VakifBank launched the first benchmark covered bond from Turkey today (Tuesday), a Eu500m five year deal that attracted over Eu3bn of demand and which bankers said was a strong endorsement of the country’s new asset class given its pricing relative to senior and sovereign Turkish euro paper.

Although Turkish banks have issued covered bonds since 2011, previously these were only privately-placed and initial issuance was backed by loans to SMEs and supported by international agencies. However, since the country’s framework was updated in 2014 Turkish banks have been working towards international mortgage-backed issuance.

VakifBank early this month announced it had mandated Barclays, BNP Paribas, Erste, Natixis and UniCredit and then held a roadshow, ahead of a planned first euro benchmark covered bond.

The leads then opened books this morning with initial price thoughts of the mid-swaps plus 280bp area for a five year issue that is understood to have been a Eu500m no-grow from the outset. Guidance was then set at the 265bp area on the back of orders of over Eu1bn from more than 100 accounts, before the spread was ultimately fixed at 250bp over with demand over Eu3bn.

“It was a very, very smooth process,” said a syndicate official at one of the leads. “We achieved a significant tightening as the books just kept growing.”

He said that the level was “very, very close” to where the Turkish sovereign would sell a new issue and a banker away from the leads said that the spread relative to Turkey government bonds – which he put at 25bp versus secondaries – was impressive. He noted that discussions about potential Turkish covered bond issuance had long focused on how much of a pick-up it would need to offer versus the sovereign, given that traditional emerging markets investors might not give full credit to the structure.

“The pick-up tells me that people are giving credit to it being a covered bond,” he said.

Bankers away from the leads meanwhile suggested that the covered bond had come some 70bp or more inside where a VakifBank senior unsecured deal might come in euros. One cited June 2019 VakifBank paper at 280bp-290bp over and said that taking into account the maturity differential and a new issue premium the covered bond’s spread was some 70bp tighter, although he said it is hard to be precise and could be anything from 50bp-100bp tighter, while another said that Garanti senior euro paper offered a pick-up of some 100bp over the Turkish sovereign, meaning VakifBank had come some 75bp tighter – although the lead syndicate official said the saving was even greater.

A banker noted that Turkish bonds overall trade tighter in dollars, with VakifBank October 2018 senior dollar paper quoted at around 270bp over dollar mid-swaps, or some 80bp tighter than its June 2019 paper taking into account the basis swap.

However, bankers away from the leads acknowledged that VakifBank had likely achieved its goal of diversifying its investor base away from dollar funding and emerging markets investors with the new euro covered bond.

One said that VakifBank had also been brave to pioneer Turkish covered bond issuance, with other issuers having waited to tap the market given the uncertain outcome and market movements – VakifBank itself is understood to have held off issuing in the autumn due to market conditions.

The banker added that Turkish government bonds are trading around their best levels in more than two years and that, given central bank actions and prevailing sentiment in emerging markets, the timing was excellent.