A $4 Billion IPO Bonanza Awaits Turkey

Power distributor Enerjisa Enerji and discount-grocery chain Sok Marketler Ticaret AS are set to tap the stock market for what could be the best year ever for Turkish share sales. It may not be all good news.

About a dozen initial public offerings are in the works that could raise $3 billion to $4 billion in 2018, according to Istanbul-based brokerages Unlu & Co. and Is Investment, surpassing the record set in 2007. Companies are betting that a surge in demand for emerging-market equities will engulf Turkey too.

Yet behind the wave of sales is a credit boom that has pushed the country’s banks to their limit, curtailing their ability to lend and prompting companies to sell stock instead. On top of that, Turkey’s corporate sector is sitting on a record $326 billion of foreign-currency debt, which risks getting more expensive if the local currency weakens.

“The indebtedness of companies is no longer sustainable,” Himmet Karadag, the chairman of the nation’s stock exchange, Borsa Istanbul, said in an interview on the sidelines of a conference in the city. “Those companies have already restructured their bank loans and used the Credit Guarantee Fund but can’t reduce debt. Through an IPO, we offer them a chance to cut their debt and maximize their valuations.”

Slowing Down
Total loan growth in Turkey slows towards 15%

Source: Central Bank of Turkey

There are a several reasons why Turkish stocks trade at lower valuations than their peers: double-digit inflation, increased military activity near Syria’s border, President Recep Tayyip Erdogan’s strained relations with the U.S. (and even with his central bank), the prospect of early elections and a slowing economy. Fitch Ratings in January 2017 became the last major ratings companies to cut its assessment on Turkey to junk.

Even so, with Turkish stocks trading near the biggest discount to the MSCI EM Index in more than eight years, investors might shift their portfolios from stocks that have already rallied into the newcomers, said Isik Okte, an investment strategist at Istanbul-based TEB Investment, a local unit of BNP Paribas. It may also give companies access to cheaper cash than they can get elsewhere, he said
Emerging-market equities are the true darling of global markets,” Okte said. “Turkish companies have figured this out and are trying to take advantage after the recent loss of the investment-grade rating pushed up their borrowing costs.”

Repaying Debt
Borsa Istanbul has also moved to ease listing requirements. It reduced the amount of shares that need to be sold to domestic investors to as low as 10 percent from 20 percent, while companies that have bottom-line losses can also list as long as they are making operational profits.

A revival took hold in the IPO market last year even before the bourse bent its rules. Turkish companies raised $700 million, the highest in six years, and compared with $120 million in 2016, according to data compiled by Bloomberg.

Hospital operators Medical Park Saglik Grubu AS and Istanbul Memorial Saglik Yatirimlari AS both plan to sell shares, while other IPOs in the pipeline include luxury brands retailer Beymen Magazacilik AS and clothing retailer DeFacto Perakende Ticaret AS.

Istanbul Memorial plans to use 90 percent of the proceeds from its IPO to repay debt, almost all of which is in U.S. dollars, according to its prospectus. Medical Park and the owners of Enerjisa Enerji will consider what to do with the cash, which may include paying off some of their liabilities. An IPO is a good way of injecting fresh capital that can be used to plug the shortfall in foreign-currency denominated debt, said Emre Sezan, head of research for non-financial companies at Is Investment.

“Markets are in a bullish trend that companies want to benefit from,” he said. “Firms also want to reduce their debts. Investors will be willing to participate in the IPOs on the view that a reduction in these debt levels will pave the way for future growth.”