Fitch Affirms Arcelik at 'BB+'; Outlook Stable

Fri Mar 28, 2014 10:41am EDT

(The following statement was released by the rating agency) WARSAW/LONDON, March 28 (Fitch) Fitch Ratings has affirmed Arcelik A.S.'s (Arcelik) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and National Long-term rating at 'AA(tur)' The Outlooks are Stable. Fitch Ratings has also affirmed Arcelik's senior unsecured rating at 'BB+'. KEY RATING DRIVERS: Stable Financial Performance Arcelik's 2013 financial results were broadly stable and within Fitch's expectations. The recent slowdown in domestic economy was balanced by international revenue growth, backed by market share gains and recent deterioration in the Turkish lira. Free cash flow (FCF) remained negative due to increasing working capital needs in 2013. Fitch expects muted growth in the medium term as the domestic economy slows down, and funds from operations (FFO) margins to be inline with historical averages. High Working Capital Needs Arcelik has a high working capital to sales ratio due to the Turkish market practice of the manufacturer providing financing for customer purchases. Working capital needs increased to 38% of sales as of end-2013 from 32% at end-2012, negatively affected by the devaluation in Turkish lira and Gezi Park protests in 3Q13. Fitch believes that the scope for cutting cash drainage will be dependent on inventory management and receivables focus. Effective working capital management remains key to Arcelik returning to positive FCF generation. Persistant negative FCF would place pressure on the present ratings. 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 has relatively limited geographic diversity, albeit improving, which restricts the ratings. Stable Adjusted Leverage Expected Arcelik's reported leverage is negatively affected 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 transfered to retailers while Arcelik's credit risk to the retailers 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-2013) to enable a more accurate peer comparison. On this basis, Arcelik's FFO-adjusted leverage was 1.9x at end-2013 (from 2.8x at end-2012). Fitch expects slower delevaraging in the next two years until the political risk subsidies, but still forecasts FFO adjusted leverage slightly below 2.0x, supporting the current rating. Increased Macroeconomic Risks: Fitch notes that a prolonged decline in currency along with other domestic shocks from country's political crisis poses a risk for Turkish corporate ratings in 2014. Although Arcelik's FX exposure is somewhat balanced by its export revenues and hedging, it is still vulnerable to a higher than expected slowdown in domestic market and any cost increases that could result from Turkish lira devaluation. RATING SENSITIVITIES Negative: Future developments that could lead to negative rating action include: - Receivable-adjusted FFO gross leverage ratio above 2.0x. - FFO margin below 8%. - Consistently negative FCF. - Increase in the unhedged balance sheet mismatch between foreign currency debt and receivables 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. Contact: Principal Analyst Cigdem Cerit Analyst +90 212 279 1065 Supervisory Analyst Tom Chruszcz Director +48 22 338 6294 Fitch Polska SA Krolewska 16 00-103 Warsaw Committee Chair Emmanuel Bulle Senior Director +34 93 323 8411 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, "Corporate Rating Methodology", dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. 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.

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