Project lenders in Turkey have been pushing tenors over the past year, with a number of 10- and 12-year limited recourse loans being signed – many as part of hybrid acquisition deals spawned by the IMF-backed state privatization programme.

2006 may see tenors stretched even further – out to 15 years. Although pioneered by international banks, local institutions have rapidly built up their project finance departments, and are now taking MLA roles and large tickets of $300 million and upwards on individual deals. In addition, foreign banks are becoming more comfortable with Turkish risk, allowing both country lending limits and tenors to be increased.

Until a few years ago ECA cover would have been required for loans, but the market moved decisively forward in 2005 with a number of limited recourse acquisition facilities.

Bank takes bulging

One of the biggest was for the acquisition of Turkish Petroleum Refineries (Tupras) – an important deal in the government privatisation programme, since Tupras meets more than 80% of total demand for refined oil products in Turkey.

The successful bidder was Koc Holdings, which partially financed the deal via a $1 billion corporate acquisition loan. However, another $1.8 billion worth of non-recourse debt with no shareholder guarantees was also provided by the banks. This financing is structured on the basis of cashflows in the form of dividends to be paid by Tupras to an SPV known as Enerji Yatirimlari. It was this SPV, which is a partnership of Koc Holding (75%), Aygaz (20%), Opet (3%) and Shell (2%), which acquired the 51% stake in Tupras.

The 10-year facility – arranged by Halkbank with Garanti Bank, Akbank, Isbank, Standard Bank and Vakifbank as MLAs – has a grace period of 2.5 years, and an average maturity of seven years.

Tupras was not unusual in the current market in terms of tenor or documentation, but it was a bit unusual in terms of the amounts involved. It showed that local banks are willing to take large amounts of $300 million to $500 million each, and that small consortiums of Turkish banks can easily do $1 billion-plus deals these days.

For the privatisation of steelmaker Erdemir, Oyak Group beat international bidders including Arcelor and Mittal. The financing put in place by Oyak for the $2.77 billion acquisition comprised both corporate debt and a limited recourse facility.

ABN Amro, Citigroup and HVB led a 10-year $1.62 billion limited recourse facility, and were joined as MLAs by Calyon, Fortis Bank, Garanti Bank and Isbank.

Oyak had the choice to pay all the money on day one, or pay in installments, and eventually decided to pay all at once, with the help of a $980 million two-year corporate bridge loan arranged by ABN Amro and Citibank. This was fully underwritten by the two banks and may yet go into limited syndication.

Concession and privatization models

"There are two models being used for long term non-recourse finance in Turkey," explains Constantin von Moltke, a director at HVB. "One is concession based financing, for example that used for airports and ports, where the concession is generating a cashflow, and banks are lending against that on a typical project finance basis."

"The other model involves privatisations, where the government is selling part of its own stake, but where the buyer does not have 100% ownership," he adds. "In these cases banks are reliant upon dividends to repay debt. They are not lending at the operating level, but one level above to an SPV borrower."

HVB has been at the forefront of both types of financing. Last year it led a Eu178 million limited recourse financing for a BOT-style concession at Ankara Esenboga Airport, as well as its involvement on the limited recourse acquisition financing for Erdemir.

Both deals illustrate the growing appetite of banks for uncovered project debt in Turkey. "The market response to the Ankara deal showed a departure from the previous trend of commercial lenders requiring a substantial degree of commercial risk cover for onshore Turkish projects," says von Moltke, noting that the Ankara airport transaction, a traffic risk project with only a very limited passenger shortfall guarantee, incorporated only 15% ECA cover.

The Ankara Airport concession was awarded late in 2004, when Turkish airports operator TAV Airports Holding signed a BOT concession to run Ankara Airport. In May 2005 TAV put in place a 12-year Euro149.5 million commercial bank loan, plus a Euro28.5 million ECA tranche.

Late in 2005 TAV won the bidding to refurbish and operate Istanbul Ataturk Airport in a 15.5-year concession, and had already been running the airport under a concession originally awarded back in 1997.

With this new concession, for which it bid $3 billion, TAV was looking for debt finance, and last December it signed a $700 million limited recourse loan for Istanbul Airport, backed by assets and receivables. The tenor was ten years, and has structured and arranged by HVB, with WestLB and Garanti as lead arrangers.

Subsequently, in January, Izmir Airport signed a six-year Eu113.5 million loan, this time led by WestLB and Vakifbank. TAV is once again the operator.

"There is a growing amount of non recourse lending being done in Turkey, and strong appetite from both international and local banks," says Turkekul Dogan, Executive Director, Origination, at WestLB Capital Markets in Istanbul.

"Terms have been getting longer in line with the improvement of overall market conditions and the Turkish economy," Dogan adds.

In addition to joining the Istanbul Airport loan as a lead arranger, WestLB also lead managed the Eu113.5 million loan for Izmir Airport signed in January.

"The liquidity demanded in the market has been quite high, and deals have therefore been reliant upon local liquidity," comments another banker. "Turkish banks are generally take-and-hold banks – they are relationship-driven and will put $300 million to $400 million into a deal and hold it. Another important factor for local banks is ancillary business, which they may factor into their return, so they may go for a slim return on the actual lending."

Meeting the long tenor challenge

Long tenors have traditionally been a challenge for Turkish banks, but this has been changing over the past few years, for a number of reasons. First, many Turkish institutions have been accessing the securitisation market, giving them access to longer-term funding. Second, foreign banks have been buying stakes in Turkish institutions, potentially giving these institutions access to long-term credit lines in Dollars or Euros.

One of the big sources of funding for banks over the past 12 months has been the securitisation of Diversified Payment Rights. The major Turkish banks have very large Dollar and Euro payment flows, in the form of foreign payments to local exporters, Turkish workers abroad remitting money back home, or credit card payments by business travellers or tourists visiting Turkey.

In 2005 Turkey was the world's largest issuer of DPR securitisations, and local banks raised in excess of $5 billion. Most deals featured both wrapped Triple-A and unwrapped Triple-B tranches. The monolines have regarded Turkey as an improving credit story, and have been competing fiercely for business.

Deals in 2005 included $150 million wrapped by FGIC, and $200 million unwrapped, for Isbank, a $600 million deal for Garanti featuring four monolines, and a $750 million offering for Vakifbank. And in 2006 more wrapped deals have followed, most recently Vakifbank's $815 million offering wrapped by FGIC, MBIA, Radian and Ambac.

Seven-year tenors are commonplace, which would not be possible for Turkish banks, either in the syndicated loan market or via unsecured bond offerings, which are very rare.

Clearly treasury departments at Turkish banks have been keen to take full advantage of Turkey's current status as a highly favoured market. These DPR securitisations have come at the perfect time for banks that want to get involved in project lending, even though there is still a partial mismatch between funding and ten-year project loans.

In addition, many Turkish banks have also been selling stakes to strategic partners, or being privatized, and foreign banks have been buying in. This is providing some of them with access to long term funding.

Late last year, GE Capital acquired a 25.5% stake in Garanti Bank from Dogus Holding. Unicredito and Koc Holding have had a partnership since 2002, and have recently agreed to buy 57% of Yapi Kredi Bankasi (YKB), in a deal which will help HVB.

Earlier this year National Bank of Greece acquired a 46% stake in Finansbank. The latest rumours concern the future of Denizbank, with Dexia tipped as a possible bidder.

"These deals are giving local banks a better funding base, because their own ratings are quite weak, and are also making foreign buyers more comfortable with Turkish country risk," comments one banker. "So there is a growing number of banks that are willing to do uncovered country risk, and are formally stretching country limits internally."

More deals underway

The result of both the longer-term funding being done by Turkish banks, and the arrival of foreign banks with stakes in Turkish institutions, makes some project bankers believe that tenors can be pushed out yet further on upcoming deals.

One of the biggest involves Turk Telekom. Last year Oger Telecom of Saudi Arabia paid Eu5.6 billion for a 55% stake in Turk Telekom, and Citibank and ABN Amro are currently working on what is expected to be a limited recourse acquisition facility.

The port privatisations coming this year are also likely to involve foreign buyers. Bankers note that be there are not many top class ports within touching distance of Europe, Russia and the Middle East available, and expect players such as Dubai Ports and Hutchison to bid aggressively.

Sizeable deals with foreign sponsors will provide an interesting test of the project lending market in Turkey, since for loans involving names such as TAV, Oyak (Erdemir) and Koc (Tupras), Turkish banks have close relationships with these companies, and many credit lines in different areas of their businesses.

This raises the question whether Turkish banks view their privatisation or concession loans as fully non-recourse, or still view them as relationship banking, assuming that the big conglomerates will be unlikely to walk away if the predicted cashflows come up short. Turk Telekom and the sea ports will thus be a tougher test of the appetite for true non-recourse lending depending on the strength of the sponsors.

In addition, there remains the possibility that both Istanbul and Ankara airports could be refinanced in the bond markets. Both are expected to be wrapped by monolines, giving certainty of execution. Given the jitters in emerging markets, including Turkey, over the past few months, coming to market with an unwrapped bond offering would be difficult.