Fitch affirms Turkcell's Positive Outlook

Published October 20th, 2003 - 02:00 GMT

Fitch Ratings has affirmed the Senior Unsecured foreign currency and local currency ratings of Turkcell Iletisim Hizmetleri (Turkcell) at B and B+ respectively following completion of an annual ratings review assessment. The rating Outlook remains Positive.  


The agency also affirmed its ratings for the outstanding notes of Turkcell's guaranteed special purpose financing vehicle Cellco Finance (Cellco). The ratings for Cellco's $400 million senior unsecured notes due 2005 are affirmed at B and its 300 million Senior Subordinated Notes due 2005 at B-.  


The rating affirmation and Positive Outlook reflect macroeconomic improvement in Turkey. Following Fitch's upgrade of Turkey's ratings to B from B- on September 25, 2003, the agency upgraded the Long-term foreign currency ratings of nine Turkish companies, mirroring the sovereign action.  


Turkcell's Long-term local currency rating was upgraded to B+ from B and the Outlook was changed to Positive from Stable. Macroeconomic trends are a key driver of Turkcell's credit profile, as shown by its strong operational and financial performance in 2002 and 2003. The rating also reflects prudent financial policies, demonstrated by cost control measures and a proven commitment to debt service and liquidity.  


Consequently, net leverage ratio adjusted for leases and Ericsson vendor credits has improved to 1.4x range in 2002 compared with 2.4x in 2000. Fitch views Turkcell's recent $300 million bond buyback as consistent with its refinancing and recapitalization attempts, which should strengthen its balance sheet. Offsetting these positive factors, Turkcell is entering a period of increasing competitive pressures, driven by regulatory changes such as the new cost-based interconnect regime.  


The ratings factor in Turkcell's margin pressures, increasing capex, and the potential cash flow impact of the recent International Arbitration Court ruling that Turkcell should make provisioned payments on its interconnect revenues to the Turkish Treasury, estimated at around $400 million.  


The ratings also take into consideration the potential impact of newly-merged IS TIM, jointly owned by Telecom Italia Mobile and Isbank of Turkey, and Aycell, the mobile arm of Turk Telekom. The merger was announced in May 2003 and exact ownership percentages will be agreed at a later stage.  


Consequently, Fitch's ratings include the expectation that Turkcell will lose market share gradually over the next three to four years. However, assuming margin pressures and increased capex as a result of possible increased traffic volumes, Turkcell's financial profile remains supported by its cash from its operations. Leverage ratios for 2004 and 2005 should be within the company's rating category.  


Fitch has historically rated Turkcell on a stand-alone basis as it operated independently. The agency has not assumed any significant support under the ownership structure, with Turkcell's own business and financial profiles easing the need for such support. However, the agency believes recent developments, such as Turkcell's call for an Extraordinary Shareholders Meeting (EGM) due to conflict on its board preventing strategic decision-making, may bring a change in the board structure and control. Fitch views this ownership issue as a developing event and will report again following the Turkcell's board reshuffle.  


The agency is aware of management's intention to expand the scope of Turkcell's operations and in particular the intention to buy the 72.6 percent stake of Digital Platform (Digiturk) from Yapi and Kredi Bankasi Cukurova Group, which currently owns forty two percent of Turkcell shares on an effective basis, owns 45 percent of Yapi and Kredi Bankasi.  


The agency aims to undertake a thorough evaluation of the strategic logic and the capital requirements of such an investment and, in the event that management proceeds with the purchase, will communicate any rating implications to the market.  


Turkcell is the largest provider of GSM telephony services in Turkey, and as of June 30, 2003 had 17.2 million subscribers. It also has investments in mobile markets in Azerbaijan, Moldova, Georgia and Kazakhstan through Fintur Holding. With 1.6 million total subscribers, Fintur generated $126.8 million combined EBITDA in 2002. Turkcell does not fully consolidate these ventures and has not received dividends as of yet. — ( 


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