Disappointing launch for Turkey’s Islamic bonds

By Delphine Strauss in Ankara

Published: January 28 2009 17:07 | Last updated: January 28 2009 17:07

Turkey’s launch of bonds designed to appeal to Islamic investors fell flat on Wednesday, raising only a quarter of the 1.89bn Turkish lira ($1.16bn) the Treasury had hoped for.

Banks bought just TL420.7m ($260m) and $49.1m worth of the new revenue-linked bonds, which rely on income from state bodies such as the airports authority and Turkish Petroleum Corporation rather than on interest rates, the Treasury said.

Turkey’s ruling Justice & Development (AK) party, often accused by its opponents of having a religious agenda, prefers not to term the new instrument “sukuk”, though it is aimed at meeting Islamic rules forbidding interest payments.

But the government, which is seeking IMF help to close an external financing gap estimated at between $15bn and $30bn in 2009, is keen to diversify borrowing and tap new sources of foreign capital.

Wednesday’s sovereign issue was Turkey’s first suitable for Islamic investors since a brief venture in the 1990s, and the lacklustre reception is a setback to its efforts to win a bigger share of Gulf petrodollars.

It is not clear how many Gulf institutions participated, but domestic investors hold most of Turkey’s sovereign debt. Much of the interest may have come from Turkish “participation banks” – the term for those offering Islamic finance - unable to join in previous Treasury debt auctions.

Albaraka Turk, one of the bigger participation banks, said it had bought TL100m and $5m worth of the bonds. It had previously invested in sukuk bonds issued by Bahrain.

“This is a very illiquid product,” said Senay Ugur Ustay, at Ata Invest, adding many investors would be deterred by the lack of a secondary market.

She said most preferred short term instruments, while the new bonds have a maturity of more than 3 years. Banks could also be waiting until big government debt redemptions next month set a benchmark for prices.