* Issue was tightly priced vs outstanding sukuk
* But it offered large premium over conventional curve
* Choice of sukuk as much political as commercial
* Banker says Turkey aiming to expand investor base
* Core Mideast market got relatively small allocation
By Abhinav Ramnarayan
LONDON, Oct 7 (IFR) - Turkey sold a $1.25 billion, five-year sukuk last week that was relatively tightly priced compared with its outstanding Islamic bond, but the sovereign's strategy left bankers puzzled given the premium it had to pay over its conventional curve.
The 144a/Reg S deal, Turkey's second in the sukuk format after last year's debut, was priced at par to set the profit rate at 4.557 percent and the issuance spread at 300 basis points over mid-swaps.
This was well inside initial guidance of plus 325 bps and at the tight end of revised guidance of 300-310 bps.
The leads argued that the new deal came inside the outstanding 2.803 percent March 2018 sukuk, which they quoted in the low-300s. However, bankers away from the deal had the 2018s trading much tighter, in the 275-high 280s range.
Tradeweb data shows the notes were trading around 288 bps over mid-swaps on the morning of the deal's announcement on Wednesday, making for a 12 bp premium.
What is not under debate is that the new sukuk offered a juicy premium over Turkey's conventional curve, with its 6.75 percent April 2018 bond trading around 260 bps over mid-swaps.
Rival bankers were critical of the decision to issue sukuk rather than conventional bonds, as they felt the sovereign could have dipped in and out of the conventional market with relative ease in the period between the U.S. Federal Reserve's meeting in mid-September and the U.S. government's shutdown last week.
The feeling within the dealer community was that the decision to go for a sukuk was as much political as commercial. Although Turkey has a strong secular identity, the government is keen to develop its Islamic finance industry.
Bankers close to the deal confirmed the idea was for Turkey to grow its investor base. "It's a strategic deal for the Turkish government to diversify the investor base and open up the Islamic market," said Souhail Mahjour, a syndicate official at HSBC, which led the deal with QInvest and Standard Chartered.
However, with Middle East investors receiving 27 percent of the deal - they bought 58 percent of the March 2018s - the core sukuk market accounted for less of the buying than may have been expected.
By contrast, Turkish and British accounts took 19 percent each, followed by continental Europe with 14 percent, the United States with 11 percent and Asia 10 percent.
"We got good demand for the deal with an order book of close to $8 billion and you can see that reflected in the aftermarket, where it is up to 100.5," Mahjour said.
By investor type, banks took 43 percent, fund managers 36 percent, insurance and official institutions 10 percent, private banks 7 percent, and hedge funds and others the remaining 4 percent. The deal received 330 orders.