November 23 (SeeNews) - Fitch Ratings said it has revised the long-term local currency (LC) issuer default rating outlook of Turkish telecommunications company Turk Telekom [IST:TTKOM] to stable from negative.
The credit ratings agency also upgraded Turk Telekom's national long term rating to 'AAA(tur)' from 'AA+(tur)', it said in a statement on Friday.
Fitch also said in the statement:
"The National Long-Term rating upgrade and LC IDR Outlook change reflect TT's strong performance during 2020, reduced exposure to foreign currencies in their net debt and a strong market position as the country's leading converged telecoms operator. It is our expectation that if the Turkish sovereign's LC IDR is downgraded by one notch, TT's LC IDR would remain at 'BB-'.
While TT is domestically focussed and has a high exposure to a weakened Turkish economy it has continued to outperform our expectations, growing 3Q20 LTM EBITDA by 18% and reducing LTM funds from operations (FFO) net leverage to 1.3x, from 1.4x at end-December 2019. TT's Long-Term Foreign-Currency (FC) IDR is capped by the Turkish sovereign's Country Ceiling at 'BB-'.
KEY RATING DRIVERS
Strong Fixed-Line Performance: TT's fixed-line business has outperformed our expectations this year. Growth in subscriber numbers and average revenue per user (ARPU) meant that fixed-line revenues for LTM to September 2020 were 18% higher than at end-December 2019. Social restrictions due to the pandemic forced many people in Turkey to stay at home, sending average monthly broadband data usage higher to 172Gb in June 2020 from 119Gb in December 2019 (Source: ICTA). As the country's incumbent fixed-line operator with the broadest fibre network, TT is best-placed to benefit from additional fixed-line demand.
Softer Mobile Market: The pandemic has made it more difficult to switch mobile networks during the year, resulting in lower mobile subscriber acquisitions than in 2019. Total mobile subscriber numbers were lower in June 2020 than in March 2020 but picked up to 23.1 million by September 2020. With a 25% annual growth in data usage at end-September 2020 mobile ARPU was up at TRY37.1 from TRY34.7 the previous year. While 2020 mobile revenue growth is below our previous forecasts we believe high single-digit growth is still a positive result during such an unprecedented year for the global economy.
LC and National Rating Changes: Today's positive rating actions reflect TT's improved ability to withstand a weakening of the macroeconomic environment. In September 2020 Fitch published its 2020 economic indicator forecasts for Turkey, which included a GDP decline of around 4%, a rise in unemployment to an estimated 14% and a decline in inflation to about 12%. Against this macroeconomic backdrop, TT further deleveraged its balance sheet and demonstrated its position as an essential service provider by delivering 39% higher YoY LTM pre-dividend free cash flow (FCF) at end-September 2020.
Lira Weakens, Leverage Reduced: We had previously capped TT's LC IDR at the Turkish sovereign's. This partly reflected the risk that in the event of a sovereign crisis, FX devaluations would increase leverage. TT has since reduced the level of foreign currencies in its net debt during 2020, a year that has seen the lira depreciate to over 8x the US dollar from just below 6x the US dollar at end-December 2019. EBITDA was up 18% in LTM-to-September 2020 on revenue growth and coronavirus-related cost savings during the year. FFO net leverage was down to 1.3x at end-September 2020 from 1.4x at end-December 2019.
One-Notch LC IDR Cap Above Sovereign: TT is a domestic operator with limited exports. At end-September 2020 89% of pre-hedged gross debt was denominated in foreign currencies. Its hedges are imperfect and if lira was to increase beyond 12.5 to the dollar, without further action we would expect leverage to increase rapidly thereafter. Seventy-three per cent of gross debt at end-September 2020 was hedged though swaps, futures and forwards and only 19% was hedged with foreign-currency cash. We do not expect to rate TT's LC IDR more than a notch above the sovereign's (BB-/Negative). Should Turkey's LC IDR be downgraded to 'B+' we would expect to maintain Turk Telekom's LC IDR at 'BB-'.
Country Ceiling Restricts Rating: The Turkish state and Turkish Wealth Fund own a combined 31.68% share of TT but we view the links between TT and the Turkish state as weak. This means TT's rating is not constrained by the Turkish sovereign rating but due to its exposure to the Turkish market the FC IDR is capped by the Turkish Country Ceiling.
Long-Term Concession Uncertainty: The ratings factor in some long-term uncertainty over the expiry of TT's fixed-line concession agreement with the Turkish government in 2026. Fitch does not rule out the risk that in the lead-up to the concession termination date, the views of TT's management, TT's main shareholder and the Turkish government on the company's operational and financial priorities may diverge. Fitch believes that TT's management will pursue a conservative financial policy to ensure that all debt could be repaid before the expiry of the concession agreement.
DERIVATION SUMMARY
TT has a similar operating profile to other European incumbent peers such as Royal KPN N.V. (BBB/Stable), BT Group (BBB/Stable) and Rostelecom PJSC (BBB-/Stable). The strength of TT stems mainly from its leading fixed-line operations in Turkey with its increasing fibre deployment a key advantage. It is also a fully integrated telecoms operator with a growing mobile market share and increasing pay-TV penetration.
Leverage thresholds for its current ratings are tighter than for European peers due to a higher risk from the FX mismatch between mainly hard-currency debt and lira-denominated cash flow generation. On the national rating scale, TT's profile compares well with Turkiye Petrol Rafinerileri A.S.'s (Tupras, A(tur)/Negative) and Arcelik A.S.'s (AAA(tur)/Negative). The latter benefits from its exposure to international markets, which is also reflected in its IDR being higher than the Turkish sovereign rating. No parent/subsidiary linkage is applicable, even though the Turkish government owns a minority stake in TT.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to grow 15.5% in 2020, followed by high single-digit growth until 2023
- EBITDA margin to increase to 44.1% in 2020, before gradually declining towards 43.2% by 2022 following inflation-linked cost rises and FX-based increases in non-lira operating costs;
- Capex at around 24% of revenue in 2020, falling gradually towards 22% in 2022. Fibre roll-out was around 70%-75% complete at end-September 2020 and the speed of roll out to decline beyond 2021;
- Dividend payments to resume in 2020 at 25% of 2019 profits. Thereafter 90% of prior-year profits to be distributed as dividends; and
- Depreciation in the lira in 2020 to cause gross debt to increase by over TRY2 billion in 2020.
RATING SENSITIVITIES
Developments that may, individually or collectively, lead to positive rating action/upgrade on the Long-Term FC IDR and senior unsecured rating
- TT's ratings are currently constrained by Turkey's Country Ceiling of 'BB-'. An upgrade of Country Ceiling will result in a similar rating action on the FC IDR and senior unsecured rating
Developments that may, individually or collectively, lead to negative rating action/downgrade on the Long-Term FC IDR and senior unsecured rating
- FFO net leverage above 3.5x on a sustained basis
- Material deterioration in pre-dividend FCF margin, or in the regulatory or operating environments
- Negative rating action on the Turkish Country Ceiling, which could put pressure on TT's ratings
- Excessive reliance on short-term funding, without adequate liquidity over the next 12-18 months
Developments that may, individually or collectively, lead to positive rating action/upgrade on the Long-Term LC IDR
- Positive rating action is limited by the sovereign's rating. TT's ratings are unlikely to be more than one notch higher than the sovereign LC IDR.
Developments that may, individually or collectively, lead to negative rating action/downgrade on the Long-Term LC IDR
- FFO net leverage above 3.5x on a sustained basis
- Material deterioration in TT's pre-dividend FCF margin, or in the regulatory or operating environment
- Negative rating action on the Turkish sovereign's LC IDR, which could put pressure on TT's LC IDR
- Sustained increase in the forex mismatch between TT's net debt and cash flows
- Excessive reliance on short-term funding, without adequate liquidity over the next 12-18 months
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: TT has TRY9.8 billion of debt maturing in the next two years, of which TRY7.2 billion is denominated in foreign currencies. Liquidity is supported by strong FCF generation, TRY5.5 billion of cash on balance sheet (of which TRY3.9 billion is in foreign currencies) and a strong record of access to international capital and loan markets. After accounting for TT's cross-currency swaps, forwards and futures contracts the company has reduced net debt exposure to foreign currency to TRY0.2 billion.
Nevertheless, refinancing risk remains and reliance on short-term borrowings may exacerbate pressure on TT's liquidity profile in an uncertain FX environment. We expect the company to remain FCF-positive in each of the next four years on a pre-dividend basis.
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit [...]."