5/5/2021 Fitch Places Arcelik's 'BB' Ratings on RWP
RATING ACTION COMMENTARY Fitch Places Arcelik's 'BB' Ratings on RWP
Wed 05 May, 2021 - 11:09 AM ET
Fitch Ratings - Barcelona/London - 05 May 2021: Fitch Ratings has placed Arcelik A.S.'s Long-Term Foreign- and Local-Currency (FC and LC) Issuer Default Ratings (IDRs) of 'BB' as well as its senior unsecured ratings of 'BB' on Rating Watch Positive (RWP). It has also af rmed Arcelik's National Rating at 'AAA'(tur). The Outlook on the National Rating is Stable.
A full list of ratings actions can be found at the end of this Rating Action Commentary.
The rating action re ects our expectation that a successful re nancing of the September 2021 Eurobond will positively affect Arcelik's FC debt coverage ratios, and that the issuer will maintain a funding policy that would grant a two-notch uplift above the Turkish Country Ceiling of 'BB-'. Currently, Arcelik's standalone credit pro le (SCP; bb+) is constrained, and is rated one notch above the Country Ceiling.
Fitch views Arcelik's SCP as below investment-grade because the issuer's free cash ow (FCF) generation is signi cantly more volatile compared with higher-rated peers, and its exposure to emerging markets (EMs) is higher, leaving it exposed to political risks and currency uctuations. However, Arcelik will maintain leverage metrics and pro tability commensurate with the current rating level, despite increasing raw material prices and the weakness in the local Turkish market.
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Short-Term Re nancing: As of end 2020, over 60% of total nancial debt is to be repaid during 2021, including the EUR350 million bond by September 2021, and the two TRY500 million bonds maturing in February 2021 and July 2021. Arcelik has already re nanced most of its Turkish lira-denominated maturities, and Fitch expects Arcelik to successfully re nance its September 2021 Eurobond. In the rare event of a complete market shut down, Arcelik has TRY12.8 billion of liquidity on its balance sheet (as of end-2020) that would successfully cover all of its upcoming short-term maturities. However, this is not Fitch's base case.
FCF Generation to Soften in 2021: We expect FCF to come under pressure in 2021 and 2022, driven by increased working capital needs, higher capex and the resumption of dividends distribution, despite a record FCF generation at end-2020 (Fitch-de ned FCF of TRY2.6 billion). Volatile working capital needs have historically pressured Arcelik's FCF generation; however, Arcelik has been successfully managing its working capital for the past two years, aided by strong domestic receivables collection. Fitch expects FCF generation to turn positive by 2023, as the expansion programme completes and inventory levels in factories normalise.
Pro tability Under Pressure: We expect robust revenue growth to persist, given the continuation of stay-at-home practices, a faster recovery in exports and a more favourable FC conversion impact. In the medium term, we see some challenges stemming from higher raw material costs, which we expect will have a negative impact on pro tability margins. On the other hand, Arcelik is monitoring its cost base through hedging activities by xing raw material purchases on a six-month basis, and has been successfully controlling its cost base, partially mitigating the negative impact from cost in ation.
Leverage Still Commensurate with Ratings: Fitch forecasts funds from operations (FFO) adjusted (for receivables) net leverage to remain under 2x throughout our forecast horizon, below our negative rating sensitivity, which is comfortably in line with a high-investment- grade median. Fitch forecasts EBIT margin to remain slightly resilient at an estimated average of 7.9% from 2021-2024, versus a historical four-year average of 7.8% and FCF to be negative. Nevertheless, we expect Arcelik to maintain some headroom under our current leverage sensitivity.
No Impact from Covid-19: Domestic revenue grew by 63% yoy during 4Q20, as stay-in- home Covid-19 practices skewed consumer behaviour more towards the home appliances sector rather than the services sector. International revenues increased by 58% yoy in lira terms during 4Q20, driven by a mix of 45% and 13% currency and organic growth impact, https://www.fitchratings.com/research/corporate-finance/fitch-places-arcelik-bb-ratings-on-rwp-05-05-2021 2/11 5/5/2021 Fitch Places Arcelik's 'BB' Ratings on RWP respectively. In 4Q20, Arcelik achieved high double-digit revenue growth in euro terms in Europe (about 15%-20% in Eastern Europe and 5%-10% in Western Europe). The Asia Paci c region has also delivered 15%-20% growth in euro terms with sales picking up in Pakistan (+48% yoy in LC).
Arcelik recorded the highest operating margin and FCF generation in the past ve years, helped by increased sales volumes, a weak US dollar against the euro and the pound sterling and continued strength in the high-margin Turkish market. Pro tability margins were shielded against industry-wide cost in ation thanks to raw material hedging contracts and the ability to pass off increased costs; in turn, EBITDA more than doubled in 4Q20 reaching a margin of14.5%.
No Immediate Impact from Hitachi: Arcelik's USD300 million purchase of a 60% share in Japanese appliance maker Hitachi Global Life Solutions will have no immediate rating impact. The purchase consideration, which will be paid from cash, will have a limited impact on Arcelik's FFO net leverage, which Fitch forecasts to remain below 2.0x in the medium term. The nal purchase price will be subject to the change in the net working capital and net debt level and the value corresponding to the minority share in the af liated companies as of closing date.
Growing Market Shares: Arcelik has generated strong international revenue growth in the past few years, by attracting more price-conscious consumers in western Europe and by capitalising on its strong marketing and distribution network, which has allowed it to become one of the top-three white goods manufacturers in Europe. Arcelik has been a strong performer in the domestic market, gaining substantial market share following Whirlpool's decision to exit from Turkey and its wider price choice for Turkish consumers under weakening affordability. We expect Arcelik to maintain its positioning with a stable market share.
Financial Services Adjustments: Fitch adjusts Arcelik's domestic receivables, and deems the portion above 60 days as a part of its nancing operations. The receivable adjustments will be zero days when domestic receivable decline to below 60 days, and will be 120 days when the domestic receivables increase to 180 days. Fitch considered 40 days of the 100 days of reported domestic receivables at end-2020 to be nancial services debt.
Nonetheless, the maximum amount of domestic receivables that could be allocated to nancial services is 120 days, and Fitch will consider any additional increase as working capital. After this adjustment, Fitch applies a 2x debt/equity ratio for these receivables based on its nancial services criteria. https://www.fitchratings.com/research/corporate-finance/fitch-places-arcelik-bb-ratings-on-rwp-05-05-2021 3/11 5/5/2021 Fitch Places Arcelik's 'BB' Ratings on RWP
DERIVATION SUMMARY
Arcelik has strong market shares in Turkey and Europe, which drive stable through-the- cycle EBITDA (about 10%) and FFO margins (about 7%). These nancial metrics are commensurate broadly with the 'BB' rating median in our Capital Goods Navigator, and are in line with that of higher-rated peers like Whirlpool Corp. (BBB/Stable) and Panasonic Corporation (BBB-/Stable). However, these strengths are offset by weak FCF generation, driven by intense capex in new markets, and structurally high working capital needs. Despite the current investment phase, Arcelik's leverage metric adjusted for nancial services remains below our negative rating sensitivity and conforms with the 'BBB' rating median in our Capital Goods Navigator.
Arcelik's technological content and R&D capabilities are broadly in line with those of Whirlpool, Electrolux and the broader white goods industry. However, Arcelik has a much higher share of revenue from EMs than higher-rated white goods manufacturers. Arcelik is diversifying away from Turkey, but it remains vulnerable to macro-economic, political and FC risks in EMs.
KEY ASSUMPTIONS
-Double-digit revenue growth across the Turkish market and the international market supported by stay-at-home practices and favourable FC impact on sales
-Slight margin pressure in the medium term
-Successful re nance of upcoming short-term maturities
-Financial services adjustment assumes 120 days of domestic receivables
-Resumption of dividends distribution
-Hitachi Acquisition during 2021
RATING SENSITIVITIES
https://www.fitchratings.com/research/corporate-finance/fitch-places-arcelik-bb-ratings-on-rwp-05-05-2021 4/11 5/5/2021 Fitch Places Arcelik's 'BB' Ratings on RWP Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The ratings could be upgraded if Turkey's Country Ceiling was upgraded
- Successful re nancing of the September 2021 Eurobond
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Receivable-adjusted FFO net leverage ratio above 3.5x
-Substantial deterioration in liquidity
-FFO margin below 6%
-Consistently negative FCF
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (de ned as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (de ned as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-speci c best- and worst-case scenario credit ratings, visit https://www. tchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Low Liquidity Score: Historically, Arcelik's liquidity score has been below 1x, driven by the use of short-term debt to nance its high working capital needs. Available cash on balance sheet was TRY12.8 billion at end-2020, which almost covers short-term debt and upcoming Eurobond maturity of TRY10 billion and our expected negative FCF of TRY3.9 billion - which includes the estimated cash paid consideration for the Hitachi acquisition.
https://www.fitchratings.com/research/corporate-finance/fitch-places-arcelik-bb-ratings-on-rwp-05-05-2021 5/11 5/5/2021 Fitch Places Arcelik's 'BB' Ratings on RWP Fitch believes that liquidity risk is mitigated by Arcelik's comfortable (uncommitted) lines in Turkish banks, which were available even during the global nancial crisis of 2008-2009, and continues to be in place despite current stress. While the liquidity score below 1x is not adequate for the current rating, the risk is also partly mitigated by customer receivables nancing that are deemed self-liquidating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www. tchratings.com/esg
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Arcelik LT BB Rating Watch Positive Rating Watch BB Rating IDR On Outlook Stable
LC BB Rating Watch Positive Rating Watch BB Rating LT On Outlook Stable IDR
Natl AAA(tur) Rating Outlook Stable Af rmed AAA(tur) Rating LT Outlook Stable
• senior LT BB Rating Watch Positive Rating Watch BB unsecured On
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FITCH RATINGS ANALYSTS
Cigdem Cerit Director Primary Rating Analyst +34 93 467 8840 Fitch Ratings Ireland Spanish Branch, Sucursal en España Av. Diagonal 601 Barcelona 08028
Shrouk Diab Associate Director Secondary Rating Analyst +971 4 424 1250
Emmanuel Bulle Senior Director Committee Chairperson +34 93 323 8411
MEDIA CONTACTS
Adrian Simpson London +44 20 3530 1010 adrian.simpson@the tchgroup.com
Pilar Perez Barcelona +34 93 323 8414 pilar.perez@ tchratings.com
Additional information is available on www. tchratings.com
APPLICABLE CRITERIA
Parent and Subsidiary Linkage Rating Criteria (pub. 26 Aug 2020) Corporate Rating Criteria (pub. 21 Dec 2020) (including rating assumption sensitivity) Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria (pub. 08 Jan 2021)
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Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)
ADDITIONAL DISCLOSURES
Solicitation Status Endorsement Policy
ENDORSEMENT STATUS
Arcelik EU Issued, UK Endorsed
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