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Fitch Ratings: Turkish Decrees to Reduce DPR Flows, but not Fitch Ratios.

London: The Turkish government's decree limiting the use of foreign currency in some domestic business deals will reduce the volume of payment orders in Turkish diversified payment rights (DPR) transactions, Fitch Ratings says. However, Fitch-calculated debt service coverage ratios (DSCR) will not be affected, as these always exclude onshore flows.

There may be some offsetting impact from the requirement that export proceeds are returned to Turkey within 180 days. The main sensitivity for Fitch's Turkish DPR ratings remains potential changes to originating banks' Local-Currency IDRs, in the absence of further policy announcements.

Decree 85 of 13 September states that new property sales, rental contracts and leases in Turkey can only be transacted in lira, and that existing contracts must be redenominated within 30 days. It is one of several steps taken to support the lira.

DPRs are financial future flow securitisations that can provide emerging market banks with access to foreign-currency funding in the international capital markets on attractive terms. Collateral consists of existing and future rights of the bank to receive foreign currency payments into their accounts with correspondent banks abroad. In Turkish deals, the payments are typically in relation to exports, capital flows (including FDI), tourism and, to a lesser extent, worker remittances. Total outstanding issuance from Fitch-rated Turkish DPR programmes is about USD15 billion. We estimate that DPR issuance accounts for more than 20% of long-term, wholesale foreign-currency funding at several Turkish banks, and sometimes over 30%.

Turkish DPRs are unusual among Fitch-rated programmes in including flows generated by foreign-currency transactions between Turkish residents. The share of onshore flows ranges from 30% to 70% and tends to be higher for smaller banks. Decree 85 will substantially reduce these flows, meaning transactions' reported DSCRs will fall.

However, Fitch does not give credit to domestic flows because of their susceptibility to sovereign influence. This means that the Fitch-calculated DSCR used in our rating analysis should not be significantly affected. Despite lira depreciation, the monthly DSCR excluding onshore flows has been healthy, ranging from 50x-100x in recent months and there is no evidence of a consistent decline in payment order volumes. In Fitch's scenario analysis, where flow volumes fall by 25%-65% depending on the programme, and which incorporates interest-rate stresses, the average DSCR for the past 12 months ranged from 20x-40x.

The expected fall in onshore flows could mean that some programmes hit early amortisation triggers, which include a limited amount of onshore flow in their calculation. This would activate the trapping of 60% of the excess cash to speed up amortisation.

Turkish banks usually prefund the relevant account ahead of the interest payment date in DPR deals. If reduced access to foreign currency or liquidity strains caused banks to stop prefunding, the process of capturing cash flow offshore in the debt service account could give rise to operational errors, although collections are rehearsed periodically.

Changes in total flow volumes will also be a function of macro-economic developments and other government policies. Earlier in September, amendments to an existing decree (Decree 32) were made that required Turkish exporters to bring proceeds back to Turkey within 180 days and convert them into lira via banks. This could give flows a temporary boost (the amendment expires after six months), depending on the extent to which exporters have already repatriated proceeds.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Dec 26, 2018
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