Fitch Downgrades Dogus's Long Term National Long Term Rating to 'BB(tur)'; Withdraws Ratings

Dogus Otomotiv Servis ve Ticaret

09/04/2019 11:26

(The following statement was released by the rating agency)


Fitch Ratings-Frankfurt am Main-April 09: 

Fitch Ratings has downgraded Turkish car importer Dogus Otomotiv ve Ticaret 
A.S.'s (Dogus) National Long-Term Rating to 'BB(tur)' from 'BB+(tur)'. The 
Outlook is Negative. Fitch has simultaneously withdrawn all of Dogus's ratings 
for commercial reasons. Accordingly, Fitch will no longer provide ratings or 
analytical coverage for Dogus.

The downgrade reflects continuing weakness in the Turkish domestic market, 
coupled with Fitch's expectations of a prolonged stress on sales driving further 
deterioration in Dogus's financial profile compared with local peers'.The 
ratings are constrained by heightened liquidity and medium-term refinancing 
risks amid ongoing market volatility and currency weakness, coupled with our 
expectation that the prevailing environment in Turkey will not improve in the 
medium term. The Negative Outlook reflects potentially limited credit 
availability and the significantly increased refinancing risk of parent Dogus 
Holding (DH) AS.

The ratings were withdrawn for commercial reasons.

Key Rating Drivers

Continuously Weak Liquidity: Given negative free cash flow (FCF) and the absence 
of committed credit facilities for Dogus, which is common in Turkey, liquidity 
remains a key pressure on its credit profile, which is captured in its 'BB(tur)' 
rating. While Dogus had historically enjoyed large limits of uncommitted credit 
facilities (around TRY5 billion) from a wide range of banks, access to these 
undrawn cash limits has been revoked through 2018. As a result, Dogus's 
liquidity profile has weakened and is contingent on the continued successful 
rollover of drawn credit facilities.

Heightened Risk of Credit Availability: We believe that accessing credit 
facilities is becoming harder under the current macro-economic environment in 
Turkey. Although Dogus enjoys strong relationships with both local and 
international banks and to date has been able to regularly roll over these 
lines, it is exposed to an increasing risk of reduced availability of credit and 
renewal at more onerous conditions if the currency crisis worsens further and 
the impact on Turkish banks intensifies, notwithstanding slightly improving 
commercial interest rates during 1Q19.

Stretched Financial Metrics: Due to the large adverse FX impact in the 
year-to-date on Dogus's cash interest costs, the utilisation of factoring to 
meet working capital requirements, coupled with our assumption of declining 
operational cash flow, we project funds from operations (FFO) adjusted net 
leverage to remain around 7.0x over 2019-2020 (2018: 6.1x), which is 
commensurate with the rating. Nonetheless, the company's 2018 EBITDA margin 
increased to 5.7% (2017: 4.3%) on the back of operational cost control, 
illustrating Dogus's mostly flexible cost structure.

Slump in Turkish Automotive Sales: Automotive sales in Turkey have been hit 
significantly in 2018, showing a 37% decline compared with 2017, driven by large 
adverse FX impact and resulting spike in inflation. This led to higher vehicle 
prices, more onerous terms for auto financing and depressed consumer sentiment. 
Notably, Dogus's 2018 unit sales (-43%) contracted slightly more than the 
market, illustrating the company's high exposure to the domestic market. Fitch 
expects further contraction in automotive sales through 2019 and does not see 
any stabilisation before 2020.

Manageable FX Risks: Car imports are entirely euro-denominated while Dogus's 
operations generate mostly Turkish lira-denominated revenue, creating a 
significant FX mismatch. However, pricing mechanisms with automotive 
manufacturers provide a balanced burden-sharing model over the long-term, 
smoothing out average currency volatility.

We view the absence of hard-currency denominated debt, which compares favourably 
with Turkish corporate peer Yasar Holding A.S. (B-/BB(tur)/Stable) and 
Georgia-based auto spare parts provider Tegeta Motors LLC as positive for 
Dogus's credit profile. Both peers have substantial unhedged foreign 
currency-denominated debt on their balance sheets, leading to an adverse 
FX-driven impact on leverage metrics.

Standalone Rating Assessment: Fitch has applied its 'Parent and Subsidiary 
Rating Linkage' Criteria and assessed that the legal, operational and strategic 
linkage with DH was sufficiently weak to rate Dogus on a standalone basis. In 
particular, the absence of up- and down-stream guarantees, ring-fencing 
mechanisms and cross-default clauses underpins the separate financing of both 
entities, while a small management overlap and a broadly independent Board of 
Directors promote an autonomous management strategy with only marginal influence 
from DH.

Fitch views the credit profiles of DH and Dogus as broadly similar. However, 
further deterioration of DH's credit profile could be negative for Dogus as 
Fitch believes that Dogus is unlikely to be rated more than one notch above its 
parent.

Parent's Planned Refinancing Stalls: Fitch believes that Dogus 's financial 
profile is somewhat stressed by DH's tight liquidity profile and heightened 
refinancing risk, as we understand that refinancing talks are stalling. This is 
despite management's continued working assumption that Dogus will be exempted 
from the debt reorganisation at DH and Fitch's view that inter-linkages are 
weak. Following DH's disposal of its stake in Garanti Bank, Dogus has become the 
largest dividend source.

Derivation Summary

Not applicable.

Key Assumptions

Fitch's Key Assumptions within our Rating Case for the Issuer

-Revenue to decline by around 9% in 2019, as drop in Turkish new car sales (-37% 
in 2018 and -60% in January 2019 compared with prior year) are not fully offset 
by price increases.

- Majority of existing drawn credit lines to be rolled over to ensure funding.

- Normalisation of capex with annual investment spend slightly in excess of 
TRY200 million through 2019-2020.

- Dividend payments suspended pending further notice.

- No major acquisition or disposal over 2019-2021.

- Rating predicated on current corporate structure remaining in place.

RATING SENSITIVITIES

Not applicable.

Liquidity and Debt Structure

Thin Liquidity: Dogus's liquidity profile is weak results in a liquidity score 
significantly below 1.0x, owing to predominantly short-term funding. Readily 
available cash and cash equivalents was TRY381 million at end-2018, after 
adjusting for TRY100 million restricted cash and the inclusion of 20% of Dogus's 
stake in DH valued at TRY116 million. This does not cover TRY2.5 billion of 
short-term debt as at the same date and expected negative FCF for the coming 12 
months.

With access to previous uncommitted cash limits (roughly TRY3 billion) revoked, 
Dogus's liquidity is contingent on the continued rollover of drawn credit lines, 
while being exposed to an increasing risk of reduced availability of credit and 
renewal at more onerous conditions.

Dogus Otomotiv Servis ve Ticaret A.S.; National Long Term Rating; Downgrade; 
BB(tur); RO:Neg

; National Long Term Rating; Withdrawn; WD(tur)

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

Severin Testroet, 

Associate Director

+49 69 768076 113

Committee Chairperson

Emmanuel Bulle, 

Senior Director

+34 93 323 8411

 

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 

National Scale Ratings Criteria (pub. 18 Jul 2018)

https://www.fitchratings.com/site/re/10038626

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018)

https://www.fitchratings.com/site/re/10036366

Additional Disclosures 

Solicitation Status 

https://www.fitchratings.com/site/pr/10069002#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO