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Iran Risk Lurks in Shadows as Refiner Sells Bonds: Turkey Credit

October 19, 2012

Turkey’s sole oil refiner is planning its first bond sale as investors weigh an investment- grade ranking from Fitch Ratings against prospects for dwindling crude supplies from neighboring Iran amid tightening sanctions.

Tupras Turkiye Petrol Rafinerileri AS (TUPRS) won state approval on Oct. 16 for the sale, which Chief Executive Officer Yavuz Erkut said that day would be between $500 million and $1 billion. The refiner, rated BBB- by Fitch and one step lower at Ba1 by Moody’s Investors Services, its highest junk level, is raising funds after the average yield on debt for emerging-market oil and gas companies tumbled to 3.9 percent from 5.5 percent a year ago, a JPMorgan Chase & Co. index showed.

Turkey was among seven countries exempted in June from U.S. oil sanctions on Iran for a renewable six-month period because they reduced trade with the Islamic republic, U.S. Secretary of State Hillary Clinton said at the time. Tupras pledged on March 30 to cut its purchases of 180,000 barrels a day of Iranian crude by 20 percent following a U.S. law giving nations until June 28 to show reductions.

“Tupras was buying Iranian crude on lira-based long-time contracts, and now with 20 percent of Iranian supplies gone, they will have to make it up with shorter-term dollar-based contracts,” Hasan Sener, an analyst at Istanbul-based Oyak Securities, said by phone yesterday. The bond will finance additional working capital needs, he said.

Iran Sanctions

Turkey, which imports 95 percent of its oil needs, is buying more crude from Russia and Saudi Arabia as it seeks to extend the U.S. exemption on purchases from Iran, Energy Minister Taner Yildiz said Oct. 15. Iran was Turkey’s top supplier in the first half of this year, according to the energy market regulator’s website.

Yildiz said Turkey is in talks with U.S. officials on the waiver, which expires Dec. 6, and expects the dispensation to be granted. If a country fails to meet the terms of the law, its banks settling trades with Iran risk being shut out of the U.S. financial system. The U.S. sanctions are designed to prevent Iran from developing nuclear weapons. Iran says its nuclear program is for peaceful medical purposes and power generation.

“A ban on purchases of Iranian oil due to international sanctions could be negative for Tupras’s refining margins and working-capital needs, if Iranian crude cannot be economically replaced with suitable alternative sources,” Arkadiusz Wicik, a director at Fitch Ratings, said in a statement Oct. 17. Fitch said in its statement that a substantial reduction in Iranian imports by Tupras “would be treated as an event risk” which could lead to a review of its rating.

‘Dominant Position’

Moody’s assigned its Ba1 rating to Kocaeli, Turkey-based Tupras on Oct. 18, the same as its grade for Turkey. The refiner is owned by Koc Holding AS (KCHOL), Turkey’s biggest conglomerate.

“The ratings primarily reflect Tupras’s dominant position in the Turkish market, as well as the execution risks associated with the company’s ongoing capital expenditure investment program,” Martin Kohlhase, Moody’s lead analyst for Tupras, said in an e-mailed statement yesterday. “Tupras ratings also incorporate challenges, including future profitability compression from reduced sourcing of discounted Iranian crude.”

Tupras hired Citigroup Inc. (C:US) and Deutsche Bank AG (DBK) to arrange the sale, which would be Turkey’s largest by a non-financial institution, the company said Oct. 17. Investor meetings start from today in Europe and the U.S.

Corporate Bonds

Turkish non-financial companies are planning debt sales to take advantage of declining international rates.

Istanbul-based Anadolu Efes Biracilik & Malt Sanayii AS, Turkey’s largest brewery that received an investment-grade Baa3 rating from Moody’s Oct. 10, is the second company, after Tupras, to announce an investment-grade bond sale in the past month as bets increased the nation’s sovereign rating is heading for an upgrade.

Turkey is “quite close” to being reviewed and its growth is consistent with a lower inflation rate and current-account deficit, Paul Rawkins, senior director at Fitch, told a London conference last week. Fitch rates Turkey BB+, one level below investment grade, while Standard & Poor’s places it one step lower at BB.

Efes, which hired JPMorgan, Bank of America Merrill Lynch (BAC:US), Royal Bank of Scotland Group Plc and HSBC Holdings Plc (HSBA) for the offering, sold $500 million of October 2022 bonds at a yield of 175 basis points above 10-year U.S. Treasuries, a banker involved in the deal said today, declining to be identified as the transaction isn’t yet public.

Two-Year Yield

Calik Holding AS, with interests in media, energy and construction, won a B rating from S&P Oct. 17 for a planned bond sale worth $300 million maturing in 2017.

The lira fell 0.1 percent to 1.7954 per dollar at 5:28 p.m. in Istanbul yesterday, paring its gain this year to 5.2 percent.

The yield on Turkey’s two-year local currency notes fell eight basis points, or 0.08 percentage point, to 7.28 percent, 76 basis points less than two-year Brazilian debt. On Sept. 14 the yield on Turkish debt was 87 basis points lower.

The extra yield investors demand to hold Turkey’s dollar- denominated sovereign bonds rather than U.S. Treasuries rose four basis points to 207 today, JPMorgan (JPM:US)’s EMBI Global index showed. That compares with 385 at the end of 2011, and with 134 basis points for Brazil today.

Credit-default swaps on Turkey climbed three basis points to 153, in comparison with 133 for Russia and 90 for Poland. Rising prices show deteriorating perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash equivalent should a government or company fail to adhere to its debt agreements.

Four Refineries

“After big corporates such as Tupras set a benchmark for Turkish corporate bond sales, other smaller companies will follow suit,” Cem Karakas, chief financial officer of Istanbul- based Yildiz Holding AS, maker of Godiva chocolates, said in an interview in Istanbul Oct. 17.

Tupras, operating Turkey’s four refineries, aims to complete a $2.4 billion project by 2015 to turn high-sulfur products such as fuel-oil into low-sulfur ones including diesel.

The main purpose of the debt sale is diversification of financial sources, and to help manage liquidity and interest- rate risk, Tupras said in an e-mailed statement Oct. 17.

“Interest rates are so low at the moment that they are opening a window of opportunity for Turkish corporates,” Alper Paksoy, head of research at TEB Investment, an Istanbul-based unit of BNP Paribas SA, said in a phone interview yesterday. “Tupras is one of the most sound.”

To contact the reporter on this story: Ercan Ersoy in Istanbul at

To contact the editors responsible for this story: Benedikt Kammel at

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