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art of forfaiting

The main drivers for the countrys popularityhave been its economic fundamentals. In

short, it is a classic emerging market. This

year it is expected to achieve GDP growth of 6.5%.

Although inflation is stubbornly pegged at a little

above this level, the country is sucking in foreign

direct investment at the rate of $20bn annually.

A recent report by The Economist noted that

Turkey is now the worlds biggest exporter of

cement, the second-largest exporter of jewellery

and is Europes leading maker of televisions and

DVD players, and its third-biggest maker of motor

vehicles. While it exports mostly to Europeancountries, it is rapidly expanding export markets

throughout the Middle East, Russia and Central Asia.

In October 2010, Moodys revised Turkeys

sovereign Ba2 local and foreign currency government

bond ratings from stable to positive. In November,the rating agency issued a credit opinion that

concluded: The Turkish economy has experienced

a V-shaped recovery after the 2009 recession and is

currently the fastest-growing economy in the OECD.

Furthermore, and of particular interest to the

western banking and forfaiting community, Moodys

added on 22 November an improved stable outlook

for the Turkish banking system, stating, Turkish

banks have shown resilience during the recent global

financial crisis, as evidenced by their balance-sheet

strength, which has been supported by appropriate

loan-loss provisioning, a solid capital base, andrecurrent earnings generation. Financial sector

reforms that were enacted following the 2000-2001

financial crisis set the foundations for the stability of

the banking system today.

Turkey: forfaiting

market saviour?Am t goom tat as srou t forfatng markt for mu of t tm sn Sptmbr 2008, Turkyas onsstnty prov to b a sour of optmsm an as, wrts RichARd WillSheR.

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Perfect match

Pretty glowing stuff. And it is easy to appreciate that inorder to achieve its export led economic growth, the

countrys manufacturers have needed to import capital

goods, particularly production machinery, as well as

raw materials such as minerals that it cannot produce

itself. Moreover, Turkey imports substantial quantities

of oil to power its vibrant economy. All of these lend

themselves to import financing on credit terms that

can typically be provided by the forfaiting market.

Turkish banks are quite used to the forfaiting

product, says IFA board member Sema Zeyneloglu

of Rabobank. They have been involved on the

primary side of market for many years and areaccustomed to use alternative forms of forfaiting

to provide their clients with funding. In addition,

many of those banks have their secondary market

operations outside Turkey, so they are also familiar

with how that side of the market operates.

Meanwhile, the volume of trade finance in Turkey has

held up well even in the crisis. It may have decreased

somewhat, but deals continued to be done.

Deferred payment letters of credit (LCs)

probably account for the largest value and deal

volume, in particular big ticket Middle East oil import

LCs and those relating to steel and scrap metal.Inevitably these are short term, varying from 30 days

to one year in duration.

However Muzaffer Aksoy of ABC International

Bank in Istanbul notes that his bank is financing

imports of capital goods with tenors of up to 36

months at present. He expects that terms are likely to

push out to five years before too long, with traditional

10 x 6 promissory note structures being used.

Capital-goods imports typically originate from

Germany, Italy and Switzerland and bankers and

brokers in those countries confirm that Turkey has

been a main source of new trade business over anumber of years. In terms of guarantors or issuers

of notes, the government-owned banks, such as

Halk and Vakifbank, and the private banks Akbank,

Isbank, YKB, Garanti are popular.

Risk and pricing

As yet, the market is very limited for the corporate

risk, but Akbanks Istanbul-based Vice President

for financial institutions, Altug lker, confirms that

some Italian exporters have accepted short-term

notes issued by strong corporate names without the

support of a bank guarantee. These are, however,likely to be sold back to Turkish banks in the

secondary market, it ought to be said.

One very large feature of the primary and

secondary market in Turkish risk is bank fund

raisings via syndicated loans. Some argue that this

sort of financial transaction is not real or pureforfaiting. Nonetheless, it represents an elephant in

forfaitings parlour that cant be ignored.

And, in many ways, trade in syndicated loans

conditions the pricing of trade deals and vice versa.

Altug lker notes that lately, following the Irish crisis,

Turkish pricing has increased as holders of Turkish

bank loans aim to sell before their year-end. However,

he expects pricing to tighten in the new year.

All agree that the outlook for Turkish paper is

quite buoyant for the foreseeable future. Zeyneloglu

is confident that Turkey will remain a mainstay of

the forfaiting market. It is one of the traditional

markets from which I would expect to see a

continued, regular flow of business. The bankingsystem is quite sophisticated and Turkish banks

are very well known in the international banking

environment and there are always buyers that are

happy to buy Turkish bank risk.

ABCIBs Muzaffer Aksoy expects pricing to

come down as more banks become buyers of

paper, a view shared by Akbanks Altug lker,

especially as the countrys sovereign credit rating

continues to strengthen.

In summary, with uncertainty over the Irish crisis

and widespread fear of contagion from the sovereign

debt crisis in Europe, markets may not yet be readyto branch out to embrace more exotic country risk,

longer credit terms and tighter pricing.

But in credit terms as well as geographically, Turkey

sits between Europe, the Middle East and the CIS

countries. For this reason, it is well placed to continue

supporting the forfaiting market with both trade deals

and syndicated loans for some time to come. q

Rihrd Willshr is fiil jorlist d trir,

prhps st kow for th sirs tht h

odts with th IFa. H ottd

ilig rdw@rihrdwillshr.o

For or ifortio ot th Itrtiol

Forfitig assoitio s: www.forfitrs.org or

-il ifo@forfitrs.org

Deferred payment LCs probably

account for the largest value

and deal volume, in particular

big ticket Middle East oil import

LCs and those relating to steel

and scrap metal.