November 24 (SeeNews) - Fitch Ratings said it has revised the national long term rating of Turkish mobile phone operator Turkcell [IST:TCELL] to 'AAA(tur)' from 'AA+(tur)'.
The ratings agency has also affirmed Turkcell's long-term foreign-currency (FC) issuer default rating (IDR) at 'BB-' with a negative outlook, it said in a statement on Monday.
Fitch also said in the statement:
"The upgrade reflects Tcell's sustained deleveraging and strong performance in 2020 despite challenges in the Turkish economy and local currency depreciation. Tcell manages its funds from operations (FFO) net leverage at below 1.0x, which is low compared with EMEA investment-grade telecom peers'. We expect that healthy cash flow generation, a measured financial policy and an active approach to managing currency risk should continue to sustain its low leverage.
The ratings benefit from Tcell's leading market position in mobile and strong number two position in fixed line. Its FC IDR is capped by the Turkish sovereign's Country Ceiling at 'BB-'.
KEY RATING DRIVERS
Leading Position in Mobile Market: Tcell is Turkey's leading mobile operator and second-largest fixed-line telco. A mobile subscriber share of 41% at end-2Q20 positions it strongly ahead of closest rival Vodafone at 31% and Turk Telekom (TT) at 28%. With a fixed-line strategy selectively investing in fibre and an increased focus on digital applications and services, Fitch expects Tcell to continue to benefit from above-average market growth, stable margins and strong cash flow generation. The country's young population with its propensity to adopt digital services and balanced market dynamics are supportive of its growth.
Strong 9M20 results: Tcell reported strong growth in revenue and EBITDA in 9M20, driven by new subscriber additions and growing average revenue per user (ARPU), both in mobile and fixed line. Mobile ARPU growth is supported by ongoing migration of prepaid subscribers to post-paid, higher usage of data and wider adoption of digital services. Average mobile data usage in 3Q20 was 12.2Gb per user compared with 8.1Gb in 3Q19 and 5.4Gb in 3Q18. The share of post-paid mobile subscribers reached 64% in 3Q20 (56% in 3Q19), leaving room for further improvement. Group revenue is also supported by fast growing pay TV and digital services as well as by the solid performance of its international subsidiaries, primarily Ukraine.
Sustainably Low Leverage: Tcell has maintained its FFO net leverage at 0.6x-0.8x over the last three years, which is low compared with EMEA telecom peers'. Low leverage is primarily supported by strong double-digit EBITDA growth, a rational dividend policy and a prudent approach to debt hedging. We expect leverage to be at 0.6x and to remain largely stable in 2021-2023.
Managed FX Risk: Tcell proactively addresses currency risks to mitigate the negative impact of local- currency weakness. Debt is mainly raised in US dollars and euros but also in Turkish lira. The former two are hedged using derivative instruments, which cover both interest and principal payments during the entire life of the loans. Tcell had 15% of total debt denominated in lira, which increased to 49% at end-3Q20 when adjusted for derivative instruments. A substantial portion of cash held in hard currencies (68% at end-3Q20) is an additional hedging tool. Sustained low leverage in 2017-2020 despite a sharp depreciation of the lira underlines prudent and efficient management of currency risk.
Shareholder Change Neutral: We believe that the recent change in the shareholding structure is largely neutral to Tcell's ratings. In October 2020 Turkey Wealth Fund (TWF, BB-/Negative) acquired a 26.2% share in Tcell via a series of transactions with the previous shareholders Telia and Cukurova. As of end-November 2020 LetterOne had a 19.8% share in the company, while 54% remained publicly traded. TWF gains control over the board of directors via 15% privileged shares within its 26.2% shareholding, providing it with the ability to appoint five out of nine directors.
Standalone Assessment: TWF acts as the strategic long-term investment arm and equity solutions provider of Turkey and we will look past TWF to assess Tcell's links directly with Turkey (BB-/Negative), as per our criteria. We believe that the strength of links with the new majority shareholder is weak-to-moderate and hence will continue to rate Tcell on a standalone basis, without implication of any support from the parent. We believe that Tcell's rating is not automatically constrained by Turkey's IDR as its debt is ring-fenced from TWF and extraction of excessive dividends is limited by the Capital Markets Law. High minority interest also makes any excessive dividends unlikely.
DERIVATION SUMMARY
Tcell's ratings are firmly positioned relative to closest peer Turkish incumbent, Turk Telekomunikasyon A.S.'s (TT; BB-/Negative)). TT has a similar operating profile but its strength stems from its incumbent fixed-line operations. It has higher leverage and greater FX risk associated with its hard currency-denominated debt. Both actively manage their debt portfolios using derivative instruments.
Absent FX risk and associated sovereign pressures, Tcell has a similar or stronger rating profile, both business and financial, to that of similarly or higher-rated western European telecom peers such as Royal KPN N.V. (BBB/Stable) and Telefonica Deutschland Holding AG (BBB/Stable). Tcell has stronger growth potential than these peers even when adjusted for inflation, and has developed a broader understanding of mobile-based digital services and data monetisation. Tcell's ratings are constrained by the sovereign Country Ceiling of 'BB-'. No parent/subsidiary or operating environment aspects affect the rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue growth, excluding financial services, of 15% in 2020, gradually slowing to around 8% by 2023
- Fitch-defined EBITDA margins of around 34% in 2020-2023
- Capex at around 22%-22.5% of revenue in 2020-2023, including spectrum payments
- Fitch excludes debt and cash flows from the consumer finance (CF) company, assuming that debt in this entity is serviced by the underlying cash flows of the CF business
- Dividends of TRY1 billion-TRY2 billion per year in 2021-2023, corresponding to 50% of previous years' net income
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Tcell's IDR is currently constrained by Turkey's Country Ceiling of 'BB-'. An upgrade of the Country Ceiling will be reflected in Tcell's IDR.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Expectation that FFO net leverage will remain above 3.5x on a sustained basis
- Material deterioration in pre-dividend free cash flow (FCF) margin, or in the regulatory or operating environments
- Sustained increase in FX mismatch between net debt and cash flows
- A downgrade of Turkey's Country Ceiling
- 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
Healthy Liquidity: Tcell reported cash of TRY 13.5 billion at end-3Q20, which is sufficient to address short-term liabilities of TRY6 billion, including CF debt. The company has a committed facility with J.P. Morgan Chase Bank and AB Svensk Exportkredit of USD150 million (of which USD100 million was utilised as of end-3Q20), available until April 2021 and a EUR500 million facility with China Development Bank is available until August 2023 for infrastructure procurement. Maturities are evenly balanced and refinancing risk is manageable.
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 [...]."