The government of Turkey increased its use of the Sukuk (lease certificate) market in May 2020 to raise much-needed funds in the wake of the continuing impact of the Covid-19 pandemic especially on the health and economic sectors. Of all the 57 member countries of the Islamic Development Bank, Turkey has been the worst affected by the outbreak with 165,555 confirmed cases at end May 2020 and 4,585 deaths – the tenth largest number of recorded cases in the world.
In some instances, auctions of government securities were actually brought forward from their planned calendar dates, indicating the urgency created by a liquidity squeeze in the public finances of the country and of the banking sector, including the participation banks.
The issuance calendar for the May-July 2020 period earmarks further lease certificate auctions in June and July. Moreover, the Ministry of Treasury & Finance does resort to switching/buy-back auctions, tap issuances and public offerings as part of an active debt management strategy.
The Turkish Ministry of Treasury & Finance has been very active in May with several auctions comprising domestic issuances of fixed rent rate lease certificates; gold-backed lease certificates; and issuances of Euro-denominated and US dollar-denominated lease certificates. In total the Treasury raised TL11,810.13 million in two domestic Sukuk auctions in May, in addition to two foreign currency denominated auctions – one which raised €232.754 million and another which raised US$666.403 million, thus bringing the total US dollar equivalent for the month to US$2,676.453 million. Similarly, the Treasury also issued Gold-backed lease certificates in May collecting 2,465,610 grams of gold (1000/1000 purity) from institutional investors for issuance of an aggregate 2,465,610 gold lease certificates (at a nominal value).
“Due to the demand from participation banks (Islamic banks), Turkish lira (TL) denominated fixed rent rate lease certificates (Sukuk Ijara), which were to be issued on May 27th, 2020 (settlement date) according to May – July 2020 Domestic Borrowing Strategy, will be issued to the banks through direct sale method on 13 May, 2020 (settlement date),” stressed one announcement from the Debt Office of the Treasury & Finance Ministry.
That auction went ahead with TL5,353.6 million raised and the certificates priced at a Periodic Rent Rate payable over 6 Months of 3.83% with a tenor of 182 days and maturing on 11 November 2020. The Treasury even made an exception to the settlement process. “Because of Coronavirus pandemic, if there is no possibility to complete two signatures and bank stamp, one authorized signature would be accepted. All signatures and bank stamp can be completed at a further date,” explained the Treasury in the offer document.
A second auction was held on the same day raising TL6,456.53 million with the certificates priced at a Periodic Rent Rate payable over 6 Months of 4.70% but this time with a tenor of 728 days and maturing on 11 May 2020.
In fact, these latest issuances in May follow TL7,200.66 million (US$1,028.76 million) raised by the Treasury through four monthly auctions of lease certificates (Sukuk Ijara). The last one being a 5-year TL1.47 billion Sukuk Ijara issuance on 8 April priced at a rental rate of 1.7% on a 6-month rental payment period.
Similarly, the Debt Office of the Turkish Treasury also issued 1-Year Gold-backed Lease Certificates (Sukuk Ijara) on 13 May 2020 maturing on 14 May 2021priced at a Lease Rate of 0.75% payable over the 6 Month lease period. The amount of gold collected, according to the Treasury, amounted to 2,465,610 grams of gold (1000/1000 purity) from institutional investors for issuance of an aggregate 2,465,610 gold lease certificates (at a nominal value).
For the January-May 2020 period, the Treasury has conducted four such gold-backed lease certificate auctions in January, March, April and May 2020 collecting a total 31,296,730 grams of gold (1000/1000 purity) from institutional investors for issuance of an aggregate 31,296,730 gold lease certificates (at a nominal value).
All the lease certificates were issued by Hazine Mustesarligi Varlik Kiralama A.S., wholly-owned special purpose vehicle owned by and on behalf of the Ministry of Treasury & Finance, the obligor.
The Ministry of Treasury & Finance issues these gold-backed lease certificates “to diversify borrowing instruments, broaden the investor base and bring the idle gold into the economy.”
According to Finance Minister Berat Albayrak “citizens are 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.”
The investors will be paid TL-denominated returns on a semi-annual basis indexed to the gold price. On maturity, according to the Ministry of Finance, 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.
In another auction on 27th May 2020, the Treasury opted for international currency issuances, raising €232.754 million through a 1-Year Euro-denominated Sukuk Ijara issuance which matures on 28 May 2021 and priced at a Periodic Rent Rate (6 Months) of 1.25%.
Similarly, it raised a further US$666.403 million in a second offering on the same day through a 1-Year US dollar-denominated Sukuk Ijara issuance which also matures on 28 May 2021 and priced at a Periodic Rent Rate (6 Months) 1.75%. Both transactions were conducted by the Central Bank of Turkey Bank via its Auction System under the Central Bank Payment Systems.
Turkish banks (both participation and conventional) may also increase their holdings of government securities going forward for reasons other than the reserve and liquidity management purposes as the requirement for them to maintain an asset ratio of at least 100% from 1 May 2020 sets in.
According to Fitch Ratings, the move introduced by the Banking Regulation & Supervision Authority to stimulate lending to support the economy amid the Covid-19 pandemic “will force some banks to increase lending at a time when the operating environment has weakened, with heightened risks to borrowers’ repayment capacity and therefore to banks’ credit profiles. Banks failing to meet the target are likely to face a fine based on their ratio shortfall. But many banks will not be affected as they already meet the requirement.”
Some banks with lower asset ratios may be unable to reach the target in such a short timescale purely with loan growth, particularly if customer deposits continue to grow. “We therefore expect some banks to increase their holdings of government securities or FX swaps with the Central Bank of Turkey (CBT), which count towards the target. Unlike loans, however, these are subject to haircuts in the asset ratio calculation. Purchases of Turkish sovereign debt have already increased since the target was announced.”