When bond yields in advanced markets were very low and, in many cases, negative, we were forced to look to supranational issues denominated in emerging currencies to hopefully bring home something decent. In recent months, the rise in yields is clouding this market, but there are issues that cannot go unnoticed. In recent days, the Asian Infrastructure Investment Bank (AIIB) has offered a supranational bond (ISIN: XS2530041420) what is interesting to say is little: deadline 8 March 2024, for which the initial duration is only one and a half years; gross annual coupon of 45% (FORTY-FIVE !!!).
Turkish lira down with rate cut
It is likely that this was the issue with the highest coupon in history. And we are talking about an issuer with an AAA rating, that is, with theoretically zero credit risk. What’s the catch? If you are at least educated in finance, you will know very well that there is no such thing as free meals. High interests always correspond to equally high risks. And here the point is that the supranational bond is denominated in Turkish lira.
The amount placed on the market was 500 million, equal to just over 27 million euros. The minimum denomination of just 20,000 lire (about 1,080 euros) makes the issue affordable for all budgets. However, we are talking about a currency, which in 2021 alone lost 44% against the dollar. And this year, it already marks another -25%. The Turkish central bank, instead of raising interest rates with inflation rates now exceeding 80%, continues to cut them. Current real rates are at -67%, the lowest in the world. Capital flows relentlessly from Turkey and inevitably the lira tends to depreciate.
Supranational bond, very high exchange rate risk
And here we understand the reason for this maxi-coupon. The supranational bond aims to support the Anatolian currency, but is forced to offer a very high rate to compensate for the exchange risk. 45% is not necessarily enough. At the pace of recent months, it is possible that the Turkish lira against the euro will lose more than the coupon offers. Of course, the best scenario would be a stabilization of the exchange rate, following a monetary normalization in the country. The odds of this happening between now and the next 2023 elections appear very low, however.
Moreover, the AIIB itself is betting on the depreciation of the Turkish lira. If he wins the bet, he will find himself paying a much lower value at the indicated deadlines, once transformed into the main currencies such as the dollar. It was unlikely to have issued a longer-term bond, as the high exchange rate risk would have dissuaded the market from entering the deal.CopyAMP code.