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ARCLK - Arcelik AS News Story

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Last Trade - 07/05/21

Sector
Consumer Cyclicals
Size
Mid Cap
Market Cap £1.93bn
Enterprise Value £2.73bn
Revenue £4.01bn
Position in Universe 21st / 645

Fitch Ratings: Turkey Downgrade Drives Corporate Actions, Highlights FX Risks

Fri 19th July, 2019 4:17pm
(The following statement was released by the rating agency)


Fitch Ratings-London-July 19: Fitch Ratings' recent downgrade of Turkey and the 
lowering of the Country Ceiling have led to the downgrade of several Turkish 
corporates. The sovereign action highlights that foreign exchange and 
refinancing risks remain a key threat to Turkish corporate ratings overall, 
given the frequent use of unhedged dollar and euro borrowing that is not matched 
by foreign-currency revenue.

The downgrade of Turkey to 'BB-' from 'BB' with a Negative Outlook reflects, 
among other factors, the dismissal of the central bank governor Murat Cetinkaya, 
which has heightened doubts over the authorities' tolerance for a period of 
sustained below-trend growth and disinflation. We now forecast a somewhat faster 
cut in the Turkish policy rate to 18% at end-2019 (compared to a previous 
forecast of 20%) and further currency depreciation.

Turkish corporates commonly use foreign-currency borrowings that are not 
effectively hedged or adequately matched by foreign-currency revenue. As the 
lira depreciates, companies with a debt mismatch find themselves having to 
service inflated foreign-currency-denominated debt with local-currency revenue, 
which lifts debt-service costs and can significantly increase leverage. The 
impact is exacerbated for importers and other companies with foreign-currency 
costs and only domestic revenue.

Consumer goods companies without significant exports can be among the most 
exposed as they can also face an impact from rising prices for commoditised raw 
materials, which are influenced by global prices even when procured 
domestically. Passing on inflation- and FX-driven cost increases to consumers is 
a gradual process and might be constrained by weakened consumer confidence and 
purchasing power. In addition, the minimum wage, which affects personnel costs - 
a large cost item for retailers - has risen faster than our projected increase 
in consumer prices for the year. This is making it even harder for the sector to 
protect margins in 2019.

A government decree last year that forced the conversion of existing 
foreign-currency leases into lira has provided some relief for retailers, albeit 
at the expense of the real estate sector. Real estate companies that borrowed in 
hard currencies have found that their natural hedge from hard-currency leases 
has disappeared, exposing them to higher FX risks. However this decree is 
currently scheduled to expire in 2020.

Alongside the sovereign downgrade, Fitch lowered the Country Ceiling to 'BB-', 
removing the previous one-notch uplift compared with the Long-Term 
Foreign-Currency IDR, to reflect the increased risk of unorthodox policy-making 
that could affect the availability of foreign currency for non-sovereign 
external debtors. Turkish corporate debt's relatively short-term maturity 
profile and companies' use of uncommitted bank lines to finance their liquidity 
needs mean that a significant reduction in the availability of foreign currency 
could quite quickly drive an increase in refinancing and liquidity risks.

Some corporate ratings, however, remain above the Country Ceiling. For example, 
Arcelik's rating is above the ceiling as structural enhancements mitigate 
transfer and convertibility risks, while Coca-Cola Icecek's rating one notch 
above the ceiling reflects the scope for support from The Coca-Cola Company.

Rating actions on the following companies following the sovereign downgrade are 
available at www.fitchratings.com:

Ronesans Gayrimenkul Yatirim; Turk Telekomunikasyon; Turkcell; Oyak; Emlak 
Konut; Sisecam; Tupras; Coca-Cola Icecek; Arcelik.

Fitch is recalibrating its Turkish National Rating scale to better reflect the 
changes in the relative creditworthiness among Turkish issuers that have taken 
place since the sovereign downgrade. The recalibration may result in rating 
actions on some issuers with Turkish national scale ratings.

Contact: 

Simon Kennedy

Senior Director, Corporates

+44 20 3530 1387

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Alex Griffiths

Managing Director, Corporates

+44 20 3530 1709

David Prowse

Senior Director, Fitch Wire

+44 20 3530 1250

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

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

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