Despite a 36% yield, cash-strapped Turkish firms were forced into lira debt

(Bloomberg) — Some of Turkey’s biggest companies are flocking to the bond market for local currency funding. Central bank regulations hinder access to corporate credit, forcing them to borrow at almost double the cost of commercial loans.

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Borsa Istanbul data shows corporate debt sales have accelerated since July, reaching 24.4 billion lira ($1.3 billion) as of October 21, almost triple the total raised in the entire first half of the year. .

The cost of borrowing on public bonds reached 36% in October, while the average commercial loan interest rate was 18.3%.

The transformation into debt by companies ranging from glass manufacturers to phone companies has come as the government of President Recep Tayyip Erdogan pursues an economic model aimed at lending to small businesses and net exporters. It reflects a new division in the credit markets.

Regulations that force more selective lending are offsetting unprecedented pressure from central banks to loosen monetary policy. This approach has put Turkey into the world’s worst inflation-adjusted negative interest rate environment. And domestic bond sales are a lifeline, given that global bond markets are effectively closed to companies with little names or those that don’t offer exorbitant yields.

“Corporations are flooding the bond market as bank lending stagnates,” said Murat Gulkhan, head of OMG Capital Advisors, an Istanbul-based structured finance firm.

“However, the bond market is not large enough to match a significant portion of bank lending,” Gurkan said. “Bank lending is several orders of magnitude larger than the bond market.”

Commercial credit costs in Turkey have fallen since reaching nearly 30% in July, and the weighted average interest rate on bank loans has fallen by more than 10% since then.

The central bank says small businesses have loaned more than $30 billion in loans this year, a record amount. The three rate cuts have delivered 350 basis points of easing since August, taking the benchmark to 10.5% despite an acceleration of over 85% in inflation.

But alongside an ultra-accommodative monetary stance, the central bank is encouraging targeted lending and allocating cheap capital to exporters and investment-oriented firms.

money not so easy

Businesses and bankers have been vocal about the need for easier access to credit across the economy, and have even warned that corporate cash flow will be tight.

The head of Isbank, Turkey’s second-largest lender by market capitalization, also called for the removal of recent regulations that force banks to hold large amounts of government debt.

The rule means that Erdogan’s economic model is “at a stage where it cannot support the industry,” Isbank Chief Executive Hakan Alan said this week.

As it became harder to get loans, some companies were forced to look to the debt market.

“It’s not necessarily a good idea for companies en masse to move away from high-secured banking relationships and borrow unsecured from pension funds and the like,” Gurkan said.

–With the help of Asli Kandemir.

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