Credit insurers pare back exposure in Turkey

Turkey’s bad loan ratios low, but expected to double

ISTANBUL, Dec 13, (RTRS): 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 authorised to speak on the record.

France’s Coface SA, Allianz’s Euler Hermes unit and Spanish insurer Grupo Catalana Occidente’s 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 domesticfocused constuction, 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.

The lira fell as much as 47 percent against the dollar this year on concerns about President Tayyip Erdogan’s control over monetary policy and a diplomatic rift with the United States. It has recovered since the height of the crisis in August, but is still down some 30 percent.

The sell-off pushed inflation to its highest in 15 years and has deepened concern about banks.

Despite the signs of strain, Turkish banks’ non-performing loan (NPL) ratios officially remain low - although analysts say that is likely to change.

Ratings agency Standard & Poor’s expects bad loans to roughly double over the next 12-18 months, to about 6 percent from 3.5 percent at the end of September.

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”.