16 Billion Reasons Why Turkey's Currency Crisis Will Become A Debt Crisis

Earlier this week, when the Turkish lira imploded over the weekend, plunging by the most on record in two consecutive days, bonds of Turkish banks tumbled amid concerns that lira's slump this year would makes it extremely difficult for lenders to repay dollar-denominated debts or rollover maturities. As a result, numerous bonds issued by Turkish banks tumbled to record lows on Monday: bonds of Yapi Kredi Bankasi AS were among the hardest hit, losing almost 30 cents on the dollar in the past week.

The reason for the prompt liquidation were investors fears that Turkish lenders would struggle to find the capital to repay about $34.4 billion of bonds sold during a decade of rapid economic growth and historically low global borrowing costs. Turkish banks alone have to service $7.6 billion in USD-denominated debt by the end of 2019.

"The material level of foreign currency borrowings among Turkish institutions makes them vulnerable," said BNP Paribas analysts, while a Goldman report dropped the hammer on panicked bondholders with the claim that if the Turkish Lira tumbled to 7.1, then the excess capital in the Turkish bank sector would be wiped out.

Yet while the market has already punished Turkish banks, they are not the only culprits behind the nation's ravenous dollar-denominated debt binge, and there are no less than 16 billion reasons why the Turkish currency crisis, unless arrested early, would morph into a debt/rollover crisis.

According to Bloomberg calculations, major Turkish companies, financial institutions and the government are facing a "bond wall" of at least $16 billion in bonds denominated in foreign currency that are due by the end of next year.

The amount due by the end of next year is mostly composed of debt issued by Turkish financial institutions, and includes conventional bonds and Islamic sukuk bonds valued at a minimum of $100 million at the time of issuance.

Investors will be closely watching if banks and corporations - not to mention the government - will be able to maintain access to the foreign funding they need not only to keep economic activity humming as the country’s currency plunges, but rollover maturity debt. The alternative would mean mass defaults for the companies that make up the core of Turkey's economy.

"So far, a currency crisis has not turned into a debt crisis," analysts at Exotix Partners wrote in a report, although that is largely due to the lack of imminent debt maturities: the longer the crisis plays out and the lower the lira drops, the greater the likelihood of a catastrophic outcome. Meanwhile, the country’s low public debt, at 28% of GDP, "might be some comfort, and the country has ammunition in the form of $98 billion in official reserves," they wrote, although here too the bigger wildcard is how the country will be able to maintain the critical inflow of foreign capital to keep its current account funded.

"The next time a bank approaches the wholesale markets for funding via a structured repo or syndicated loan, it will be interesting to see if those lines are still in place in a similar size and what pricing is offered to the Turkish banks," said Mohammed Elmi, an emerging-market portfolio manager at Federated Investors U.K. in London.

One answer may be imminent: according to Bloomberg, Coca-Cola Icecek AS is first up with a senior unsecured note of $500 million maturing on Oct. 1. The company refinanced the securities last September to extend the maturity to 2024 at cheaper rates than previously, and now has “more than sufficient hard-currency cash” to meet its obligations, CCI said in a statement Tuesday. Fitch Ratings affirmed the company at BBB- this week, but kept its outlook negative in line with that of the sovereign, while pointing out all of CCI’s operations are based in emerging markets.

But it's not until next year that the big hitters emerge: 2019 has a heavy concentration of bonds maturing for Turkish issuers, Lender Turkiye Garanti Bankasi AS has $1.4 billion in three bonds maturing between February and October. The Turkish government has a sukuk of $1.25 billion that’s due in October, plus three bonds denominated in U.S. dollars and euros, nominally valued at $4.4 billion in total, that will mature between March and November.

A list of major upcoming USD-denominated bond maturities in Turkey is shown below.