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Some of Turkey’s biggest companies are seeing their bonds enter distressed territory, as soaring inflation and one of the world’s worst-performing currencies wreak havoc on the economy.
Two bonds of the nation’s second-largest telecoms firm, Turk Telekomunikasyon AS, have traded at distressed levels since the start of last week. Investors are demanding a premium of more than 1,000 basis points over US Treasuries for the firm’s June 2024 and February 2025 notes, worth a combined $1 billion, according to Bloomberg-compiled data. In response to Bloomberg questions, the company said its liquidity position was “sound” and that it may consider repurchasing any of its two dollar bonds, depending on liquidity conditions.
Turkish firms face more than $16 billion of debt coming due by the end of 2024. With corporate yields on dollar debt on average almost at 12%, refinancing pressures are being compounded by a weak lira. The currency has lost more than a quarter of its value against the dollar this year, putting strain on companies that generate most -- and in some cases all -- of their revenue in Turkey, but have dollar-denominated debt.
Turkey has this year seen only one sale in international debt markets after Coca Cola Co.’s bottler unit sold bonds in January. That compares to 14 corporate deals for all of 2021, according to data compiled by Bloomberg.
“Once you see the lira stress kicking in, you see that companies with challenging foreign-exchange exposure come under pressure in terms of bond valuations,” said Sergey Dergachev, senior portfolio manager and head of emerging market corporate debt at Union Investment Privatfonds GmbH in Frankfurt. “A large chunk of Turk Telekom debt is dollar denominated, therefore there is some pressure on it as well due to the lira’s depreciation.”
Ankara-based Turk Telekom, owned by the nation’s sovereign wealth fund, said in response to questions that its leverage ratio is low relative to the telecoms sector’s global standards and has the capacity to meet all its financial and commercial obligations. “Turk Telekom has a sound position currently in terms of liquidity,” the company said. It said it was “managing its financial risks with a pro-active and cautious approach in the current climate.”
Elsewhere, two subordinated bank bonds sold by Akbank TAS and Turkiye Is Bankasi AS are also trading at distressed levels, as is snack maker Ulker Biskuvi Sanayi AS’s debt.
A government move to ban loans to companies holding foreign-exchange cash, aimed at slowing the lira’s depreciation, is reducing companies’ ability to hedge their foreign-exchange positions and adding to corporate debt risk, according to Egor Fedorov, an emerging-markets analyst at ING Bank.
Soaring Costs
Price growth in Turkey has been in the double digits almost without interruption since the start of 2017, but this year neared a quarter-century high on the back of soaring energy and other commodity costs. While central banks worldwide are tackling inflation by tightening monetary policy, Turkey has kept its benchmark rate unchanged this year. President Recep Tayyip Erdogan believes -- contrary to mainstream economics -- that higher rates cause faster inflation.
Annual price growth hit 78.6% in June, and a month later the cost of insuring against Turkish government default hit its highest in almost two decades.
“The risk is coming from the sovereign and bank foreign-exchange liquidity side and the rising risk perception of the whole economy,” said Magdalena Polan, lead EM economist at PGIM Fixed Income, noting that Turkish companies have enough to cover short-term foreign exchange needs.
Fitch Ratings last week downgraded 25 Turkish banks’ long-term foreign-currency issuer default ratings, citing “policy uncertainty and increasingly interventionist policies,” as well as inflation. And to top it off, Turkey will have parliamentary and presidential elections in June 2023.
“Investors need more clarity how the political situation in Turkey will evolve,” said Union Investment Privatfonds’ Dergachev. “This is very crucial for investors and in my view, as soon as we have more visibility here, this might reduce uncertainty as well.”
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Author: Selcuk Gokoluk and Ercan Ersoy