Moody’s upgrades Turkish Airlines’ BCA to b3

DUBAI, Nov 28: Moody’s Investors Service (“Moody’s”) has today upgraded Turk Hava Yollari Anonim Ortakligi’s (“Turkish Airlines”) Baseline Credit Assessment (BCA) to b3 from caa1. Concurrently, Moody’s has affirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating (PDR). The outlook remains stable.

Ratings rationale

Turkish Airlines’ BCA upgrade to b3 from caa1, CFR affirmation at B3 and PDR affirmation at B3-PD, reflects the company’s continued strengthening in operating metrics and cash flows during 2022. This has led to a material reduction in short term debt and total debt levels as well as an improvement in its liquidity position, which is considered as a key consideration in Moody’s governance analysis. Turkish Airlines continues to rollover part of its debt maturities but has reduced Moody’s adjusted short term debt by $0.7 billion to $3.7 billion and total debt by $3.4 billion to $13.4 billion levels (including $9.9 billion of lease liabilities) as of September 2022 from December 2020, in the midst of the covid-19 pandemic.

Turkish Airlines’ passenger volume recovery and the number of flights it offers have been more resilient than EMEA’s industry average because of the company’s large network, supportive fleet mix and favorable geographical location, which makes it easier for the company to tackle demand in a profitable manner. Total revenue for the first nine months of 2022 was 37% above the 2019 levels with passenger revenue 24% above in the same period. Moody’s expects operating performance and financial results to continue improving as yields remain high, the company grows its operating fleet and it benefits from the rapid ramp up in capacity during the last 18 months. However, macroeconomic risks are increasing for the passenger airline industry as the risk of recession rises and affect demand volumes. Additionally, there is a risk that current geopolitical tensions might lead to higher than expected oil prices during a recession.

The credit fundamentals of Turkish Airlines suggest a higher rating level and the company for the last 12 months ended 30 September 2022 had Moody’s adjusted RCF/Debt of 29.5% and Debt/EBITDA of 2.9x. However, the company’s corporate family rating and BCA are constrained by the Government of Turkiye’s B3 rating because the company is materially exposed to Turkiye’s political, legal, fiscal and regulatory environment. Moody’s classifies Turkish Airlines as a government-related issuer (GRI) because of the Government of Turkiye’s 49.12% ownership stake held through its sovereign wealth fund. GRI considerations for Turkish Airlines incorporates ‘moderate’ government support assumption and ‘high’ dependence assumption.

Turkish Airlines’ B3 CFR continues to reflect the company’s scale and competitive position with a well-diversified passenger revenue base and its role as the national flag carrier; track record of managing through challenging operating environments through its flexible fleet base, capacity management and cost discipline; growing transit passengers and strong cargo revenues; and supportive shareholder base with strong relationship with Turkish banks.

Conversely, the CFR remains constrained by Turkish Airlines’ credit linkages and exposure to the Turkey sovereign and operating environment; its exposure to an inherently cyclical industry; sensitivity to global and domestic economic weakness, foreign-currency volatility; and geopolitical risks.

Liquidity

Moody’s liquidity analysis assesses a company’s ability to meet its funding requirements over the next 12-18 months under a scenario of not having access to new funding unless it is committed and does not assume the rollover of existing loans. Under this approach, Turkish Airlines’ liquidity is adequate despite the absence of undrawn long-term committed facilities.

As of 30 September 2022, the airline had about $3.6 billion of cash balances and $0.8 billion in time deposits relative to short term debt of $976 million and current portion of long term debt and leases of $2.8 billion. Of this $3.7 billion total, $0.9 billion is with the Export Credit Bank of Turkey (Turk Exim), a government-owned development bank mandated to support the Turkish economy as part of the government’s export-led growth policy. While these loans are short-term in nature, we believe that the likelihood of loan rollovers by Turk Exim is very high.

Turkish Airlines does not have any significant undrawn long-term committed facilities that can provide a solid liquidity buffer to the company. The airline has strong relationships with local banks, including state owned banks, and we understand that the company has access to about $4 billion of available uncommitted credit lines. In Moody’s view, the company has started to reduce its reliance on short-term loans and increased the cash levels which has improved its liquidity profile. However, large short term debt maturities create greater uncertainty in the currently volatile macroeconomic environment. Our liquidity assessment does not incorporate Turkish Airlines’ access to uncommitted credit lines, which if included in our assessment, would indicate a stronger liquidity profile.

Outlook

The stable outlook mirrors that on the Government of Turkiye’s rating and reflects Turkish Airlines’ exposure to the country’s political, legal, fiscal and regulatory environment. Additionally, the stable outlook reflects Moody’s expectation for improving operating performance and financial results over the next 12 to 18 months as passenger demand continues to grow while maintaining adequate liquidity.