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April 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Arcelik AS's (Arcelik) USD500m 5% 10-year bond a 'BB+' senior unsecured rating. The rating is in line with Arcelik's 'BB+' Long-term Issuer Default Rating (IDR).The bond's final rating follows a review of the final terms and conditions conforming to information already received when Fitch assigned the expected rating on 20 March 2013.
The notes are expected to be used to refinance existing short-term debt and for general corporate purposes. The notes will be direct, unconditional, unsubordinated and unsecured obligations of Arcelik AS and rank parri passu with all the company's other outstanding unsecured and unsubordinated obligations. The bond includes a negative pledge provision binding Arcelik, as well as financial reporting obligations, a restriction on certain corporate reorganisations, and a covenant limiting transactions with affiliates that do not comply with an arms-length principle.
KEY RATING DRIVERS:
Stable Financial Performance
Arcelik's 2012 financial results were broadly stable and within Fitch's expectations. Strong revenue growth driven by market share gains was tempered by flat profitability margins as a result of cost pressures, especially from raw materials. Free cash flow (FCF) was negative, albeit better than expected, due to working capital needs resulting from the top line growth. Fitch expects Arcelik to demonstrate a slight improvement in its 2013 financial metrics, but remain at levels in line with the present ratings.
High Working Capital Needs
Although much reduced from 2011 levels, Arcelik still had a high working capital to sales ratio due to the Turkish market practice of the manufacturer financing a portion of customer purchases. The company is addressing its working capital management and Fitch believes there is scope to substantially cut the cash drain through improved inventory and receivables focus. Effective working capital management remains key to Arcelik achieving positive FCF generation.
Strong Growth in International Markets
Arcelik has achieved strong top line growth in the past two years outside Turkey, taking advantage of more price-conscious consumers in Western Europe as well as its previous marketing and distribution network expansion efforts. Further growth in developed markets in the short to medium term is likely as the company continues to capitalise on its present momentum and current market trends, although this may place pressure on profitability as the company focuses on expanding market share. We note that the company retains relatively limited geographic diversity, which restricts the ratings.
Stable Adjusted Leverage
Arcelik's reported leverage is negatively impacted by its 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 consumer credit risk is covered by bank letters of credit. Fitch adjusts Arcelik's debt by netting off the debt portion of trade receivables above 60 days of revenues (approximately TRY1.7bn at end-2012) to enable a more accurate peer comparison. On this basis, Arcelik's funds from operations (FFO)-adjusted leverage was 2.3x at end-2012 (from 2.1x at end-2011), but is expected to improve to under 2x at end-2013.
Positive: Future developments that could lead to positive rating actions include:
- Significant improvement in business profile
- Reduced structural FX risks
- Receivable-adjusted FFO gross leverage ratio below 1x
- FFO margins consistently above 10%
- FCF margin above 2% on a sustainable basis
Negative: Future developments that could lead to negative rating action include:
- Receivable-adjusted FFO gross leverage ratio above 2.0x
- EBITDA margins below 10.5%
- Consistently negative FCF