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ARCLK - Arcelik AS News Story

TRY31.96 0.0  0.0%

Last Trade - 13/04/21

Sector
Consumer Cyclicals
Size
Mid Cap
Market Cap £1.92bn
Enterprise Value £2.39bn
Revenue £3.65bn
Position in Universe 22nd / 645

Fitch Downgrades Arcelik to 'BB'; Outlook Stable

Thu 14th May, 2020 1:09pm
(The following statement was released by the rating agency)


Fitch Ratings-Barcelona-May 14: 

Fitch Ratings has downgraded Arcelik A.S.'s Long-Term Issuer Default Rating 
(IDR) to 'BB' from 'BB+', and senior unsecured ratings to 'BB' from 'BB+' The 
Outlook is Stable. Arcelik's National Rating has been affirmed at 'AAA(tur)'. A 
full list of rating actions is below.

The downgrades reflect the change in notching between Arcelik's IDR and the 
Turkish Country Ceiling and Arcelik's upcoming refinancing risk from the EUR350 
million maturity in September 2021. The downgrades also reflect Fitch's view 
that Arcelik does not have the structural enhancements that are required to be 
rated two notches above the Country Ceiling. Currently the foreign-currency debt 
coverage is only sufficient for one notch. Consequently, Arcelik is rated one 
notch above Turkey's Country Ceiling of 'BB-'.

The Stable Outlook reflects our expectation that Arcelik will maintain leverage 
metrics and profitability commensurate with the rating despite COVID-19-related 
macroeconomic stress. Fitch forecasts that funds from operations (FFO) net 
leverage metrics will remain below 2.5x despite our negative free cash flow 
(FCF) expectations for the next two years, which is in-line with a 'BBB' rating. 
Similarly, our EBIT and FFO margin forecasts of 7%-8% are commensurate with the 
'BB' rating median in our Diversified Industrials Navigator.

Key Rating Drivers

Increasing Refinancing Risk: Arcelik has significant loan repayments in 2020 and 
2021 of an average of about TRY5 billion each year. Fitch is forecasting that 
Arcelik will be able to successfully refinance both its short-term debt and 
Eurobond, during the respective year of repayment, albeit at higher interest 
rates, given the current challenging liquidity environment. Fitch expects 
Arcelik to successfully complete refinancing before 2Q21. However, failure to do 
so could put pressure on the ratings.

Currently Fitch forecasts that Arcelik's available cash balances of TRY7.8 
billion at end 1Q20, which Fitch adjusts for TRY0.7 billion, will barely cover 
TRY 6.1 billion of short-term debt for the next 12 months, and our negative FCF 
expectations of TRY1.3 billion for the year. Fitch notes that under a stress 
case scenario where the international markets are closed, Arcelik's strong 
banking relationships in the local market will help the issuer refinance through 
local Turkish banks.

COVID-19 Likely to Impact Operating Performance: Fitch has factored in the 
potential impact of COVID-19 disruption on Arcelik's operating performance 
during 2020, with a spill over impact in 2021. Fitch forecasts significant drops 
in revenue for 2020 on a foreign-currency basis, but this is partially balanced 
by the Turkish lira depreciation, which is Arcelik's reporting currency. Fitch 
forecasts EBIT margins of around 7%, which is supported by Arcelik's low cost 
base, despite a significant drop in demand in its EMEA markets. Fitch also notes 
that these EBIT margins are in line with the rating, and the 'BB' rating median 
of 6% in our Diversified Industrials  Capital Goods Navigator.

FCF Generation Pressured: Fitch expects pressure on FCF generation to increase, 
driven by higher working capital outflow, resumed dividends distribution in the 
upcoming years, and sharp increases in interest rates in Turkey. Fitch believes 
that current FCF generation is not commensurate with the ratings, and prolonged 
stress on cash generation could further increase leverage. However, Fitch notes 
that Arcelik has some flexibility in its capital structure, and in the absence 
of pressure from its major shareholders, dividend pay-out and capex could be 
adjusted to support liquidity needs.

Leverage Commensurate with Ratings: Despite significant volatility in working 
capital needs, sharp movements in currency and interest rates, Fitch forecasts 
FFO (adjusted for receivables) net leverage to average 2x throughout our 
forecast horizon. 

A significant increase in uncertainty in both the domestic Turkish economy and 
international markets combined with COVID-19 disruption could drive sharp FX and 
interest rate movements, leading to swift and material increases in leverage, 
which may put downward pressure on the ratings.

Adequate Business Profile: Fitch believes that Arcelik's business profile is 
adequate, supported by its sizeable market shares in the European market, and 
its leading status in the Turkish domestic market. Arcelik's higher exposure to 
emerging markets leaves it prone to foreign-currency fluctuations and political 
risks, but this translates into superior profitability compared with its Western 
European peers.

Growing Market Shares: Arcelik has generated strong international revenue growth 
in the past few years by attracting more price-conscious consumers in Western 
Europe and capitalising on its strong marketing and distribution network. This 
has allowed it to become one of the top three white goods manufacturers in 
Europe. Arcelik has been a strong performer in the domestic market, gaining 
substantial market share following Whirlpool's decision to exit Turkey and its 
wider price choice for Turkish consumers under weakening affordability. We 
expect Arcelik to maintain its positioning with a stable market share. 

Financial Services Adjustments: Arcelik's reported leverage is affected by 
higher-than-average working capital needs, as a significant portion of durable 
goods are sold on credit in Turkey. While this is partly financed by Arcelik, 
the dealer credit risk is covered by banks' letters of credit and mortgages. 
Fitch assumes approximately 120 days of domestic receivables come from this 
business practice in Turkey and adjusts debt accordingly to reflect a more 
accurate peer comparison. Based on its financial services criteria, Fitch 
applies a 3x debt/equity ratio for these receivables.

Derivation Summary

Arcelik has strong market shares in Turkey and Europe, which drive stable 
through-the-cycle EBITDA (around 10%) and FFO margins (around 6%). These 
financial metrics are commensurate broadly with the 'BB' rating median in our 
capital goods navigator, and are in line with that of higher-rated peers like 
Whirlpool Corp. (BBB/Negative) and Panasonic Corporation (BBB-/Stable). However, 
these strengths are offset by weak FCF generation, driven by intense capex in 
new markets, and structurally high working capital needs. Despite the current 
investment phase, Arcelik's leverage metric adjusted for financial services 
remains below our negative rating sensitivity and conforms with the 'BBB' rating 
median in our capital goods navigator.

Arcelik's technological content and RD capabilities are broadly in line with 
those of Whirlpool, Electrolux and the broad white goods industry. However, 
Arcelik's revenue from emerging markets is much higher than higher-rated white 
goods manufacturers. Although Arcelik is broadening its geographical 
diversification away from Turkey, it remains vulnerable to macro-economic, 
political and FX risks in emerging markets.

Key Assumptions

- Single-digit revenue growth across the Turkish market and the international 
market 

- Effective interest rates for 2020 to decline, and successful refinance of 
short-term debt 

- Successful refinance of Eurobond maturing in 2021 

- Dividends distribution to resume by 2021

- Financial services adjustment assumes 120 days of domestic receivables

RATING SENSITIVITIES

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

- The ratings could be upgraded if Turkey's Country Ceiling was upgraded.

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

- Receivable-adjusted FFO net leverage ratio above 3.5x

- Substantial deterioration in liquidity

- FFO margin below 6%

- Consistently negative FCF

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 
https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Low Liquidity Score: Historically, Arcelik's liquidity score has been around 1x, 
driven by the use of short-term debt to finance its high working capital needs. 
Available cash on balance sheet was TRY7,576 million at end-2019 (net of TRY639 
million intra-working capital adjustment), which is sufficient to cover 
short-term debt of TRY6.1 billion for the next 12 months and our expected 
negative FCF of TRY1.3 billion for 2020. However, the upcoming Eurobond 
maturity, coupled with our negative FCF expectations for TRY2 billion for the 
next two years is putting pressure on Arcelik's 24 month liquidity profile.

Fitch does not count Arcelik's large (uncommitted) lines in Turkish banks in its 
liquidity score. However, their strong presence in Arcelik's funding could 
mitigate liquidity risk, reflecting their availability for drawing even during 
the global financial crisis of 2008-2009, and continue to be in place despite 
the current stress. While the liquidity score below 1x is not adequate for the 
rating, the risk is also partly mitigated by customer receivables financing that 
are deemed self-liquidating.

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 www.fitchratings.com/esg.

Arcelik; Long Term Issuer Default Rating; Downgrade; BB; RO:Sta

; Local Currency Long Term Issuer Default Rating; Downgrade; BB; RO:Sta

; National Long Term Rating; Affirmed; AAA(tur); RO:Sta

----senior unsecured; Long Term Rating; Downgrade; BB

Contacts: 

Primary Rating Analyst

Cigdem Cerit, 

Director

+34 93 467 8840

Fitch Ratings Espana. S.A.U.

Av. Diagonal 601 

Barcelona 08028

Secondary Rating Analyst

Shrouk Diab, 

Associate Director

+971 4 424 1250

Committee Chairperson

Paul Lund, 

Senior Director

+44 20 3530 1244

 

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: 
adrian.simpson@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10120170

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10090792

Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria (pub. 25 
Feb 2020) 

https://www.fitchratings.com/site/re/10111391

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0

1-https://www.fitchratings.com/site/re/973270

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10122139

Solicitation Status 

https://www.fitchratings.com/site/pr/10122139#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10122139#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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