Turkish inflation of 79% pushes corporate debt into a …

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Some of Turkey’s largest companies are seeing their bonds enter troubled territory as rising inflation and one of the world’s worst-performing currencies are wreaking havoc on the economy.

Two bonds from the country’s second largest telecommunications company, Turk Telekomunikasyon AS, have been trading at difficult levels since the beginning of last week. According to data gathered by Bloomberg, investors are asking for a premium of more than 1,000 basis points on US Treasuries for the company’s June 2024 and February 2025 bonds, worth a total of $ 1 billion. In response to Bloomberg’s questions, the company said its liquidity position was “healthy” and that it might consider redeeming one of its $ 2 bonds, depending on liquidity conditions.

Turkish companies face more than $ 16 billion of debt maturing by the end of 2024. With corporate dollar debt yields averaging nearly 12%, refinancing pressures are compounded by a weak pound. The currency has lost more than a quarter of its value against the dollar this year, putting a strain on companies that generate most – and in some cases all – of their revenue in Turkey, but have dollar-denominated debt.

The one and only

Only one Turkish company has managed to issue as bond sales plummet in 2022

Turkey saw only one sell-off in international bond markets this year after Coca Cola Co.’s bottling unit sold bonds in January. This compares with 14 corporate deals throughout 2021, according to data compiled by Bloomberg.

“Once you see the stress of the lira, you see that companies with difficult currency exposure are under pressure in terms of bond valuations,” said Sergey Dergachev, senior portfolio manager and head of emerging markets corporate debt at Union Investment Privatfonds GmbH. in Frankfurt. “Much of Turk Telekom’s debt is denominated in dollars, so there is also some pressure due to the depreciation of the lira.”

Turk Telekom, headquartered in Ankara and owned by the country’s sovereign wealth fund, said in response to questions that its leverage ratio is low by global telecom industry standards and has the ability to meet all of its financial obligations. and commercial. “Turk Telekom currently has a good liquidity position,” the company said. He said he was “managing his financial risks with a proactive and cautious approach in the current climate.”

Elsewhere, two subordinated bank bonds sold by Akbank TAS and Turkiye Is Bankasi AS are also trading at distressed levels, as is the debt of snack maker Ulker Biskuvi Sanayi AS.

According to emerging markets analyst Egor Fedorov, the government’s decision to ban lending to companies holding foreign currency liquidity, aimed at slowing the depreciation of the lira, reduces the ability of companies to hedge their foreign currency positions and increases the risk of corporate debt. at ING Banca.

Costs skyrocketing

Turkey’s price growth has been close to double digits since early 2017, but this year has exceeded a quarter-century high due to rising costs of energy and other commodities. As central banks around the world tackle inflation by tightening monetary policy, Turkey has kept the key rate unchanged this year. President Recep Tayyip Erdogan believes, unlike the traditional economy, that higher rates lead to faster inflation.

Annual price growth reached 78.6% in June and a month later the cost of the Turkish government’s default insurance rose to its highest level in nearly two decades.

“The risk comes from the side of sovereign and bank liquidity in foreign currencies and the growing perception of risk in the economy in general,” said Magdalena Polan, senior emerging markets economist at PGIM Fixed Income, noting that Turkish companies have enough to cover foreign markets in the short term. exchange needs.

Fitch Ratings last week downgraded the long-term default ratings of foreign currency issuers of 25 Turkish banks, citing “political uncertainty and increasingly interventionist policies” as well as inflation. And finally, Turkey will hold parliamentary and presidential elections in June 2023.

“Investors need more clarity on political developments in Turkey,” said Dergachev of Union Investment Privatfonds. “It is very crucial for investors and, in my view, as soon as we get more exposure here, it could also reduce uncertainty.

Source with Bloomberg

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