FITCH: UNHEDGED BORROWING EXPOSES TURKISH COMPANIES TO LIRA RISK
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.