VakifBank sold a Eu500m five year debut yesterday (Tuesday) that attracted orders from around 300 accounts, achieving the Turkish bank’s main objective of diversifying its investor base, according to an official at the issuer, while also setting the product on the path to pricing through the sovereign.

The new issue for Türkiye Vakiflar Bankasi (VakifBank) is the first euro-denominated mortgage-backed covered bond from Turkey, with previous covered bond issuance only privately-placed and initially backed by loans to SMEs and supported by international agencies. Amendments to the Turkish covered bond legislation in 2014 paved the way for foreign currency issuance.

Leads Barclays, BNP Paribas, Erste, Natixis and UniCredit launched the new issue with initial price thoughts of the 280bp over mid-swaps area yesterday morning, before setting guidance at the 265bp area on the back of orders of over Eu1bn from more than 100 accounts. The deal was then re-offered at 250bp over with demand over Eu3bn. The book closed at Eu3.2bn with around 300 accounts.

“This is a very good outcome of more than two years of hard work,” said Mustafa Turan, head of international banking and investor relations at VakifBank. “It involved many steps, such as the necessary regulation, amendments, putting together IT systems, and all of the hard work with rating agencies and with establishing the swap counterparties.

“It took a long time to get here, so we are very happy.”

Turan said the deal had been priced around 5bp wider than a hypothetical new Turkish sovereign issuance and around 100bp inside VakifBank’s senior unsecured curve. He said this was in line with the issuer’s expectations, which had been communicated to investors on the roadshow.

“This pricing is a strong testimony that in the medium term Turkish covered bonds could be positioned through the sovereign curve,” he said. “Maybe not initially, but eventually we believe that with a rating three notches higher than the sovereign, and having the swap counterparties embedded, this product is the safest and the strongest possible issuance from Turkey.

“Even with the debut deal, investors gave a lot of value to this structure.”

Turan said that with the deal VakifBank had achieved its primary objective of diversifying its investor base, reaching key covered bond investors as well as other accounts, such as investors in emerging markets.

“Investors liked the structure, they liked the jurisdiction, and of course at VakifBank we already have a good investor base,” he said. “The reception was very strong.

“We had some investors unhappy because their allocations were lower than they wanted. It is a good problem to have.”

Turan added that he expects other Turkish banks to follow VakifBank into the market, after the deal demonstrated the product’s potential for reaching new investors.

“With this very successful debut, VakifBank has opened the door,” Turan said. “Therefore, in the next 12 months I believe there will be a good number of new issues from Turkey.”

Turan said this is important as it will increase liquidity in the developing Turkish covered bond market.

“Also, investors will be happy that their hard work on the structure and the Turkish framework was not only for one issue,” he added. “Once there are more issuers and increased liquidity, Turkey will become an important jurisdiction in the covered bond market.

“It is going to be a very interesting time.”

Bankers away from the deal agreed that the strong demand for VakifBank’s debut and its pricing level will encourage other Turkish banks to join the euro covered bond market.

“It was a very good start,” said one.

Moody’s on 18 April also said it expects Turkish banks to “ramp up” covered bond issuance in the coming months, with banks taking advantage of rising investor confidence as a result of a stabilised Turkish government and a relatively low-cost environment for covered bonds in the Eurozone.

Moody’s in September assigned a provisional rating of A3 to the first series of euro-denominated covered bonds expected to be issued by Garanti.