By Sujata Rao and Nevzat Devranoglu
ISTANBUL Oct 13 Turkey, yet to complete its 2011 external financing plan, may be gearing up to sell debt as the global markets gloom lifts, and robust performance by its existing bonds during the recent turmoil indicates a new issue would be well received.
International bond markets have been in lockdown for months amid fears of a Greek default, a European bank meltdown and a global recession. That means many expected bond issues from emerging issuers, both sovereign and corporate, have not materialised, leaving investors with cash in hand.
But improved investor confidence this week saw Mexican state oil company Pemex tap its 2041 bond to the tune of $1.2 billion. Many investors reckon Turkey will follow as soon as this week if risk appetite holds up.
Ankara had an external issuance target of up to $6 billion for this year and has so far raised the equivalent of $4 billion including pre-financing that was done late last year.
It also has a $1.6 billion bond maturing in January 2012.
"The Turks should be getting ready to tap this window," fund manager Jeremy Brewin at Aviva Investors in London said on Thursday.
A new Turkish issue would likely see good demand because of the way its existing corporate and sovereign debt weathered the crisis, Brewin said, adding he had used recent falls to buy more of the benchmark 2036 bond.
"Turkey has been far more resilient than most other emerging credits -- from Latin America, Russia or even the Gulf. It's been half as volatile as other benchmark bonds," he added.
The yield premium investors demand to hold Turkish debt over U.S. Treasuries has fallen 100 bps in recent days to around 300 bps. But the spread widened only 80 bps during September compared with a 150 bps jump for another big emerging European sovereign, Russia.
The existing debt curve meanwhile is trading strongly, with bond prices on average more than 6 points higher than lows hit last month and up almost 1 point on Thursday.
Most players expect Turkey to tap its 10-year 2021 bond for $1 billion though some say a $500 million issue -- with an option to add $250 million -- would achieve a good price.
A new issue premium of around 10 bps to existing Turkish bonds would be appropriate for a 10-year issue, analysts say, noting the 2021 issue is yielding in the 5.02-5.10 percent area, 35 bps tighter on the month.
One bond trader in London noted that Pemex had paid 315 bps over Treasuries on its 2041 bond, a premium of 20 bps to the underlying issue.
If Turkey, a pure sovereign, decided to re-open the 2041 it would need to pay a smaller new issue premium, possibly around 15 bps, he added.
That's especially so as strong demand is anticipated from local banks who are enjoying an improved liquidity position thanks to the recent relaxation in reserve ratio rules. Turkish buyers typically take least half of any new sovereign bond.
"Locals are already ready to bid as they have generally done in the past. They will probably bid for more then 50 percent (of the issue) given FX liquidity in the sector is more than $15 billion now," said one bond trader in Istanbul. (Reporting by Sujata Rao and Nevzat Devranoglu; editing by Ron Askew)
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