Turkey’s Yapi ve Kredi Bankasi is set to become the country’s second covered bond issuer, sticking to issuance under Turkey’s asset backed legislation that allows SME loans as collateral, and an official at the issuer told The Covered Bond Report that it is targeting a debut deal next month.

The bank has set up a TL464m (Eu199.5m) programme backed by loans to small and medium-sized enterprises (SMEs), following in the footsteps of its country peer Şekerbank, which last year twice issued off a TL800m programme with the same type of collateral. Institutional investors such as the International Finance Corporation, Dutch development agency FMO, and the European Bank for Reconstruction & Development (EBRD) were the main takers of Şekerbank’s issues.

Yapi Kredi is targeting October for its inaugural issue, and is turning to covered bonds for diversification reasons, an official at the bank told The Covered Bond Report. The bank is working on programme documentation, with UniCredit International as the arranger.

Moody’s has assigned a preliminary rating of A3 to Yapi Kredi’s covered bonds, based in part on an issuer rating of Baa2, on negative outlook, and a Timely Payment Indicator (TPI) of “probable”. The rating agency said the TPI is relatively high for covered bonds issued out of a country that is related below investment grade (it rates Turkey Ba1), but that it believes refinancing and operational risks are “well mitigated” based on the strength of Turkey’s asset covered bonds legislation and structural mechanisms implemented.

The covered bonds’ rating is constrained by the local currency ceiling of A3.

Yapi Kredi is Turkey’s fourth largest private bank, with TL117bn of assets as at 31 December 2011. It is majority owned by Koç Financial Services (81.8%), which is jointly held by UniCredit and Koç Holding. Deposits make up 56% of Yapi Kredi’s total liabilities, with wholesale borrowing accounting for 17%.

Turkey also has mortgage backed covered bond legislation, but no issuance has yet taken place under it. Standard & Poor’s in May said that Turkish banks are seeking to broaden their funding sources and could turn “sooner rather than later” to mortgage covered bond issuance to help fund a property boom in the country, and the Yapi Kredi official said that the mortgage covered bond product has potential in Turkey.