Covered Bonds-Alternative Funding Tool in the Turkish Housing Market
11th June, 2012: According to a recent report by S&P, Covered Bonds can play a major role in funding the housing market boom in Turkey. Despite having a law dealing with covered bonds, the covered bonds market in Turkey is completely untapped and till date the only covered bond issuances that have taken place have been backed by SME loans. The first and the only RMBS transaction till date was by Turkey�s Sekerbank � a mid-sized lender that focused on SME business and had come up with Turkey�s first covered bonds issuance last year sometime in July. (See our news segment on this transaction here)
With a GDP growth of over 8% in 2011, the demand for housing in Turkey has exceeded the supply and the homeownership rates in Turkey are higher than in any other European countries. In such a scenario Turkish banks would have to find ways to fund the housing demand and there is quite a possibility that banks with growing mortgage portfolios would favour more long-term funding options such as with covered bonds.
In a recent TV segment, Standard & Poor�s Director Sabrina Miehs discussed the trends in Turkish covered bonds market stating that if S & P were to rate covered bonds in Turkey, it would probably use its covered bond rating criteria as the starting point and would give a maximum uplift of 5 notches above the issuer�s rating as the number of refinancing options available to the portfolio manager in a typical transaction would be quiet broad and the systematic importance would not be that high as the country is very new in these types of issuances. She also stated that the main features that would be considered for rating covered bonds in Turkey would be the – timely payment of interest and payment, asset liability mismatch risk, liquidity risk, credit risk, cash flows, market risk, counter party risk and country risk which is an important feature in case of turkey. With the growth in the housing market, the covered bonds markets is likely to emerge sooner as the funding cost would be lower than those for traditional funding and moreover the presence of a covered bond legislation provides a solid structure for the issuance of covered bond in Turkey.
[Reported by Abhijit Nagee]