Erdogan Ratings Company Threat Imperils Corporate Debt

By Taylan Bilgic

Photographer: Krisztian Bocsi/Bloomberg

Recep Tayyip Erdogan, President of Turkey.

Turkish President Recep Tayyip Erdogan’s threat to cut ties with rating companies risks harming investor sentiment toward corporate borrowers, which have doubled their foreign debt holdings in the past four years.
Erdogan accused two of the raters of trying to “bring down Turkey,” Hurriyet reported. His comments followed Fitch Ratings’ inclusion of Turkey this month on a list of nations most exposed to possible downgrades if higher U.S. interest rates shock markets. The lira is the third-worst performing currency in Europe, the Middle East and Africa this month as investors weighed prospects for a shift in Federal Reserve policy.
Turkish borrowers have become more active on international markets since Fitch and Moody’s Investors Service raised the country to
investment grade starting in 2012, before political and financial turmoil roiled sentiment. Foreign debt holdings of private companies and banks due in one year or less jumped to $110 billion in July from $53 billion in the second quarter of 2010, according to central bank data.
“Turkey should be going the extra mile to help convince rating agencies over the Turkey story, and not pulling back from engagement,” Timothy Ash, the chief economist for emerging markets at Standard Bank Group Ltd. in London, said in an e-mailed note yesterday. “Pulling the relationship with ratings agencies will make life more difficult both for investors and ultimately for Turkey.”

Yields Climb

The yield on Turkey’s corporate dollar debt climbed to a four-week high of 4.87 percent as of Sept. 16, according to JPMorgan Chase & Co. indexes. That’s up 30 basis points since the San Francisco Fed said Sept. 8 the public may be underestimating the pace of increases. Emerging-market high-grade debt increased 15 basis points to 4.38 percent, the indexes show.
Fitch, which rates Turkey at the lowest investment grade of BBB-, with a stable outlook, said Sept. 3 that the country was among those most susceptible to a cut. That could include the Fed raising its target rate to 3 percent by the end of 2015, the rating agency said.
The Fed maintained a commitment yesterday to keep interest rates near zero for a “considerable time” after asset purchases are completed, anticipated next month. Policy makers raised their median estimate for the federal funds rate at the end of 2015 to 1.375 percent, compared with 1.125 percent in June.

Negative Outlook

Moody’s cut Turkey’s sovereign outlook to negative in April, citing political uncertainty, lower global liquidity and pressure on external financing. That was 11 months after it raised the debt to its lowest investment grade. Standard & Poor’s rates the country BB+, its highest junk score, with a negative outlook.
Turkey signed a rating agreement with Fitch and Moody’s in January 2013, replacing a previous deal with S&P and Moody’s.
“Two credit rating companies are criticizing Turkey with far-fetched statements,” Hurriyet newspaper cited Erdogan as saying in Ankara. “There’s a calculation to bring down Turkey, which they couldn’t crumple politically.” The nation would “cut ties with these two institutions if necessary,” he said, without naming the companies. Erdogan said in televised comments today that rating companies were politically motivated.
Deputy Prime Minister Ali Babacan said two days ago in Istanbul that the country hasn’t been able to get the credit rating it deserves and called for companies to objectively assess Turkey.

Borrowings ‘Vulnerable’

Non-bank corporates had $35.2 billion of short-term foreign debt in July while private banks and financial institutions held the remainder, according to central bank data.
Companies with short-term foreign liabilities are vulnerable to declines in the lira, because it pushes up borrowing costs, according to Arda Tunca, chief financial officer at Eko Faktoring AS.
“If earnings are not in foreign currency, such borrowing amounts to senseless risk-taking,” Tunca said by phone yesterday.
The lira appreciated 0.1 percent to 2.2225 against the dollar at 1:13 p.m. in Istanbul. The currency has depreciated 17 percent since the Fed first signaled in May last year that it would start paring stimulus.
“As the Fed interest rate increase approaches, corporate foreign holdings will come under the spotlight,” Ozlem Bayraktar Goksen, research director at Phillip Capital in Istanbul, said by phone yesterday. “Foreign-currency borrowing is still a source of vulnerability.”