Weakening lira is a risk for Turkish industrial firms
ISTANBUL: It may be time for Turkish industrial companies to curb their fondness for debt-driven profit growth.
While rising earnings have impressed shareholders, the foreign borrowing relied on to fuel much of the gains has left balance sheets vulnerable to a weaker lira.
It was a blowout year in 2017 for Turkey’s non-financial companies, which posted record net-income-to-equity ratios.
The flip side is that total debt for members of the Borsa Istanbul Industrials Index relative to assets has seldom been higher, a stress point that won’t be improved by the currency’s slump in the past six months.
The use of cheaper funding through credit, rather than raising equity, has helped to enhance performance metrics at Turkish industrials.
“A combination of net profit increases – for companies with international revenue – and lower equity capital – for indebted companies – leads to a surge in return on equity,” said Emre Sezan, an equity research manager for non-financial companies at Istanbul-based Is Investment.
But tailwinds could quickly turn to headwinds if companies fail to manage their liabilities.
“Debt-to-asset ratios are a key indicator for investors, providing the clearest measure of the extent that companies have financed their growth with borrowed money.
If this figure is high “in comparison to history, peers or other industries, it is an elevated risk, should the cycle turn down,” said Heinz Ruettimann, an emerging market strategist at Zurich-based Bank Julius Baer & Co.
Given the extent of their foreign borrowing, Turkey’s industrial companies won’t catch a break from climbing debt discomfort should lira weakness persist.
Short-term debt from abroad doubled in the past two years to US$4.6bil as of January, numbers from the central bank in Ankara show. Long-term foreign debt rose by US$13.2bil to US$110.1bil.
The lira is “probably what is raising companies’ debt ratios,” said Sezan. The currency has depreciated 12% against the dollar and 15% against the euro since September, the worst performance among emerging-market peers after the Argentinian peso.
And tightening steps by the Federal Reserve won’t make things any easier for the lira, a currency highly sensitive to rising US yields. If global liquidity conditions turn less accommodative, leverage ratios at Turkish industrials are destined for greater stress.
Turkey “should do just fine,” as long as a scenario of synchronized global growth and investor risk-on mentality prevails, according to Ruettimann, who is underweight the country’s equities as Bank Julius Baer sees better opportunities in other emerging markets. “It is only when the cycle turns that leveraged companies will likely get into trouble.”