Ankara: The first sovereign Sukuk issue in Turkey has shown the risks of over-allocating debt deals to the region proving to be a financially wrong decision in the secondary market even though it was a triumph in general public in the beginning.
The $1.5 billion sukuk, maturing in 2018 and issued at a profit rate of 2.803 percent, dropped to about 98¢ on the dollar in the secondary market soon after issue in mid-September and has stayed below par since then.
Traders say bids have ranged between 99 and 99.5¢ in the past few days. It was bid at 99.5¢ yesterday to yield 2.9 percent, according to Thomson Reuters data.
As Turkey’s first official venture into Islamic finance, the sukuk issue was closely watched by investors around the world, drawing 250 separate orders totaling over $7 billion. The successful sale paved the way for Turkey to raise 1.62 billion lira ($905 million) with a local currency-denominated sovereign sukuk two weeks later.
The historic nature of the dollar sukuk, however, may have blinded some buyers to risks such as a last-minute upsizing of the issue and an overwhelming allocation to a single region, the Middle East.
“Whilst we are comfortable with Turkey as a credit, we avoided the issue as there was no clarity on the size or pricing until the last minutes of the deal,” said Mark Watts, Head of fixed income in the asset management group at National Bank of Abu Dhabi.
“When buying any asset, clarity of price and size of supply are key. Turkey priced aggressively, a good deal for them, but it left little on the table for investors and slipped below its issue levels after a short period,” he added.
Turkey, rated BB by Standard & Poor’s, was initially expected to raise between $500 million and $750 million from the issue, or up to a maximum of $1 billion, several regional investors who attended roadshows told. But the issue was expanded to $1.5 billion in the closing hours, even as price guidance continued to tighten, in contrast to the usual pattern of a substantial upsizing causing some widening of the pricing.
Another surprise was the huge allocation to the Middle East. Traditionally, Gulf investors have focused on their own region, where yields are relatively high relative to credit ratings. So an allocation of well under half of the Turkish sukuk to the Middle East would have seemed reasonable.
But the Turkish sukuk was sold 58 percent to the Middle East, 13 percent to Europe, 12 percent to Asia, 9 percent to Turkey and 8 percent to US investors. The small Asian allocation was particularly shocking, since Malaysia is one of the biggest sources of demand for sukuk globally.
Many major investors in the UAE, both Islamic and conventional, have informed that they did not put in orders for the Turkey deal. They cited various reasons, including unusually tight pricing for a first-time, sub- investment grade issuer.
The implication is that a relatively small number of investors in the Gulf ended up with considerably more of the sukuk than they had expected.
In most deals, investors bid for more of a bond than they think they will be allocated, on the assumption that actual distribution of the bond will be proportional to their share of the total bid. In this case, Turkey seems to have skewed its allocation in favor of Middle Eastern bids.