Turkey’s bad loan problem:  Credit insurers pare back exposure in Turkey

07:2230 December 2018
Turkey’s bad loan problem:  Credit insurers pare back exposure in Turkey

On Thursday, Turkey’s bank regulator BRSA admitted that a first-round stress revealed bad loans could rise to 6% of total, from the current  4% within 12 months. It didn’t release the assumptions and scenarios used in the  estimation of bad loans, but experts believe BRSA is still way behind the curve.  In a December report S&P  noted that using a wider definition of problem loans that includes restructured loans  NPLs already exceeded 10% of total loans and could move up to 20% over the next year under the rating agency’s base-case scenario amid the country’s credit crunch.  According to Reuters, global credit insurers have cut exposure to some Turkish builders, retailers and other industries.


Canary in the coal mine?


Global credit insurers have cut exposure to some Turkish builders, retailers and other industries, four people familiar with the matter said, in what could be an early warning sign of a spike in bad debts.


For years, Turkish companies have borrowed cheaply in euros and dollars but a currency crisis, which sent the lira down as much as 47 percent against the dollar this year, has driven up the cost of servicing that debt.


Insurers have pared back coverage limits by 10 to 50 percent over the last few months, the sources said, to reflect the weaker financial position of some firms, including electricity companies.


Trade credit insurers provide coverage to companies for when a customer fails to pay. The insurer covers the debt and then tries to collect it itself.


Because they are in close contact with companies and check their payment abilities frequently, credit insurers can sometimes spot signs of financial distress ahead of banks.


“Credit insurance companies have reduced their coverage limits for companies that have problems,” one person said, adding that more were defaulting on trade payments – especially those with large foreign-currency or short-term debts.


“This has been happening for the last two or three months.”



All four sources declined to be identified because they were not authorized to speak on the record.


France’s Coface SA (COFA.PA), Allianz’s (ALVG.DE) Euler Hermes unit and Spanish insurer Grupo Catalana Occidente’s (GCO.MC) Atradius are major players in Turkey’s trade credit insurance market, each guaranteeing around 4-4.5 billion euros of transactions.


Coface told Reuters it had observed a “need to be more cautious” towards the domestic-focused construction, retail and other industries, as the weaker lira and higher interest rates led to a slowdown in domestic demand.


Euler Hermes said it was being cautious to support “reliable trade” but it had no general policy to tighten coverage limits.


Atradius said it was standard procedure to cut limits for firms facing a liquidity squeeze, or those that had bounced cheques, defaulted on bank loans, filed for protection from creditors or faced negative net capital. It said any limit cuts were not made on a industry-specific basis.



What do S&P and EBRD think?


S&P also reckons that problem loans may be much higher than the figures show. By using a wider definition – one that includes restructured loans – bad debts already exceed 10 percent of total loans and could go up to 20 percent, it said.


“We still don’t fully understand the … vulnerabilities in the banking system,” EBRD chief economist Sergei Guriev told Reuters in a recent interview.


“We only use official information so it’s very hard for us to comment on the true extent of NPLs, quality of assets.”


Turkey has seen a swell in the number of distressed companies applying for protection from creditors this year, a process known as “concardato” (Chapter 11 protection).


Well known firms that have been granted Chapter 11 protection include intercity coach operator Pamukkale Turizm, shoe maker Yesil Kundura and construction firm Nuhoglu Insaat. According to Trade Minister Mrs. Ruhsar Pekcan, companies seeking bankruptcy protection reached nearly 1,000 by the third week of December, while private sources claim applications for such protection may be as high as 3-5K.



Modified Time: 07:2230 December 2018
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