the changes in economic conditions.
• The Amendment has paved way for the issuer to use cash derived from the redemption of cover assets, provided that the redeemed assets are replaced with new assets, cover matching principles are in no way violated and the issuer is not in failure to fulfill its obligations arising from ACBs.
• The CMB is entitled to authorize Investor Protection Fund for conducting an administrative liquidation process (i.e. an accelerated and cost efficient way of liquidation) for a cover pool in the event that (i) the issuer fails to fulfill its obligations on due date, (ii) the value of issuer’s liabilities exceeds the value of issuer’s assets, (iii) the management control of the issuer is transferred to governmental authorities, (iv) operation license of the issuer is revoked, or (v) the issuer is suffering from bankruptcy.
• The Amendment, in line with the above defined revisions, have attributed new responsibilities to the cover monitor (i.e. independent audit company) which shall be appointed for the supervision of the cover register and cover pool.

Source: Eryürekli Law Office