November 4 (SeeNews) - Moody's Investors Service said it affirmed the B2 corporate family rating (CFR) and the B2-PD probability of default rating of Turkish mobile phone operator Turkcell [IST:TCELL], keeping the negative outlook.
The ratings agency also affirmed the B2 senior unsecured rating assigned to Turkcell's $500 million (427 million euro) bond due in 2025, it said in a statement earlier this week.
Moody's added it has changed its analytical approach used for rating Turkcell by applying its methodology for government-related issuers (GRI) due to the recent acquisition of a 26.2% stake in Turkcell by the Turkey Wealth Fund, an investment vehicle fully owned by the country's government.
Moody's also said in the statement:
"RATINGS RATIONALE
The affirmation of the company's CFR reflects Moody's view that the changes to the shareholder structure and the indirect government ownership will not alter the credit quality of the company. The classification of Turkcell as a government-related issuer (GRI) is driven by the completion of the Government of Turkey's acquisition of a 26.2% ownership stake in the company through its sovereign wealth fund. The B2 CFR reflects a baseline credit assessment (BCA) of b2, a measure of standalone credit quality, and no rating uplift for government support. Turkcell's CFR and bond ratings are in line with Turkey's long-term issuer rating and foreign currency bond ceiling of B2.
The BCA of b2 reflects Turkcell's significant exposure to Turkey's political, legal, fiscal and regulatory environment as well as to its weakening financial institutions. Turkcell otherwise exhibits strong credit fundamentals, underpinned by its leadership position in the Turkish mobile telephony market, strong mobile sector fundamentals in Turkey, conservative financial policies with a maximum net debt/EBITDA target of 1.5x (reported 0.8x as of 30 June 2020), good access to debt capital markets and strong relationships with international banks. Moody's also notes the company's resilient performance amid the coronavirus pandemic.
The BCA also reflects the highly competitive operating environment in Turkey, with two strong competitors, weak growth prospects of the Turkish economy and a depreciating Turkish lira, which increases the import costs of handsets and capital equipment, as well as the cost of servicing foreign-currency debt.
Moody's notes that, at present, there is limited public disclosure related to any possible changes to the strategy of the company under the influence of the government. TWF has stated that it intends to maintain the current dividend policy of distributing at least 50% of distributable net income. The current rating also reflects the expectation that the company will continue to operate under the stated leverage targets. Even if the company were to increase its investments or pay greater dividends, its leverage of 0.8x is still very low for the b2 rating. Moody's assesses default dependence between the Turkish government and Turkcell to be 'high' and the likelihood of extraordinary government support to be 'moderate'.
Moody's default dependence assessment evaluates the exposure of a government-related issuer and its supporting government to adverse circumstances that simultaneously move them closer to default. The 'high' default dependence assumption reflects Moody's view that events which may cause financial distress to Turkcell are likely to be highly correlated to events which would cause financial stress at the government level. In light of Turkcell's concentration to Turkey, which accounts for c. 90% of its revenue and EBITDA, the default dependence is 'high'. Turkcell is also exposed to weakening of the Turkish Lira as 88% of its debt is denominated in foreign currency.
The 'moderate' support assessment reflects the government's relatively limited economic stake of 26.2% and Moody's view that Turkcell's economic importance remains limited in the context of Turkey's wider economy. The assessment also takes into account that the government will exert a high degree of influence in directing the operational and financial strategy of Turkcell going forward. Through shareholder approved amendments to the Articles of Association, TWF will have the right to select the majority of board members, as well as the Chairman of the Board and the Chairman of the General Assembly. Shareholders will have voting rights proportional to their shareholding and there will be no shareholder agreement between TWF and LetterOne, who together own 51% of Turkcell. Therefore technically there will be no controlling shareholder to decide on ordinary shareholder matters. Moody's nevertheless expects that TWF will be able to exert material influence over ordinary shareholder matters, as the power to set the agenda of the Annual General Meeting (AGM) lies with the board of directors. We note however that minority shareholders, under certain conditions, are allowed to call for an AGM and set the agenda.
LIQUIDITY
As of 30 June 2020, Turkcell's liquidity over the next 12 months is supported by sizeable cash balances, expected operating cash flow generation and available committed facilities. Moody's expects this to be sufficient to cover capital investments and dividend payments in line with public guidance. There are no material upcoming maturities, with the next bond ($500 million) maturing in 2025.
While maturities due within the next 12 months of TRY5.4 billion are well covered by the cash balance of TRY10.9 billion, most of this cash is held onshore in Turkey at a mix of local banks and branches of international banks. This exposes Turkcell to growing counterparty risk as a result of the weakening credit quality of Turkey-based financial institutions. There is also a risk that weakening Turkish banks will not be able to renew credit commitments. However, this risk is mitigated by the company's strong relationships with international banks and strong operating cash flow generation.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook mirrors that of the Government of Turkey and reflects Turkcell's exposure to the country's political, legal, fiscal and regulatory environment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Turkey's foreign currency bond ceiling is raised. This would also require no material deterioration in the company's operating and financial performance, market position and liquidity.
The ratings are likely to be downgraded in case of a further downgrade of Turkey's sovereign rating or a lowering of the foreign currency bond ceiling. In addition, downward rating pressure could arise if there are signs of a deterioration in liquidity or if government-imposed measures were to have an adverse impact on its credit quality.
LIST OF AFFECTED RATINGS
..Issuer: Turkcell Iletisim Hizmetleri A.S.
Affirmations:
....Probability of Default Rating, Affirmed B2-PD
....Corporate Family Rating, Affirmed B2
....Senior Unsecured Regular Bond/Debenture, Affirmed B2
Outlook Action:
....Outlook, Remains Negative
PRINCIPAL METHODOLOGY
COMPANY PROFILE
Turkcell Iletisim Hizmetleri A.S. (Turkcell), headquartered in Istanbul, Turkey, started operations as a mobile telephony service provider in Turkey in 1994. Currently, Turkcell is an integrated communications and technology service provider in Turkey. The company shares its domestic market with two other companies, and captured around 46% of the total mobile telephony market in terms of revenue and around 41% of mobile subscribers as of March 2020, according to the Information and Communication Technologies Authority. Over the years, Turkcell has expanded its operations into Ukraine, Belarus and the Turkish Republic of Northern Cyprus.
For the 12 months that ended 30 June 2020, the company reported revenue of TRY26.9 billion, total debt of TRY19.8 billion and cash and cash equivalents of TRY10.9 billion."
($ = 0.8541 euro)