Strong demand for a sukuk issued by Turkish bank Kuveyt Turk last month underlines how Turkey may become a major source of Islamic bonds for Gulf investors who are keen to diversify geographically. The $350 million sukuk, issued at par and carrying a profit rate of 5.875 percent, was only the second sukuk issued from Turkey. But it attracted orders totaling over $550 million – and Gulf investors accounted for nearly 70 percent of final subscribers, according to data released by the lead arrangers. That may presage an important shift in investor interest. Traditionally, Gulf investors have not focused on bonds from Turkey, instead preferring debt from names in the immediate region with which they are most familiar and comfortable. Now, however, the relatively comfortable way in which Turkey's economy is coping with global weakness – combined with strong appetite for sukuk in general, since they have proved less volatile during this year's market instability than conventional bonds – may be changing Gulf investors' priorities. “Turkish government USD paper and bank paper have been in issuance for a number of years now, but have not been a focus of MENA market players as there have been plenty of more locally- issued and better-understood names out there,” said Mark Watts, head of fixed income at National Bank of Abu Dhabi. “There are signs that this is changing as the ever-present hunt for yield forces investors to widen their horizons. Sukuk from Turkey is a relatively new phenomena for GCC investors... Turkey's performance dynamics mean that any smart fund manager will want to take a look at gaining exposure.” The profile of sukuk investors favors a hold-to-maturity investment which makes secondary market trading of Islamic bonds less liquid, but also less volatile. This has helped sukuk in general perform better than many conventional bonds in recent months. The yield on Turkey's 7 percent, $1.5 billion conventional sovereign bond, issued in 2008 and maturing in March 2019, is up about 4 bps this year and 30 bps higher than its level at the start of September. “The pricing in the (conventional) bond market is difficult. There is liquidity around in the sukuk market, so there might be better pricing,” said Debashis Dey, partner at law firm Clifford Chance in Dubai. A further attraction of Turkish sukuk is that legislative changes by Turkey this year have created a relatively favorable environment for Islamic debt issuance – in some important ways, more favorable than the environment in the Gulf. For example, last month's sukuk from Kuveyt Turk was able to combine asset-backed elements, including the sale and transfer of tangible real estate to an onshore special purpose vehicle, with asset-based elements; this increased the perceived safety of the bond for investors.
