-- There has not been any meaningful progress to date in resolution of
the dispute between Turkish telecommunications provider Turkcell's key
-- While the conflict currently does not meaningfully impact the
company's operations, it negatively affects the corporate governance and
creates uncertainty that precludes an investment-grade rating for Turkcell for
-- We are revising our outlook on Turkcell to stable from positive and
affirming the 'BB+' long-term rating.
-- The stable outlook reflects our expectation that Turkcell's operating
performance in its home market will remain robust and that its international
operations will gradually improve.
On Dec. 11, 2012, Standard & Poor's Ratings Services revised its outlook on
Turkish telecommunications provider Turkcell Iletisim Hizmetleri A. S.
to stable from positive. At the same time, the 'BB+' rating on
Turkcell was affirmed.
The outlook revision reflects our view that Turkcell's continuing shareholder
dispute and resulting implications for the company's corporate governance
practices preclude a higher rating for now. It also reflects our view that
there is little likelihood that these issues can be fully resolved in the near
term, which we view as a pre-requisite for an upgrade.
Disputes between Alfa Group, Cukurova Group, and TeliaSonera, Turkcell's key
shareholders, have lasted for several years--for the most part without any
meaningful implications on Turkcell. However, in 2012, the disputes kept
Turkcell from approving its financial statements and statutory auditors. For
the same reason, the company's annual general meeting did not convene on
several occasions and the company still cannot pay dividends for 2010 and
2011. Moreover, Turkey's Capital Markets Board issued a warning to Turkcell
for its inability to appoint independent directors, which it also cannot do
because of the shareholder conflict. Although we believe that the conflict
currently does not threaten Turkcell's credit quality, we don't consider it
commensurate with a higher rating, which could otherwise be achievable based
on Turkcell's business characteristics and sound credit measures.
In our base-case scenario for Turkcell, we assume that its reported revenue
and EBITDA growth could be meaningfully affected by foreign exchange rates. In
Turkey we expect revenues to increase by low-single-digit percentage points in
2013, largely because of the increasing scale of its fiber broadband offering.
We expect higher growth in Turkcell's international operations, as we think
the revenue growth in local currencies will likely exceed the very high
inflation rate in Ukraine and Belarus. We expect profitability to remain
stable, with a consolidated EBITDA margin of 31%-32% in 2013-2014, as we do
not anticipate a meaningful increase in competition in the home market, while
margins at international operations should gradually improve, in our view.
We expect Turkcell to continue generating positive free cash flow in 2013-2014
in an amount similar to its annual dividend payment. We assume that the
company will use its available liquidity to pay dividends to its shareholders
when the shareholder conflict is resolved, including the unpaid amount for
2010-2011. We expect leverage to remain broadly stable, at about 1x EBITDA,
The rating on Turkcell reflects Standard & Poor's assessment of its business
risk profile as "fair" and its financial risk profile as "intermediate", as
our criteria define these terms.
Turkcell's business risk profile is primarily constrained by our assessment of
its management and governance as "weak", which largely results from the
conflict between Turkcell's shareholders. Absent this, we think Turkcell's
strong market position in the Turkish mobile telephony market, its robust
operating performance, and sound cash generation could support
investment-grade ratings ('BBB-' or higher). Slightly offsetting these
strengths are its exposure to the country risk in Turkey and riskier emerging
markets, such as Ukraine and Belarus.
The company's financial profile is underpinned by its sound capital structure,
ample liquidity on the balance sheet, and historically conservative approach
to mergers and acquisitions. These strengths are partially offset by
Turkcell's exposure to short-term financing and foreign exchange risk.
We assess Turkcell's liquidity as "adequate" for the rating. We calculate that
the ratio of liquidity sources to liquidity uses for the following 12 months
comfortably exceeded 1.2x on Sept. 30, 2012.
Turkcell reported cash balances of $3.6 billion on Sept. 30, 2012. However, we
assume that a significant part of them will be used to pay dividends for three
years, including 2010 and 2011, for which dividends were also not paid.
Turkcell's short-term maturities remain meaningful, exceeding $1 billion,
which is acceptable for the current 'BB+' rating only because of the company's
strong liquidity reserves.
We expect Turkcell to generate free operating cash flows (FOCF) about in line
with its dividends in 2013 and 2014, resulting in no meaningful external
The stable outlook reflects our expectation that Turkcell will manage to
protect its strong market position in Turkey, will avoid a meaningful
weakening of profitability, and will continue generating significant FOCF. It
also assumes that the ongoing shareholder disputes will not negatively impact
Turkcell's credit quality. With the current capital structure, featured by
reliance on short-term financing and exposure to foreign exchange risk, we
expect leverage to remain below 1.5x. However, higher leverage could become
compatible if these other elements were to improve.
We could raise the rating if the situation around Turkcell's shareholding and
corporate governance is resolved in a way that we would consider positive for
the rating. This includes clarification of the shareholding structure,
re-election of a board of directors, and resumption of dividend payments. An
upgrade would also depend on Turkcell's domestic performance remaining robust
and ongoing improvements in international operations. To support an
investment-grade rating, we would not expect a stronger capital structure.
Rather, we would expect adequate visibility of the company's financial policy,
and predictability of its corporate governance.
We could lower the rating on Turkcell if we saw a threat to its credit profile
resulting from the shareholder dispute or if we saw material weakening in its
operating performance, such as a meaningful weakening of its market position
or drop in its EBITDA margin to below 30% over a long period.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Turkcell Iletisim Hizmetleri A.S.
Corporate Credit Rating BB+/Stable/-- BB+/Positive/--
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