Moody's affirms Turkey's Turkcell at Ba1, stable outlook

The outlook remains stable, the ratings agency said in a statement on Wednesday.

Moody’s also said in the statement:

"The affirmation of Turkcell's ratings at Ba1 reflect the robust financial profile with moderate financial leverage and strong coverage ratios, the solid liquidity profile even when assuming a number of sizeable potential cash calls, its leading position in the domestic Turkish mobile telephony market as well as the ability to offset declining mobile voice and texting revenues with higher contributions from fixed and mobile broadband," said Martin Kohlhase, a Moody's Vice President -- Senior Credit Officer and lead analyst for Turkcell.

Mr. Kohlhase added that "the Ba1 rating also takes into account the competitiveness of the domestic market that has resulted in market share losses, our forward-looking views about a weaker macroeconomic growth trend in Turkey. In affirming the rating at Ba1 with a stable outlook we have also taken into consideration the rating and outlook for the government of Turkey, which is currently Baa3 negative, and thus limits ratings upside for Turkcell. We furthermore recognize that there have been positive steps recently regarding the resolution of shareholder conflicts that have impacted governance at the board and shareholder level which have been seen as a constraint to the ratings in the past. Moody's will want to see a track record having developed of the board being able to undertake its responsibilities in the absence of disputes along with stability being in place on the shareholder composition side before considering the assignment of an investment grade rating notwithstanding any sovereign rating considerations.

RATINGS RATIONALE

Turkcell's Ba1 ratings are underpinned by (1) the company's robust financial profile as evidenced by debt/EBITDA of 1.7x, RCF/debt of 59.4% and (EBITDA -- Capex)/Interest Expense of 4.7x for the last twelve months ending September 2014; (2) a solid liquidity profile allowing Turkcell to address a number of potential cash calls such as aggregate dividend payments estimated by Moody's to amount to ca. $2.7 billion for the 2010-2014 period; (3) Turkcell's leadership in its core Turkish market with close to 50% market share as of June 2014 and (4) the increased contribution from fixed and mobile broadband that offsets lower revenue generation from the core mobile voice and texting services.

The Ba1 ratings also reflect (1) challenging local operations due to regulation and increased competition in the mobile telephony market with the subscriber share decreasing to below 50% as of June 2014; (2) heightened external vulnerabilities impacting the growth prospects of the Turkish economy that Moody's expects to grow by 2.5% to 3.5% in 2014 and in 2015 and (3) geopolitical unrest and currency depreciation impacting the Ukrainian operations and a weak performance of its operations in Belarus, although the overall revenue contribution from international operations is limited (ca. 12% in 2013).

With the outlook of the Baa3 rating for the government of Turkey currently negative, upside pressure for Turkcell's Ba1 rating remains limited. Moody's views it as unlikely that Turkcell's ratings could be positioned above that of the sovereign rating given Turkcell's high dependence on the Turkish market.

While a degree of stability has developed on the corporate governance side with visibility having developed over resolving the shareholder disputes that were inhibiting the board from carrying out its responsibilities and agreeing on strategy matters, the rating at the Ba1 level was affirmed as a degree of concern exists whether the existing shareholder structure will undergo further change once the disputes are resolved. Turkcell's governance has improved following (1) the resolution of the conflict between shareholder groups Alfa and Cukurova; (2) the appointment of the board of directors by Turkey's Capital Market Board (CMB) and (3) the expectation of a dividend payment in 2015 for the first time since 2010, through a decision by the Investor Compensation Centre (ICC), a legal entity established by the CMB to cater for investors' interests, but these changes in itself are not yet sufficient for us to see upside on the ratings.

Turkcell's shareholder dispute -- despite so far not having had an impact on the day-to-day operations - had weakened the company's governance structure evidenced by a gridlock over a number of issues including approval of a dividend policy and dividend distributions, election of board members and general assembly meetings. Although recent developments are credit positive, uncertainties remain over (1) the future shareholding structure once the dispute between Cukurova and TeliaSonera AB (A3 negative) will have been resolved, (2) the ability of the board to take strategic decisions; and (3) financial policies.

WHAT COULD CHANGE THE RATING - UP

Turkcell's ratings could be upgraded if the current strong financial profile is maintained with debt/EBITDA below 1.5x, interest cover (FFO and EBITDA-Capex) of at least 7x and positive free cash flow on a sustainable basis. Should Turkcell spend a large part of its current cash holdings in line with our expectations (including aggregate dividend payout of $2.7 billion for the period 2010-2014), ratings could reach a higher level, provided that the company at the same time establishes sufficiently strong back-stop liquidity (e.g., in the form of a multi-year revolving credit facility). The lack of a stable shareholding structure - evidenced by the long-standing conflict amongst major shareholders- with a functioning board without interference has constrained the ratings at the Ba1 level.

WHAT COULD CHANGE THE RATING - DOWN

Were Turkcell to step up its investment and acquisition plans - e.g. licenses, privatisation bids - or increase shareholder returns with a subsequent weakening of RCF to debt below 35%, debt to EBITDA above 2 times and (EBITDA - Capex) to interest expense of less than 5 times this could exert pressure on both the rating and outlook.

The principal methodology used in this rating was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Turkcell Iletisim Hizmetleri A.S. ("Turkcell"), headquartered in Istanbul, Turkey and established in 1993, started operations as a mobile telephony service provider in Turkey in 1994 and acquired a 25-year GSM license in 1998. Today Turkcell shares its domestic market with two other players and captures close to half (49% as of June 2014) of the mobile subscribers. Over the years it has expanded into Eastern European and Central Asian countries where it is active in eight countries, plus Northern Cyprus. Turkcell also has a growing business in adjacent telephony services such as fibre broadband in Turkey.

For the last twelve month ending (LTM) September 2014, the company reported revenues of USD5.5 billion, adjusted EBITDA of USD1.9 billion, total reported debt of USD1,6 billion and cash & cash equivalents of USD3.8 billion. Major shareholders (directly and indirectly) are TeliaSonera AB (37.1%), Cukurova Holdings (13.8%) and Alfa Telecom (13.2%) with the remainder being the free float."