Akbank has issued the first Turkish mortgage-backed covered bond, a TL407.31m (Eu145m) five year deal that was bought by the EIB. An official at the bank said it is hoping to tap international markets, but Sekerbank has meanwhile put on hold such plans for SME issuance.

Alongside Garanti, Akbank was in December granted approval for the issuance of mortgage-backed covered bonds (İpotek Teminatlı Menkul Kıymet) by the Capital Markets Board of Turkey, with only SME-backed covered bonds having been issued out of the country before.

The placement of the mortgage covered bond with the European Investment Bank (EIB) in a trade that settled last Friday mirrors that of Turkish SME-backed issuance, which has been privately placed mainly with supranationals and development agencies.

“Today we are signing a groundbreaking operation, the first ever residential mortgage covered bond in Turkey,” said EIB vice president Pim van Ballekom when the supranational announced its participation on 29 December. “Following the successful launch of SME covered bonds in Turkey, the inauguration of mortgage covered bonds in the Turkish market is expected to have a catalytic effect, adding one more innovative funding option to the long term funding toolset available to Turkish banks for the benefit of SMEs and midcaps.”

Hülya Kefeli, executive vice president, international banking, Akbank, (pictured) said that the establishment of the mortgage covered bond programme fits into the bank’s overall funding strategy.

“Sustainable wholesale borrowing is a priority for Akbank,” she told The Covered Bond Report. “In this respect diversifying into new products and new investor bases is extremely important. In 2010, we issued the first direct senior unsecured US dollar Eurobond by a Turkish Bank followed by our Turkish Lira issuance in 2013. Now we are putting all our emphasis on the euro-denominated covered bond market.

“The covered bond law in Turkey is modelled after German Pfandbriefe and the Irish Asset Covered Securities Act,” she added. “From the investor’s perspective, we believe that the strong Turkish legislation will support their decision-making process when investing into these bonds.”

The Turkish lira-denominated transaction was last week assigned a rating of A3 by Moody’s – Akbank is rated Baa3 by the rating agency.

“Backed by strong legislation and the mortgage portfolio credit strength, our first covered bond has been assigned an A3 rating by Moody’s,” added Kefeli. “This rating currently makes it the highest rated debt product in Turkey, by Moody’s. We hope this will provide us with better pricing levels.”

Akbank has mandated banks to launch an internationally-targeted public issue.

“Our aim for setting up the programme is to tap international markets,” said Kefeli. “Once the full structure is in place we intend to proceed with a public offering. We follow the markets closely.”

The ability of Turkish banks to offer foreign currency-denominated covered bonds was aided by a CMB communiqué in January 2014 that updated Turkey’s framework. Among the measures included in the communiqué was the possibility of including in cover pools derivatives for hedging purposes.

“Turkish covered bond regulation permits us to issue in any currency,” said Kefeli. “The main challenge for a euro issuance is the currency mismatch between cover pool (which is entirely in Turkish lira) and covered bond. We are working on a swap structure in order to hedge the currency risk of the cover pool.”

Sekerbank, having established its SME programme in 2011 before this was an option, has used a different method of offering euro denominated paper since then when it has privately placed issuance with supranationals, development agencies and other investors: the bank has issued Turkish lira-denominated covered bonds to an Irish SPV, which then issues euro-denominated securities that are rated the same as the Turkish lira-denominated covered bonds. The bank had been planning to use this structure again for a first transaction targeted at being publicly placed internationally.

“Our covered bonds are issued through an Irish SPV, then a swap counterparty provides a swap so that the final issuance to investors is in euros,” said Zeki Önder, executive vice president at Sekerbank. “Since we were the first to do this and put things together back in 2011 and had this structure up and running, we decided to use it again.

“But that doesn’t mean that we may not look into the new set-up and issue thus in the future.”

Moody’s assigned a provisional A3 rating to the Turkish-lira covered bonds and also to the notes of SKB VTMK International Issuer Limited Series 2015-1, which it rates as repackaged securities. Sekerbank is rated Ba2 by Moody’s. The rating agency noted that the International Finance Corporation is the swap counterparty.

Sekerbank had hoped to launch an internationally-targeted public deal after last month announcing plans for a roadshow – with Commerzbank and UniCredit – to prepare for such a transaction, but Önder said that its plans are now on hold.

“We will continue to monitor the market and see if we can come up with a suitable window or alternative.”