This paper introduces the theory of corporate bonds including models to price them and sharpens the understanding of the term “emerging market” before applying both to the Turkish market. The Baklava bond market is pictured from three different perspectives, namely investors, issuers and the macroeconomy.
As a result, the most suitable valuation approach is seen in classic balance sheet analysis since other models require more liquidity and less information asymmetry among counterparties. Regarding market participants, this paper further concludes: i) Companies are keen to issue bonds in order to diversify their funding and to reduce the costs of rolling short-term loans. While a large chunk of infrastructure is on sale as part of Turkey’s big scale privatisation scheme, including the Bosporus bridge, toll roads, power plants, sea harbours and the Turkish Airlines, long-term funding is needed to buy and modernise the business opportunities. ii) Domestic investors, especially the rapidly growing institutional investors, are looking forward to find alternatives to Turkish Government Bonds. iii) When taking into account a macroeconomic perspective, Baklava bonds allow to deepen the capital market. This relieves banks from transforming short-term funding into long-term lending and reduces Turkey’s dependency on foreign funding. Therefore, Baklava bonds increase both the financial stability of Turkey and its economic growth.
Despite Turkey’s investment grade rating, much can go wrong before it goes well, due to the characteristics of an emerging economy. In a nutshell, Turkey has a story of fundamental and sustainable economic growth to tell. Baklava bonds are an important chapter.