The Turkish lender privately sold a three-tranche issue this week, four years after the ink dried on the Turkish covered bond legislation.

Market experts expressed confusion as to whether or not the sale of Sekerbank's triple tranche SME-backed deal could even be really considered a true covered bond.

"An SME-backed deal is not a covered bond and particularly not from Turkey," said a covered bond syndicate official. "Some of the buyers were international public agencies and were not real money investors."

A DCM banker echoed that sentiment and said: "This issue was co-financed through the IFC so it's hard to really call it a covered bond."

And that seems to be the point. UniCredit, the sole arranger of the transaction, explained that the issuer was never going for a traditional covered bond.

"I can understand why the market thinks this is unusual," said Wasif Kazi, DCM at UniCredit. "It wasn't intended to be a traditional covered bond but rather a hybrid between a covered bond and a structured finance instrument."

"Covered bonds have traditionally come from Western Europe and are backed by mortgages so this is a new departure from that model. We used a lot securitisation techniques in this bond that investors will recognize and they will find value in the dual recourse."

BREAKING TRADITION

For covered bond experts that have looked at the Sekerbank transaction they believe it appears to be more of a secured bond from targeted investors than a traditional covered bond backed by prime residential mortgages or public sector assets and sold on the public market.

The mid-sized Turkish lender placed the bonds with UniCredit, International Finance Corporation (IFC) and Dutch development agency FMO in what is being referred to as a private placement.

And as the issuer has plans to come to the market selling the country's first every public covered bond later this year, it seems it will take some time before traditional covered bond investors are willing to take the time to analyse the sovereign or the credit.

"At the moment there is so much to look at in the European market I think Turkish covered bonds would be more suited to emerging market investors," said Marc Stacey, covered bond expert at Bluebay.

"We would have to see some meaningful issuance out of Turkey before we could get excited about the market," said another investor.

BETTER ALTERNATIVES

Meanwhile, it is difficult to make the case for covered bonds in Turkey as a funding source given that banks have got better alternatives.

In the current market, Turkish banks can offer investors spreads in the range of high 300s to low 400s over mid-swaps in the senior unsecured market as well as yields in the range of 5.1pc and 6.5pc as shown by recent bonds from the country's Double B and Triple B rated banks.

The private placements have a final legal maturity of 2019 but have differing repayment schedules. Unicredit's euro has a one year maturity and priced at 200bp over Euribor. The IFC and FMO's tranches have five-year maturities and priced at 250bp over.

According to the terms of Turkey's covered bond law should Sekerbank default, the asset pool will repay investors directly for up to three-years until 2019.

"Growth market investors are very comfortable with the unsecured credits of Turkish banks," said a covered bond originator. "For those yield-focused investors, there may be limited scope for Turkish covered spreads to be significantly through the unsecured levels."

Meanwhile, Mauricio Noe, head of covered bond origination at Deutsche Bank said that while there was certainly a future for covered bonds in the Turkish market, emerging markets investors' search for yield would make it more challenging to get them involved in a lower yielding product.

Turkish banks also have access to the highly competitive loan market. Although the bond market has become a much more attractive option for long-term to medium term financing, the loan market continues to allow Turkish banks to fund at more attractive spreads at the short-end (between one to three years).

According to a FIG banker focused on the Turkish region a three-year loan is likely to offer a price benefit of 50-75bp over the bond market in a similar maturity.

Copyright Reuters, 2011