Treasury to issue no-interest bonds

The Treasury announced it would sell bonds linked to income at state-run companies as it seeks to diversify its borrowing, according to a statement posted on the Treasury’s Web site Thursday afternoon.

The Treasury will issue the bonds in Turkish Liras and dollars Jan. 28 after collecting bids Jan. 26 and 27, according to the statement. The total issuance will be 1.89 billion liras, or $1.15 billion.

Income of state enterprises
The papers will be linked to income at four state enterprises, namely oil company TPAO, the state stationary office DMO, the government-run airports authority DHMI and the coast safety authority, or KIYEM.

Speaking to the Hürriyet Daily News & Economic Review last month, Selim Yeşilbaş, the head of the international finance markets department at the Turkish Undersecretariat of Treasury, said the new borrowing method would be "based on rent certificates."

Rent certificates
"A state-owned property will be leased to a private company for a long period, say, 30 years. Then, the company will lease the same property to other companies for a shorter period. It will then issue rent certificates to investors, who may prefer these bonds as they are not based on standard interest procedures," the Daily News quoted Yeşilbaş as saying on Dec. 23.

The statement did not clarify whether the new revenue-index bonds were compliant with Islamic investment principles but the details of the new borrowing instrument fits with what a top bureaucrat told the Daily News in December.


The new bonds, named "Income-Linked Bonds," or GES, are similar to the "Income-Partnership Bonds" issued in 1984 by the late Turgut Özal’s government, Vatan newspaper said yesterday. The first such bonds were issued Dec. 3, 1984 and involved the income from the Bosphorus Bridge in Istanbul. The late Necdet Calp, the social democrat opposition leader at the time, famously declared: "He will not let the government sell the nation’s bridge," in reference to Özal.

For political reasons, the new borrowing instrument is not termed "Islamic bond," but it does not involve interest payments, the key principle for Islamic bonds. The aim is to borrow mainly from investors from the Persian Gulf, economist Mustafa Sönmez told the Daily News on Friday. "This instrument does not involve interest, but still, it cannot be called a sukuk, as the latter depends on revenue sharing, not only rental income."

When the Özal government issued such bonds, the economy was at an expansionary period, while today it is contracting, Sönmez pointed out. "The Gulf capital is being depended on, but that capital is also at great loss from the global crisis. We do not know the amount of Gulf capital that seeks areas of investment today," he said.

The 1.9 billion liras that may be received from the bond issuance will not solve the immediate problems of the economy, he said, adding the main problem was the foreign debt of the private sector.

Demand may not live up to expectations
"There may be some demand for these from investment banks and some clients but I don’t think private banks will be particularly interested," Bloomberg quoted Barbaros Özüyılmaz as saying Friday. Özüyılmaz, who helps manage about 1.8 billion liras of Turkish assets at Alternatifbank in Istanbul, said banks "will want something with a fixed interest rate."

Sukuk issuance may not live up to expectations, as the global financial crisis hit the Islamic bond market hard. Sukuk sales hit a record at $30.8 billion, riding on the wave of high crude oil prices, but last year was not so bright. The credit crunch and falling commodity prices resulted in sukuk issuances worth $13.6 billion last year, a significant decline. Badlisyah Abdul Ghani, CEO of CIMB Islamic, a unit of Malaysia’s CIMB Group, told Bloomberg last week that sukuk issuance may fall this year to as low as $13 billion.