We identified an AAA rated Rabobank 8% Coupon Bond denominated in Turkish lira and maturing in October 2015 that was trading below par, and targeted a yield of 8.5% for our clients. It was recently completed at over 8.75%.
Corporate Bond linked to the Turkish Lira
Netherlands based Rabobank has bonds, denominated in the Turkish lira, that currently has a yield of about 8.5% for 52 months. The high yield of this Turkey bond, with its AAA rating, compares very favorably in relationship to other high yield instruments in our Foreign and World Fixed Income holdings. While the US dollar has stabilized in recent weeks, due in part to the further unfolding of the Greek debt crisis and concerns over its impact against the euro, the dollar’s longer term weakening trend against many world currencies remains a major concern for investors seeking protection against further erosion of the its buying power. This bond provides a significant diversification away from the US dollar towards an economy that has weathered the recent financial turmoil relatively well with no government bailouts.
US Debt Woes
The Treasury department has warned that the United States could default on its loans if Congress doesn’t raise the debt limit by Aug. 2, a scenario that some believe could push the country back into recession and upend financial markets. However unlikely that possibility may be, the simple fact is that U.S. budget deficits in recent years has hovered at their highest levels relative to the economy since World War II. The deficit for the current fiscal year, which ends Sept. 30, is projected to hit $ 1.4 trillion.
At this point, with politicians still demagoguing the ways and means to deal with such massive debt, how long it might actually take to deleverage such an unsustainable level of debt may not be as concerning to most income oriented investors as is the more general bewilderment in deciding which pundit’s bunker will best weather the storm. However, what is plainly evident is that the true money supply is currently up almost 43% since the beginning of 2008. Since January of 2000, the true money supply has increased by 151%. It has been the biggest monetary increase of the entire post WW II era in such a short period of time. In our effort to diversify and protect our client’s assets against a further possible devaluation of the dollar and corresponding inflation threats, we here at Durig Capital scour the globe in search of sound investments.
Turkish Economy
Turkey is a secular state often viewed as a bridge between East and West. With a constitution adopted in 1982 after a military coup, it is now a successful multi-party democracy. Prime Minister Recep Tayyip Erdogan has held office since 2003. Turkey’s financial sector has undergone a rapid transformation. Since the 2000–2001 financial crisis, the government has increased transparency, strengthened regulatory and accounting standards, and improved oversight. The banking sector dominates the financial system, with the five largest banks accounting for about 60 percent of total assets. The banking sector weathered the financial crisis well due to effective liquidity buffers and limited exposure to foreign currencies.
While its traditional agriculture sector still accounts for about 30% of employment, an aggressive privatization program has reduced state involvement in basic industry, banking, transport, and communication, and an emerging cadre of middle-class entrepreneurs is adding dynamism to the economy. Turkey’s traditional textiles and clothing sectors still account for one-third of industrial employment, despite stiff competition in international markets that resulted from the end of the global quota system. Other sectors, notably the automotive, construction, and electronics industries, are rising in importance and have surpassed textiles within Turkey’s export mix. The government sets prices for many agricultural products and pharmaceuticals and influences prices through regulation, subsidies, and state-owned utilities and enterprises.
After Turkey experienced a severe financial crisis in 2001, reforms strengthened the country’s economic fundamentals and ushered in an era of strong growth which averaged more than 6% annually until 2008, when global economic conditions and tighter fiscal policy caused GDP to contract in 2009, reduced inflation to 6.3% (a 34-year low) and cut the public sector debt-to-GPD ratio below 50%. Central government spending in the most recent year equaled 23.4 percent of GDP, while overall tax revenue as a percentage of GDP was 23.5 percent. Its well-regulated financial markets and banking system weathered the global financial crisis and GDP rebounded strongly to 7.3% in 2010, as exports returned to normal levels following the recession. The growth is expected to slow in 2011 to a more sustainable 4.5-5.5%. This is good news for inflation and the current account deficit, which both rapidly increased in line with economic growth.
Household consumption and private investment are considered the main growth drivers. Decreasing unemployment and ample credit availability are expected to prop up household consumption, which is reflected in the upward trend in the consumer price index. External demand is likely to remain subdued as the EU and UK, turkey’s main trading partners, are facing sluggish growth. While the central bank’s aim to keep inflation around 5% in 2011 seems rather ambitious (7% is more likely), it is not expected to sharply tighten its monetary policy as this would increase the appreciating pressure on the lira.
Rabobank Group
Rabobank Group, established in 1898, is a Dutch based cooperative financial services provider. It offers banking, asset management, leasing, and insurance and real estate services. In the Netherlands they are a full-service market leader. Internationally, they are a leading food and agribusiness bank. Overall, Rabobank Group has approximately 59,000 employees, who serve about 10 million customers in 48 countries, and it enjoys an award-winning sustainability rating in economic, environmental, and social categories. In terms of tier 1 capital, it is among the world’s 25 largest financial institutions with over 34 billion euro’s and a 15.7% ratio to risk-weighted assets. With a net profit of 2.772 billion in 2010, the return on equity stood at 8.6%. Rabobank has received a triple A rating from both Moody’s and Standard & Poor’s since 1981, the highest ratings possible for banks, and is considered among the top 10 safest banks in the world.
Risks
The default risk is Rabobank’s ability to perform. Given its underlying strength and AAA rating, as outlined above, it is our opinion that the default risk is significantly less than the currency risk of the Turkish lira.
The currency risk could and will affect the returns of these bonds and possibly in a negative way as it exposes investors to the Turkish economy.
The strong economic recovery is attracting much (short term) foreign capital. About a third of Turkey’s external financing comprises short term debt, and the large influx of short term foreign capital could lead to asset bubbles. By nature, short term capital flows tend to be volatile, which is a risk in itself. Downward risk to the growth projections are present in the form of a sudden reversal of short term foreign capital flows and lower economic growth than is currently expected in the western countries. In spite of solid growth outlook, many global investors still consider emerging markets relatively risky. Turkey’s relatively high current account deficit, uncertainty related to policy-making, and fiscal imbalances leave the economy vulnerable to destabilizing shifts in investor confidence.
Allotments
How can people invest in Turkish lira denominated bonds? With most firms it often requires an institutional sized single bond purchase. To circumvent this constraint, at Durig Capital we often combine world bond buyers into a larger institutional sized purchase. In this week’s offering, we anticipate being able to facilitate purchases as low as $ 5,000 US Dollars should that be the level that best fits your interest. So the answer to this question is simple – contact your Durig professional.
Conclusion
While there are increased concerns of overheating and inflation flaring up with an economy growing at well over 7%, Turkey stands out as having successfully rebuffed a serious global economic crisis. By rebounding strongly in 2010, it appears to have decoupled itself from the rest of Europe. As a result of our consideration of these trends and the high yield in Turkish lira backed by a highly accredited banking institution, we believe this Rabbobank issue offers an exceptionally attractive opportunity for high yield income diversification, and it is why we have chosen to add it to our Foreign and World Fixed Income holdings.
Disclosure: Durig Capital clients currently own Turkish bonds.
To know more about this Rabobank bond call our fixed income specialist at 971-327-8847
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