Last year was a record for M&A/privatisation in Turkey, particularly in the utilities and power sector where $6 billion of deals closed headlined by the $1.61 billion sale of gas distributor Baskentgaz and the $1.23 billion sale of Baskent EDAS. The Turkish government needs 2009 to be as busy, particularly since privatisation revenues are needed to balance the state books and satisfy the demands of the International Monetary Fund, which has been pressing for more budget discipline.

Although global risk aversion is making a repeat more difficult, the 2009 financings backing the sales of Baskent EDAS (BEDAS), Sakarya EDAs (SEDAS) and Meram EDAS (MEDAS) are symptomatic of a Turkish energy privatization market that is still able to structure around the liquidity constraints of the global debt market – albeit at a higher cost of funding to both banks and sponsors.

Deals for BEDAS and SEDAS closed earlier in 2009, and MEDAS is in the bank market now. All three share a common structure – a 50% upfront payment by the sponsor to the government followed by two deferred payments with interest that are backed by letters of guarantee from banks. All three deals involve Akbank and Isbank as lead arrangers with Yapi Kredi and Garanti also on BEDAS and MEDAS and Finansbank on BEDAS. The MEDAS deal – a $440 million acquisition by Alsim-Alarko – differs slightly in that is has a fixed interest rate (9%) payment to the state, whereas the previous deals were more difficult to predict given interest was charged over one-year Libor.

All three deals are a neat solution to global constraints on debt availability and given there are some sizeable transactions planned – the biggest should be the privatisation of Istanbul gas distributor IGDAS – are certain to be re-employed.

There has also been recent M&A activity in the private power sector, which accounted for around 20% of total energy deal volume in 2008. In March, Turkish investment company Global Yatirim Holdings announced it is selling a 95% stake in Yesil Enerji to Statkraft of Norway. Yesil is in the process of building seven hydroelectric plants worth Eu700 million. Also in March, Borusan Holding agreed to sign a 50:50 strategic partnership with Energie Baden Wurttemberg, with the aim of building 2,000MW of renewable generating capacity.

Infrastructure sales

In the infrastructure sector, the past success of the airport privatisation programme was offset by the convoluted ports privatization programme which was mired by litigation: Celebi Holding is out to market with a $150 million financing for the 36-year $175 million Bandirma port concession and what view lenders take on the deal remains to be seen.

The Turkish roads sector appears to be following a path between the two in terms of success. The initial June 2008 government deadline to privatise a $5 billion-plus package of existing roads and bridges, including the main bridges across the Bosphorus in Istanbul, was always untenable. More work on legal issues is required before it comes to market and the process could now run through to the final quarter of 2009 or first quarter of 2010.

The road assets comprise 1900km of existing toll motorway – Edirne-Istanbul-Ankara, Pozanti-Tarsus-Mersin, Tarsus-Adana-Gaziantep, Toprakkale-Iskenderun, Izmir-Cesme, Izmir-Aydin, Gaziantep-Sanliurfa, and the Izmir and Ankara Beltways – and the Bosphorus and Fatih Sultan Mehmet bridges in Istanbul.

The sale will comprise a concession from the OIB and the transfer of operating rights for up to a 25-year tenor. The auction may be in one or two lots, but even with the size of each deal watered down, the assets will be difficult to bank.

Although the existing assets are relatively new and performance is measurable on historical toll data, the financing for the sale will still require some significant due diligence because while the concession agreements are to feature indirect guarantees that a second motorway won't be built on the same route, under Turkish law there must be a free alternative road on the same route.

Financing for the Bosphorus car tunnel project – awarded in December 2008 to a consortium comprising Yapi Merkezi, SKEC Samwhan, Hanshin and NamKwang-Kukdong – is also having a troubled birth. The sponsors have just replaced the original financial adviser, Ernst & Young, with Unicredit after initial approaches to the bank market in March met a poor response. The concession is for 30 years, six months and nine days – four years, seven months for investment and 25 years, 11 months and nine days tolling – and revenues are guaranteed in the base case by the government, which is also taking all the land expropriation risk.

The transport deal nearest to going to the bank market is the $5 billion-plus build operate transfer (BOT) concession for the 420km Izmit Gulf highway, which runs from Izmir via Orhangazi to the Gebze industrial area near Istanbul. The project will require a 3km suspension bridge to be built over the Izmit Gulf, plus 377km of toll road and 43km of link roads.

High capex and construction, traffic expropriation and sovereign risk have put bidders off, with only two consortia – Cengiz, with Colin, Mapa and Limak; and Nuvol Group with Ozaltin Construction, Makyol, Yuksel, Gocay and Astaldi – in the running. The General Directorate of Highways is studying the offers, which will be judged not only on price but how many years bidders will operate the concession. The bidders have only put up offers with indicative bank support and will have six months after being awarded to find financing, with a possible additional six month extension granted in recognition of the difficult financing environment.

The bank market will be looking for a high level of equity on the project, and strong multilateral support together with construction risk mitigation given the construction period of seven years – construction alone would exhaust the tenor on most mini-perms on offer at the moment.

Debt requirement

"The amount of debt needed for these projects is more than Turkish banks can undertake on their own, not necessarily in the sense of underwriting, but final holds," comments an infrastructure banker in Istanbul. "Many Turkish banks are waiting for the international financial markets to get back to a reasonable level, where international banks again feel comfortable with Turkish infrastructure assets, even if the liquidity levels of 2007 are not going to be seen again."

"Tenor could be a problem," he adds. "Last year 12-year tenors were possible, but in the current market local banks are reluctant to go out to more than 8 to 10 years."

"We need to see the winning consortium [on Izmit Gulf], and look at the financing structure that they are proposing," adds another banker in Istanbul. "But at $5-$6 billion, a deal of this size is not going to be easy for the Turkish banking sector."

Clearly the consortium featuring Astaldi has an advantage – the Italian involvement would likely involve a sizeable ECA tranche from Sace, as well as broadening the group of international banks that might get involved. However IFC and EIB involvement is expected regardless of the nationality of the sponsors, and the big Turkish conglomerates have excellent relationships with international lenders, including those from the US which has close political ties with Turkey.

Regardless of who wins, in the absence of sizeable underwriting appetite all sponsors face the task of putting together very large club deals, which can be unwieldy to organise. Strong sponsor banking relationships are going to be vital to the success of the deal.

The domestic banking market is well developed, but major banks are feeling the funding squeeze, and the big and cheap international syndicated loans that were available in 2006 and 2007 have become more expensive and are taking longer to negotiate. Nonetheless, Turkish banks have been putting foreign funding in place. In December, Finansbank, which is owned by National Bank of Greece, signed a $470 million syndicated loan with both Dollar and Euro tranches, paying Libor plus 200bp. Akbank has also done well to attract international financing in the difficult market conditions of 2008. It signed a Eu1 billion syndicated loan with a group of 53 banks from 20 countries, paying 75bp over Libor. A similar facility in 2007 had priced at a 47bp margin. It was done on a club basis, with a maximum take and hold of Eu30 million.

Greenfield energy

In addition to energy privatisations, bankers are focused on tenders for the greenfield development of gas and coal-fired power plants, as well as renewable energy projects in the geothermal and wind sectors.

Most recently, Zorlu has raised what arrangers claim is the first international financing for a wind farm project in Turkey – a Eu130 million facility for the Eu220 million Rotor Elektrik project. The deal is heavily multilateral-backed with debt from the EBRD (Eu45 million), EIB (Eu30 million) and IFC (Eu55 million), and with the EIB tranche guaranteed by commercial banks led by DenizBank and HSBC.

A major tender package is also expected this year for the construction and operation of two 1,200MW coal fired power plants, in the Afsin-Elbistan C and D Basins in south-eastern Turkey. The previous tender, which went out in summer 2008, was cancelled because of low participation, so the prospects for 2009 are uncertain.

ECA and multilateral support is critical for these greenfield and brownfield energy projects. In April US Eximbank approved a $104.8 million loan guarantee to support the sale by GE Energy of power generating equipment and services for a new plant in the Samsum region of northern Turkey. Cengiz Enerji is buying two GE LMS100 gas turbine packages to build a 240MW combined cycle gas fired power plant on the same site as an existing diesel fuelled combined cycle plant. JP Morag Chase is the guaranteed lender on the Eximbank tranche, and GE Capital Markets Corporate is the advisor/arranger. In addition, EKF, the Danish ECA will provide co-financing for a portion of the transaction.

Going forward, for non-recourse project financings in the transport and energy sectors, large syndicates of international banks are going to be a necessity. Turkish sponsors will look back with nostalgia to the high level of global liquidity of 2006 and 2007. In February 2007 Turkcell found it relatively easy to close a $3 billion senior unsecured loan, which featured a Who's Who of European and Middle Eastern banks. This time round debt is going to be much more expensive, and for large deals will be much slower to put in place.