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Fitch affirms Turkey's Sisecam at 'BB-', outlook stable

Fitch affirms Turkey's Sisecam at 'BB-', outlook stable gary yim/Shutterstock.com

ANKARA (Turkey), July 3 (SeeNews) - Fitch Ratings said it has affirmed the long-term issuer default rating (IDR) of Turkish glass manufacturing company Turkiye Sise ve Cam Fabrikalari A.S. (Sisecam) at 'BB- ', with a stable outlook. 

Fitch has also affirmed the senior unsecured ratings of the issuer at BB-, the global ratings agency said in a statement on Thursday.

Fitch also said in the statement:

"The affirmation reflects our expectation that Sisecam's funds from operations (FFO) leverage metrics will remain within the sensitivities for the rating, despite the negative shock from the COVID-19 pandemic, and Fitch's expectations of increased investment capex that will drive negative free cash flow (FCF) generation for the next three years. Fitch forecasts that Sisecam's FFO net leverage will average 3.2x in the next four years, which is in line with a 'bb' rating median in our building materials navigator and higher rated peers.

The ratings are constrained by limited geographic diversification, a concentrated manufacturing base and the company's vulnerability to energy price volatility The ratings are also constrained by Turkey's Country Ceiling of 'BB-'. Fitch notes that Sisecam's underlying standalone rating is weakening due to the coronavirus crisis, but is higher than the Turkish Country Ceiling.

KEY RATING DRIVERS

End Markets Under Stress: Fitch's rating case includes expectations for a significant global economic downturn through 2Q20, followed by a gradual recovery towards the end of 2020 and into 2021. Under this scenario, Fitch expects that short- to medium-term profitability will suffer in a number of Sisecam's end markets including automotive, construction and white goods.

Fitch forecasts that Sisecam's EBITDA margin will fall to 17.6% at end 2020 from 20.7% at end 2019, despite its low cost base and efforts to control variable costs. Although Fitch believes that most of the deferred orders will recover in 2021, Fitch does not forecast Sisecam's profitability to return to 2018 levels in the next two years.

Solid Financial Profile: Fitch views Sisecam's financial profile as solid, evidenced by sound FFO generation around 20%, driven by a vertically integrated business profile, and leverage metrics that are commensurate with investment grade peers and a 'bbb' rating median in our building materials navigator. Fitch expects that Sisecam will continue operating with similar leverage metrics in the medium term, despite our more conservative profitability assumptions driven by the COVID-19 crisis, and expectation of a continued expansion programme.

Investments to Continue: Fitch forecasts that Sisecam will continue its investments in the US with its JV partner Ciner, to build a soda ash plant in Wyoming US in-line with its geographic diversification plans, which has historically been a rating constraint. Although the current Fitch case includes TRY 5billion of investment until 2024, revenue and profitability growth, which is expected to pick up after 2024 is not included in our current Fitch case, which covers four years.

Fitch also assumes that Sisecam's maintenance capex will remain around TRY500 million per year, and believes that the company's substantial expansionary capex plans could be partially postponed under a severe economic downturn.

Change in Structure Neutral to Ratings: Fitch views the change in the organisational structure, where Sisecam will merge its operating subsidiaries under the HoldCo (Turkiye Sise ve Cam Fabrikalari) as rating neutral. Fitch assumes that the HoldCo has full control over its subsidiaries, and there will be no practical change in the way business is being run. Fitch also assumes that Sisecam will not need bondholder consent for change of control and the existing covenants on OpCo debt will be successfully moved to the HoldCo.

Strong End-Market Diversification: Sisecam supplies products to a variety of end-markets that are affected by different macro drivers and have different cyclicality. This product diversification reduces volatility in revenue and profitability margins. Sisecam has exposure to both cyclical (autos/construction/white goods) and defensive sectors (food & beverage/consumer goods). The diversification allows the group to reduce earnings volatility and to optimise capital allocation by moving cash from cash-generative businesses into other divisions where capex needs are higher.

However, we view Sisecam's geographic diversification as weaker than its investment grade peers such as Saint-Gobain. This is expected to change following the US investments, but the scope and timing falls beyond our current rating case forecasts.

FX Exposure: FX exposure on Sisecam's balance sheet is limited, but the company's income statement has moderate exposure to FX movements. Fitch believes that this risk is mitigated by increasing export revenue, international sales, hard currency cash balances and derivatives. Nevertheless, Fitch forecasts that Sisecam's income statement and leverage metrics could be modestly impacted by the current weaker Turkish lira rates. However, leverage metrics should remain commensurate with the ratings.

Standalone Assessment: In applying its Parent and Subsidiary Rating methodology Fitch concluded that the legal, operational and strategic ties between Sisecam and owner Turkiye Is Bankasi A.S. (B+/Negative) are weak enough to rate Sisecam on a standalone basis. This reflects Fitch's general approach towards Turkish banks and their industrial subsidiaries

DERIVATION SUMMARY

Fitch expects Sisecam's financial profile to remain solid between 2020 and 2023 with average FFO gross and net leverage of 4.0x and 3.2x respectively. The leverage metrics are in line with investment-grade peers such as Compagnie de Saint Gobain (BBB/Stable) whose FFO gross and net leverage we expect to average 4.0x and 2.2x between 2020 and 2023.

Sisecam has leading market positions in key markets such as Turkey, Russia and Eastern Europe and a low cost base, leading to a strong profitability and FFO generation. Sisecam's FFO margin was 18.0% at year-end 2019 compared with 7.0% for Saint-Gobain and 7.5% for Arcelik (BB/ Stable).

Fitch views Sisecam's end-market diversification as healthy, with an exposure to several industries such as auto, pharma, healthcare and infrastructure. However, the company is significantly smaller in size, has limited diversification and higher exposure to emerging markets compared with European rated peers such as Saint-Gobain and Arcelik.

KEY ASSUMPTIONS

- Revenues decline by 21.7% in 2021, followed by a recovery in 2021 and a single digit growth in 2022 and 2023

- EBITDA margin drop by 310bp in 2020, followed by a gradual recovery to reach 24.3% in 2023

- Average capex spending of TRY3.6 billion between 2020 and 2023; excluding US soda ash investment

- Dividend pay-out ratio of 17% from net profit

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

We do not expect the ratings to be upgraded while they are constrained by Turkey's Country Ceiling.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

-A lowering of Turkey's Country Ceiling.

- FFO margin below 10% (2019: 19%).

- FFO net leverage above 3.5x on a sustained basis.

- Significant reduction in ownership in consolidated subsidiaries.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [...].

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: After the successful bond issuance in 2019, Sisecam's liquidity position improved. As of end-2019, the company had more than TRY8 billion of cash on its balance sheet, which will be sufficient to cover its forecast negative free cash flow (after acquisitions and divestitures) of TRY457 million for 2020 and the debt maturities of TRY5.2 billion(of which USD300 million had been repaid as of May 2020) .

Fitch considers the current liquidity score of 1.4x as adequate for the rating. Similar to most Turkish blue chips entities, Sisecam's liquidity score is usually around 1.0x due to the absence of a committed revolving credit facility and the high dependency on short-term funding compared with international peers.

Sisecam's liquidity risk is mitigated by its uncommitted lines with the Turkish banks. Sisecam is considered a national blue chip entity with strong bank relations. Fitch considers that these lines would remain available in a stress scenario.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit [...]."

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