Turkey Corporate Bonds Defy Bearish Chorus With Peer-Beating Run

(Bloomberg) -- Investors who looked past headwinds that pummeled the Turkish lira to record lows this year and bought foreign-currency bonds issued by the nation's companies are now sitting on some of the biggest returns in fixed-income markets.

At just under 4% -- more than five times the amount netted by traders who parked their cash in a broad emerging-market bond fund -- the gains have been driven by a global clamor for yield and demand for securities that will benefit as Europe's economy opens up. They've even outpaced U.S. high-yield debt, an asset class well-paced to weather the prospect of rising inflation that's rocked markets.

The advance mean Turkish companies now pay 78 basis points less than the government to borrow on average, the biggest discount since 2010. And it comes despite the largest increase in debt sales since 2016, underscoring the power of the rally that's driving investors up the risk spectrum to generate returns.

It's a shift for a sector that for years has been mired by the size of its hard-currency debt pile and which bruised investors with losses as recently as 2018, when the lira last crashed. The currency has lost almost half of its value over the past three years alone, and a mismatch between companies' foreign-currency liabilities and assets, equivalent to about a fifth of gross domestic product, hangs over the economy and international creditors alike.

“Current market conditions created a goldilocks zone for Turkish companies and investors,” said Okan Akin, a credit analyst at AllianceBernstein in London. Investors are buying these securities as “safer alternatives” to Turkish government bonds, while “lower-tier Turkish companies need funding for longer maturities and paying higher rates that offset any potential macro risks in Turkey,” he said.

Murky Outlook

Inflation is running more than 10 percentage points above target, the fallout of years of political interference in monetary policy that's put a premium on growth and job creation while muddying the outlook. Under President Recep Tayyip Erdogan's watch, the country has drifted away from its NATO allies, setting the stage for bouts of turbulence with Washington that tends to jolt markets.

Still, corporate bond traders have largely ignored the latest wave of depreciation spurred by Erdogan's surprise decision to sack the central bank governor, and have been piling into the securities. Turkish corporate debt still offers an average 363 basis points over U.S. Treasuries, almost twice the premium paid by South African companies.

Many are betting that brewer Anadolu Efes Biracilik ve Malt Sanayii AS and white-goods maker Arcelik AS, which make most of their revenue outside of Turkey, will benefit in particular. Data on Wednesday showed exports rose 66% in May compared to the same period last year, a sign that the reopening of major markets in Europe is feeding through trade channels.

Borrowing Drive

But the gains have been broad-based, with debt issued by banks leading the pack higher, followed by bonds sold by energy and communication services, according to the Bloomberg Barclays EM Turkey Corporate index.

“Despite domestic and geopolitical challenges, investors remain convinced on Turkish companies' willingness and ability to finance their debt,” said Aneeka Gupta, London-based research director at WisdomTree Investments Inc.

The bullish backdrop is also spurring a borrowing binge. Sales of dollar- and euro-denominated corporate bonds in international debt markets surged 72% in the first half of the year to more than $4 billion, according to data compiled by Bloomberg. That compares with a 23% increase in emerging markets as a whole.

Last month, Fitch Ratings highlighted the headwinds that creditors in emerging markets face if the U.S. dollar appreciates, noting that foreign currencies account for an average 70% of debt but only 46% of revenue for businesses they examined in Turkey.

“Turkish corporates have historically been among the most exposed to these risks,” analyst including Simon Kennedy and Tatiana Kordyukova wrote.

In 2018 and 2013, investors lost more than 4% on their corporate bond holding as the lira retreated. Even with currency down another 14% this year and flirting with a fresh record low, it's a risk that some are willing to stomach. The lira traded 0.2% stronger at 8.69 against the dollar as of 11:49 a.m. in London.

“I wouldn't tar all Turkish companies with the same brush,” said Omotunde Lawal, head of Barings' EM corporate debt group. Companies like Anadolu Efes and Arcelik are “less vulnerable than purely domestic businesses, even with the lira going above 8 versus the dollar.”