The rating agency downgraded Turkey on 17 August citing the continuing weakening of Turkey’s public institutions and a related reduction in the predictability of Turkish policy-making.

“As a result, Turkish covered bonds’ ratings are currently capped at Turkey’s local currency bond ceiling of Ba1 because ceilings generally act as the maximum ratings that can be assigned to a domestic issuer in Turkey, including covered bonds backed by Turkish receivables,” Moody’s said yesterday.

The covered bonds that have been downgraded from Baa2 to Ba1 are those issued off the mortgage-backed programmes of Akbank, Garanti, VakıfBank and Yapı Kredi, plus SME-backed covered bonds issued by Şekerbank. A provisional rating of an İşbank mortgage-backed programme was also lowered from Baa2 to Ba1.

Moody’s earlier yesterday lowered the Counterparty Risk (CR) Assessments of all the aforementioned banks except VakıfBank, with İşbank’s being lowered two notches and the others’ by one notch.

“As a result of the lowering of the CR Assessments, Moody’s assesses a higher probability that these issuers would cease making payments under the covered bonds, which the rating agency factors into its methodology,” it said.

The lowering of the CR Assessments came amid downgrades affecting 20 Turkish banks and finance companies.

VakıfBank issued the only Turkish euro benchmark covered bond in April 2016, a EUR500m five year.

Moody’s placed Turkey’s Ba2 ratings on review for downgrade last Friday, stating that it expects that a recent erosion in investor confidence in Turkey to continue if not addressed through credible policies following the country’s general elections, which are due to be held on 24 June. This could lead to “a sustained increase in the probability and proximity of severe balance of payments constraints”, said Moody’s.

It has already downgraded Turkey once this year, from Baa1 to Baa2 in March.

After placing the country’s ratings on review for downgrade, Moody’s yesterday (Thursday) took similar rating actions on a range of Turkish financial institutions, including downgrading the counterparty risk (CR) assessments of some covered bond-issuing banks and placing the CR assessments of others on review for downgrade.

Moody’s then placed the Baa2 covered bond ratings of Akbank, Garanti Bank, Şekerbank, VakıfBank, Yapı Kredi and İşbank on review for downgrade.

The covered bond ratings of those issuers whose CR assessments were downgraded were not downgraded because they remain consistent with the current ratings from both an expected loss and a Timely Payment Indicator (TPI) framework perspective. But Moody’s said that any further downgrade of the CR assessments of these issuing banks would negatively affect the covered bonds due to the effect on the expected loss method and the maximum rating uplift that covered bonds may achieve over the CR Assessment following the application of the TPI framework.

The covered bond ratings are currently capped at the Baa2 local country ceiling of Turkey. In the event of a downgrade of the Turkish sovereign rating, the Turkish country ceiling could be lowered, noted Moody’s. It said the covered bonds would subsequently adjust to the new ceiling level, if lowered.

VakıfBank sold the first and to date only euro-denominated benchmark covered bond out of Turkey, a EUR500m five year mortgage-backed issue, in April 2016.

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.”

Akbank announced on 3 July that it has signed an agreement with the EIB to secure funding of Eu200m equivalent in Turkish lira via the privately placed mortgage-backed deal, with the proceeds to be on-lent to SMEs and mid-caps and for the financing of the renewable energy and energy efficiency projects.

The first TL650m six year tranche settled on Friday of last week (28 July). A second tranche “will be secured in the forthcoming period”, said Akbank.

Akbank launched the first Turkish mortgage-backed covered bond in February 2015, a TL407m five year deal that was also placed with the EIB. The new deal is its first covered bond with such a green use of proceeds commitment.

Garanti Bank launched the first green-oriented Turkish covered bond in June, a TL530m mortgage-backed five year placed with International Finance Corporation (IFC), with a pledge to use half the proceeds to finance green lending. It placed a second TL305m covered bond with the European Bank for Reconstruction & Development (EBRD) in July, this time committing all proceeds to the financing of green loans.

Just one benchmark mortgage-backed Turkish covered bond has been issued to date, a Eu500m five year for VakıfBank in April 2016.

In a press release published on Wednesday, Halk Bankası (Halkbank) said its board of directors “has resolved to authorize the head office to issue mortgage-covered and/or asset-covered securities”.

It said its issuance will have a maximum size of $1.5bn (Eu1.29bn, TL5.32bn) or equivalent in other currencies, and could have fixed and/or floating rate coupons and different maturities of up to 10 years.

The only euro benchmark Turkish covered bond to date was a Eu500m five year mortgage-backed issue in April 2016 from VakıfBank, which is also state-owned.

Compatriots such as Garanti Bank, Yapı Kredi and İşbank have established mortgage covered bond programmes, but are yet to issue benchmarks.

Turkish covered bond issuance was in the first instance SME-backed, mainly through private placements with foreign and supranational development banks.

In June, Garanti Bank launched the first green-oriented Turkish covered bond, a TL530m mortgage-backed five year placed with International Finance Corporation (IFC). The issuer pledged to use half the funds invested by IFC to provide green mortgages for the purchase of energy efficient housing.

Gökhan Erün, deputy CEO of Garanti Bank, said the new deal with the EBRD will grow the stock of environmentally-friendly buildings and help develop sustainable cities.

“We attach great importance to green mortgage loans for the financing of environmentally friendly projects for highly energy-efficient buildings,” he said.

The new deal is backed by residential mortgages and rated Baa1 by Moody’s. Proceeds from the EBRD’s investment will be used to finance loans to home owners, home associations or service providers investing in improvements aimed at cutting energy consumption and reducing household bills.

“We are pleased to play a role in yet another covered bond issuance in Turkey,” said Noel Edison, EBRD director for financial institutions in Turkey. “This asset class, well established in Europe, is an excellent new funding tool for Turkish banks and, importantly, will broaden their investor base.

“We hope that more Turkish banks will follow suit as the asset class provides access to a wider range of long term investors at lower funding costs, reduces reliance on short term funding and thereby contributes to the management of balance-sheet asset liability.”

International Finance Corporation (IFC), a member of the World Bank Group, announced this (Friday) morning that it is investing $150m equivalent in a Turkish lira covered bond from Türkiye Garanti Bankası (Garanti Bank). It said half of the funds invested by IFC will be used by Garanti Bank to provide green mortgages for the purchase of energy efficient housing.

The five year covered bond is backed by residential mortgages, and was issued out of Garanti’s Eu5bn covered bond programme, which was established in 2015 and in April received renewed approval from the Capital Markets Board (CMB) of Turkey.

“Garanti Bank has recorded a ground-breaking transaction with IFC, the first ever residential mortgage covered bond in Turkey to support green mortgages,” said Ali Fuat Erbil, president and CEO of Garanti (pictured, left). “Garanti Bank is reinforcing its support to the sustainable future of Turkey via a $150m equivalent Turkish lira covered bond issuance.”

The Turkish bank expects that its green housing loans portfolio will grow to $100m by the end of 2020.

IFC said the investment came under its strategy in Turkey to provide financing through financial intermediaries and direct investments to scale up energy efficiency projects and sustainable energy finance.

“With this financing, we are addressing some of IFC’s key development priorities in Turkey – climate change, sustainable cities, and capital markets development,” said Marcos Brujis, global director, financial institutions group, IFC (pictured, right). “Diversified and innovative funding instruments in Turkish lira will help to deepen capital markets and increase investor confidence.

“Green mortgages also offer better borrowing rates for customers, while helping to save energy costs.”

VakıfBank is the only issuer to sell a euro-denominated benchmark covered bond out of Turkey to date, 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.

Berlin Hyp has sold the only pure green covered bond (see today’s other article), which had green collateral from day one.

Photo credit: IFC

An official at İşbank told The CBR that it obtained approval for its Eu2bn (TL7.79bn) mortgage covered bond programme from the Capital Markets Board (CMB) of Turkey on 14 April, and that the programme was established on Friday.

The provisional Baa1 covered bond rating is capped at the local currency bond ceiling of Baa1, but is higher than the foreign currency ceiling of Baa2 because mitigants are in place to lower the risk of transferability and convertibility, said Moody’s.

As of 12 April, İşbank’s cover pool totalled TL4.05bn, according to Moody’s. The rating agency said, assuming an issuance size of Eu500m, the overcollateralisation in the pool is approximately 106% on a nominal value basis, of which the issuer is expected to provide 21% on a committed basis for the first series.

Moody’s rates İşbank Ba1, on negative outlook.

İşbank was unable to respond to a request for further comment on its covered bond issuance plans by The CBR’s deadline.

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.

Hopes for further supply were lowered because of increased political uncertainty around the jurisdiction following a failed military coup in in July and a subsequent downgrade of the sovereign. In the wake of the coup, Moody’s cut Turkeys local currency ceiling from A3 in conjunction with the downgrade of the sovereign in September, resulting in downgrades of all the established Turkish covered bond programmes Moody’s rates from A3 to Baa1.

Market participants, including one issuer, later said that covered bond investors’ price expectations were too high for them to enter the market in 2016.

Last Thursday İşbank issued a $750m seven year senior bond, shortly after a constitutional referendum on 16 April that gave president Recep Erdoğan extended executive powers. Markets had priced in the victory for Erdoğan, with sovereign bond yields tightening as investors expect the result to reduce political uncertainty and raise the prospects of economic reforms in the country.

Türkiye Garanti Bankası and Yapı ve Kredi Bankası also each received CMB approvals related to covered bond issuance this month, having previously established programmes.

Photo: John Walker/Flickr

Turkish ratings have been under pressure since an attempted coup in July and on 26 September Moody’s downgraded several Turkish covered bond programmes, including that of VakıfBank (Türkiye Vakıflar Bankası), after lowering the sovereign ceiling to Baa1.

VakıfBank’s mortgage covered bond rating was left on review for downgrade, with Moody’s saying that a higher level of overcollateralisation (OC) – 22.5% versus 20% already committed – was necessary for the Baa1 rating to be maintained, all other things being equal.

VakıfBank announced yesterday (Thursday) that it had on Tuesday informed Moody’s that it has increased the Required Overcollateralisation Percentage under the programme’s terms to 22.5% as of Tuesday.

Yapı ve Kredi Bankası (Yapı Kredi) established a Eu1bn (TL3.4bn) mortgage-backed covered bond programme last month, and on 24 October received a provisional Baa1 covered bond rating from Moody’s for a first series of euro-denominated issuance. The Turkish bank has previously issued SME-backed covered bonds out of another programme, although these have been privately placed.

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.

Speaking at the 20th Central European Covered Bond Conference – organised by HypoVereinsbank and the Association of German Pfandbrief Banks (vdp) – in Munich on Friday, Tules Akıncı, head of debt capital markets at Yapı Kredi, said the Turkish issuer will consider selling its first public euro benchmark covered bond next year.

“For 2017 we are talking to a number of International Financial Institutions (IFIs) to do a bilateral transaction,” she said. “For a market transaction, depending on the market price, of course we will consider it.

“We have the programme ready, and we want to put it into use.”

Akıncı said, however, that investors’ price expectations are too high for Yapı Kredi to enter the market at present.

“For us, the most important thing when issuing covered bonds is the yield and the cost of issuing,” she said. “At the moment, investors are still asking for too high a yield.

“Covered bonds are a bit expensive these days, but hopefully going forward investors will become more comfortable with the Turkish credits and will maybe ask for lower yields.”

Akıncı described investors’ hesitancy to invest in Turkish paper as one of the biggest obstacles to banks’ covered bond issuance, which she attributed to covered bond investors being more comfortable with investing in triple-A rated notes.

Moody’s rates Turkish covered bond programmes Baa1, capped at Turkey’s local currency ceiling, which was lowered in September. Akıncı said she believes the programmes deserve higher ratings.

“I would like to underline the fact that mortgages are a very strong product in Turkey, because culturally home ownership is very important,” she said. “You may not pay back your auto loans, you may fall behind paying your credit card payments, but with your mortgage payments, you always pay.”

Akıncı said this is reflected in the Turkish banking sector’s average non-performing loan (NPL) ratio of 0.5%.

She added that Yapı Kredi intends to join the euro market partly because it has a need for euro liquidity to meet the financing needs of Turkish companies that do business internationally.

“But the more important reason is diversification, as Turkey has in the past heavily depended only on emerging market investors,” she added. “Turkey has a bit of difficulty working with more conservative euro area investors.

“Hopefully over time, when these investors start buying Turkish covered bonds, they will feel more comfortable with Turkish risk and start investing in other products as well.”