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Beleagured Turkish Treasury Persists with Spate of Ijarah and Gold-Backed Leasing Sukuk to Ease Liquidity Requirements Despite Ratings Downgrade

The Turkish Ministry of Treasury & Finance continues to tap the domestic and international markets with issuances of lease certificates (Sukuk Ijarah) to fund government budgetary requirements as part of its active but diversified public funding and debt strategy and to ease the liquidity squeeze in the economy and financial system.

This despite the fact that the Turkish economy, according to Moody’s Investors Service latest rating outlook, is faced with deep structural economic problems including intermittent currency crises, a fall in FX reserves, further concerns about the transparency and independence of the central bank and, by extension, Turkey’s broader institutional framework. “External pressures are exacerbated by the ongoing disagreement between Turkey and the United States, this time relating to Turkey’s purchase of the S-400 missile system from Russia,” said Moody’s.

Not surprisingly, Moody’s in mid-June 2019 downgraded the Government of Turkey’s long-term issuer ratings to B1 from Ba3 and maintained its negative outlook, albeit this was some 10 days before the re-run of the Istanbul mayoralty vote on 23 June, which Ekrem Imamoglu of the Opposition CHP easily won.

Imamoglu’s victory has seemingly put a dampener on any potential political unrest, with President Recep Tayyip Erdogan hailing it as a “triumph for Turkish democracy” and promising to cooperate with the new mayor to solve the challenges of Turkey’s business and financial capital, as well as the country’s economy at large.

The Moody’s downgrade has direct consequences for Turkish sovereign bond/Sukuk issuances. “The senior unsecured bond ratings and senior unsecured shelf ratings have also been downgraded to B1 and (P)B1 respectively from Ba3/(P)Ba3. Concurrently, Moody’s has downgraded to B1 from Ba3 the backed senior unsecured bond ratings of Hazine Mustesarligi Varlik Kiralama A.S. (“Hazine”), a special purpose vehicle wholly owned by the Republic of Turkey from which the Turkish Treasury issues Sukuk lease certificates, and has maintained the negative outlook,” explained Moody’s in its downgrade rationale.

However, Moody’s also highlighted the fundamental credit strength of the economy as a whole: “Today’s downgrade reflects Moody’s view that the risk of a balance of payments crisis continues to rise, and with it the risk of a government default. The B1 rating balances these risks against the country’s fundamental credit strengths, particularly its large, diversified economy and still-moderate levels of government indebtedness,” said the report.

The foray into the Sukuk market in June was kicked off with the issuance of Euro denominated fixed rent rate Lease Certificates through the Direct Sale Method on 31 May in the local market open to subscription by an approved list of primary dealer banks. The lease certificates were issued by Hazine, on behalf of the Ministry of Finance, the obligor, carry a tenor of 364 days, and are priced at a lease rental rate of 1.5 per cent payable semi-annually. The allocations to participating banks were finalised through the Central Bank of Turkey via its AS (Auction System under Central Bank Payment Systems) on 31 May.

The usual rationale of the Ministry of Finance is that the lease certificates are issued “in order to develop the domestic lease certificate market, to increase domestic savings, broaden the investor base and diversify the public debt borrowing instruments.”

Turkey last raised €835 million through a Euro-denominated issuance of 728 days lease certificates in February 2019, which was priced at a 6-month lease rate of 1.45 per cent payable semi-annually.

With this transaction, the amount of funds that have been raised by the Finance Ministry from the international capital markets to the end of June 2019 reached a total of US$6.52 billion. Finance Minister Berat AlBayrak is targeting to raise at least US$8 billion from the international debt markets in 2019. Turkey also raises regular funds from the domestic Turkish lira-denominated market.

On 18 June 2019, the Ministry of Finance similarly issued TL1,60596 billion of 2-Year Fixed Rate Lease Certificates through Hazine, which mature on 16 June 2021. The transaction similarly was effected through the Central Bank of Turkey via AS. 

In a further ‘innovative’ development to increase liquidity in the system, the Ministry of Finance issued gold-backed lease certificates “to diversify borrowing instruments, broaden the investor base and bring the idle gold into the economy.” The Ministry of Finance started selling gold bonds and gold-denominated lease certificates on 17 December 2018 – an exercise that it said would continue through 2019. Finance Minister Berat Albayrak tweeted on the issuance stressing that “Citizens were provided with a safe investment tool for their gold savings. With the gold bond and gold-denominated lease certificate issuance through five banks, our citizens will both win themselves and contribute to the national economy.

In the latest gold-backed Sukuk issuance on 19 June 2019, the Ministry of Finance confirmed that “8 tonnes 10 kilograms gold (995/1000 purity) for lease certificates has been collected from institutional investors with the value date of June 21, 2019 and the maturity date of June 18, 2021.”

In this respect, according the Ministry, a total of 34 tonnes 187 kilograms gold (995/1000 purity) (32 tonnes 304 kilograms for gold denominated lease certificate and 1 tonne 883 kilograms for gold bond) has been collected from institutional investors in 2019.

The investors will be paid TL-denominated 2.40 per cent per annum indexed to the gold price.  The certificates have a maturity of 728 days (2 years) and a coupon/lease period of 6 months.

On maturity, investors may request the principal payment as 1 kilogram of gold bar (produced by refineries) or Republic Gold Quarter Coins printed by the Turkish State Mint.

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