An expected debut euro-denominated mortgage-backed covered bond for VakifBank could “open a new door” for Turkish issuers and establish a funding mechanism for growth in the country’s mortgage market, according to an official at the issuer, who also cited the strength of the structure.

Türkiye Vakiflar Bankasi (VakifBank) is today (Tuesday) embarking on a European roadshow ahead of a potential debut euro-denominated covered bond. The roadshow will visit Vienna, Munich, Frankfurt, London and Paris, concluding on Friday. Barclays, BNP Paribas, Erste, Natixis and UniCredit have the mandate.

The deal is expected to be the first euro-denominated mortgage backed Turkish covered bond.

“This has been a long project,” said Mustafa Turan, head of international banking and investor relations at VakifBank. “We have been working on this for around two years, and in that time the Turkish legislation has been amended to finalise the differentials between markets – especially the European market.

“Our structure has been largely in place since last year, subject to some fine-tuning to really develop it for an international investor base. We have decided to move forward with this international deal as the timing seems right to offer this European product to the European market – as there is a clear need for European-based assets. Our objectives and the market’s objectives seem to be fully aligning.”

Turan said VakifBank decided to enter the euro covered bond market to establish a funding source for expected growth in the Turkish mortgage market.

“Essentially, we wanted to create a funding mechanism for future growth,” he said. “The mortgage market is still small, at only 7.5% of GDP, but it is flourishing from scratch and it is progressing nicely.

“VakifBank is not seeing this inaugural trade from a liquidity angle – we do not need Eu500m liquidity – but we see this as a medium to long term structure and we have to start from somewhere.”

Turan added that the deal will be sized at Eu500m and will have a maturity of five years.

Turkish banks have previously issued SME-backed covered bonds, starting with an inaugural issue for Şekerbank in July 2011, but these have only been privately placed internationally. Akbank sold the first mortgage-backed Turkish covered bond in February 2015, a TL407.31m (Eu126m) five year deal that was placed with the European Investment Bank (EIB).

Although legislation permitting Turkish banks to issue foreign currency covered bonds has been in place since 2014, the emergence of an inaugural deal has been delayed in part because of challenges caused by the currency mismatch with Turkish lira-denominated cover pools.

Turan said that swap counterparties, all of which are rated at least A, will be used to hedge the currency mismatch between VakifBank’s euro-denominated issue and the cover pool.

“Therefore the risk will be negated,” said Turan. “We want to highlight this structure because it is very important, and it is is why our covered bond is getting an A3 rating from Moody’s.”

Moody’s assigned a provisional A3 rating to VakifBank’s mortgage covered bonds in July. The rating agency said that because of mitigants in place to lower transferability and convertibility (T&C) risk, the covered bond rating is higher than the foreign currency ceiling of Baa1. It said the rating is capped by the local country ceiling of A3.

Turan noted that the covered bond rating is three notches higher than Moody’s rating on the Turkish sovereign, of Baa3, and that the deal would be the first A rated euro-denominated bond from Turkey.

“So it is going to be an interesting price discovery process,” he added. “But we believe we will have a strong reception, because the market needs quality new assets, and the Turkish covered bond structure, regulated by the CMB (Capital Markets Board), offers this very strong mechanism.

“We believe we will open a new door for Turkey, which may in the future become one of the main funding sources for Turkish issuers.”

Turan added that VakifBank will likely wait for around two weeks to launch the deal after completing the roadshow on Friday.

“If we decide to carry on with the process after the roadshow it will take at least two weeks for investors to do their homework,” he said. “So if you do not see us on the screens next week, do not take this as a negative signal.

“This is an expected and calculated strategy.”