VakıfBank has privately placed a TL1.3bn (Eu299m) 5.5 year covered bond that is the first Turkish lira-denominated covered bond from Turkey to be placed away from development banks, as part of its efforts to diversify funding and mitigate interest rate pressure in the Turkish lira deposit market.

VakıfBank said the mortgage-backed deal was entirely placed with a non-Turkish investor that is also not a multinational development bank. The issue has been used as a reference security for a total return swap (TRS) transaction, according to the issuer.

Legislation permitting Turkish banks to issue foreign currency covered bonds has been in place since 2014, but euro issuance was partly delayed because of challenges caused by the currency mismatch with Turkish lira-denominated pools.

VakıfBank sold the first and to date only euro-denominated benchmark covered bond out of Turkey, a Eu500m five year mortgage-backed issue, in April 2016. Turkish covered bond activity had previously been focused on SME-backed issuance placed with development banks, and has continued to involve, also in mortgage-backed issuance, the multilaterals.

The new deal follows the issuance by VakıfBank of TL525m of Tier II subordinated notes in September, and, it said, represents part of the bank’s efforts to mitigate interest rate pressure in the Turkish lira deposit market by creating long term, cost effective Turkish lira non-deposit funding.

“In the last one month period, VakıfBank procured approximately TL2bn long term bond issuance with different transactions,” said VakıfBank CEO Mehmet Emin Özcan. “We aim to continue similar issuances in the upcoming periods.

“We will continue to support the national economy and the real sector with a more robust and liquid balance sheet structure through non-deposit Turkish lira funding sources by extending the average maturity. Long term borrowings under the covered bond programme will become a more important funding source for the sector day by day.”