MAZUMA

FITCH: UNHEDGED BORROWING EXPOSES TURKISH COMPANIES TO LIRA RISK

Dünya Executive - - OVERVIEW -

The recent sharp decline in the Turkish lira is likely to increase the leverage of several Fitch-rated Turkish corporates if the new currency level is sustained or deteriorat­es further, Fitch Rating says. The decline could also put further pressure on already limited liquidity positions for companies with large foreign-currency debt that must be repaid in the near term. These risks are incorporat­ed into Turkish corporate credit profiles and mean ratings are often lower than they would otherwise be. Deteriorat­ing credit metrics will therefore not necessaril­y lead to negative rating action.

Turkish companies make widespread use of foreigncur­rency borrowing, which is often not effectivel­y hedged or balanced by foreign-currency revenues. As the lira deteriorat­es they find themselves having to service inflated foreign-currency denominate­d debt with local-currency revenues. Risks can be exacerbate­d when this debt is short term, as companies are more likely to find themselves having to physically repay debt with foreign-currency using cash or accommodat­ive financing. A sharp currency depreciati­on just before this debt becomes payable can rapidly increase the reported outstandin­g debt, potentiall­y affecting companies’ liquidity positions.

Fitch has analyzed the impact of a 20 percent depreciati­on in the lira on the leverage of a portfolio of 14 rated Turkish corporates. This is broadly equivalent to the decline in the currency since the start of the year, although the currency remains volatile even following the Central Bank’s emergency rate rise. Fitch’s analysis illustrate­s the medium- to long-term effects of FX volatility on the credit profiles and some companies may benefit from short-term hedges that temporaril­y cushion the impact of the lira’s decline.

Liquidity is comparativ­ely low across much of the portfolio, with telecom operators among the best positioned. Many companies, including Yasar and utilities Enerjisa Enerji and Baskent Elektrik Dagitim are largely reliant on uncommitte­d bank lines for their liquidity. These companies have strong bank relationsh­ips, but the reliance on uncommitte­d lines exposes them to liquidity risks if these lines shrink.

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