Research Update: Dogus Holding 'BB/B' Ratings Affirmed On Sustained Investments And Expected Completion Of Garanti Sale; Outlook Negative Primary Credit Analyst: Renato Panichi, Milan (39) 02-72111-215; renato.panichi@standardandpoors.com Secondary Contacts: Per Karlsson, Stockholm (46) 8-440-5927; per.karlsson@standardandpoors.com Werner Staeblein, Frankfurt (49) 69-33-999-130; werner.staeblein@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 30, 2015 1
Research Update: Dogus Holding 'BB/B' Ratings Affirmed On Sustained Investments And Expected Completion Of Garanti Sale; Outlook Negative Overview Over the past few quarters, Turkey-based diversified holding company Dogus Holding A.S. has continued pursuing debt-funded investments. Dogus Holding expects to complete the sale of its 14.89% stake in Turkiye Garanti Bankasi over the next few months, which will temporarily enhance the group's financial position materially. We are affirming our 'BB/B' credit ratings and our 'traa-/tra-1' national scale ratings on Dogus Holding. We are then withdrawing the national scale ratings at the group's request. The negative outlook reflects our view that Dogus Holding may continue pursuing additional investments, and we will monitor how the group uses the proceeds from the sale of Garanti stake. Rating Action On March 30, 2015, Standard & Poor's Ratings Services affirmed its 'BB/B' long- and short-term corporate credit ratings and its 'traa-/tra-1' long- and short-term Turkey national scale ratings on Turkey-based diversified holding company Dogus Holding A.S. The outlook on the long-term credit rating remains negative. At the same time, we withdrew the national scale ratings at the group's request. Rationale The affirmation reflects our opinion that Dogus Holding's upcoming sale of its 14.89% stake in Turkish bank Turkiye Garanti Bankasi A.S. (Garanti; BB+/Negative/--) will temporarily enhance materially the holding company's financial position, despite the its pursuit of debt-funded investments. Over the past few quarters, Dogus Holding has continued pursuing debt-funded investments in its portfolio of assets, including new activities. Dogus Holding net financial debt increased to $1.2 billion in 2014 from $0.6 billion at year-end 2013. This is primarily due to the group's equity injections in new tourism ventures and in the ongoing construction of the company's hydroelectrical power plant, which the group expects to complete in 2016. In addition, over the next few months, Dogus Holding expects to complete the sale of its 14.89% stake in Garanti. The group expects proceeds to near $2.1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 30, 2015 2
Research Update: Dogus Holding 'BB/B' Ratings Affirmed On Sustained Investments And Expected Completion Of Garanti Sale; Outlook Negative billion, which would significantly enhance its financial position in 2015. This offers the group an opportunity to deleverage at parent level and at some operating subsidiaries, thus improving the average quality of its portfolio assets, which will have weakened as result of the sale of its Garanti stake. The consolidated group's total debt swelled to $4.6 billion at year-end 2014 from $3 billion at year-end 2013 and $2.1 billion at year-end 2012. Given the still unattractive economic prospects for Turkey, to which Dogus Holding's portfolio companies are largely exposed, the group's asset valuations could remain volatile and the turnaround of those more fragile businesses would be subdued. The continued modest performance or cash burn of a number of segments would strain Dogus Holding's financial metrics if loans or equity infusions became necessary. Moreover, our ratings on Dogus reflect our view of its "weak" business risk and "intermediate" financial risk profiles. Dogus Holding's business risk profile reflects the group's high exposure to Turkey, modest profitability, and moderate dividend stream of industrial operations, execution risks related to large infrastructure projects in the energy and construction businesses, low percentage of liquid assets (about 42% at year-end 2014 pro-forma the sale of Garanti stake), and weakened average credit quality of assets following the sale of 14% stake on Garanti. However, we expect ongoing investment activity, particularly in tourism, to progressively increase the diversification of income away from the financial services and automotive sector, on which Dogus Holding has historically focused. In addition, Dogus Holding influences its subsidiaries' strategic decisions due to its controlling stakes. Our "intermediate" assessment of Dogus Holding's financial risk profile reflects rising consolidated debt and the group's exposure to foreign exchange swings. This is because a large portion of its financing is denominated in U.S. dollars. However, this is mitigated by the fact that cash is also denominated in hard currency and that part of the group's operating activities offers a natural hedge, particularly the automotive business. Our loan-to-value (LTV) ratio on Dogus Holding stood at 28% at year-end 2014, and we estimate that pro forma the disposal of the Garanti stake, the ratio will temporarily lower to about 6%. We assess Dogus Holding's management and governance as "fair" under our criteria. Liquidity The short-term rating is 'B.' We classify Dogus Holding's liquidity as "adequate" under our criteria. This is based on our estimate that the group's liquidity sources will exceed uses by at least 20% in the 12 months ending December 2015. Although we exclude from our liquidity assessment the $1.5 billion of uncommitted lines available to the group at the end of 2014, we note that these lines provide Dogus Holding with some flexibility. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 30, 2015 3
Research Update: Dogus Holding 'BB/B' Ratings Affirmed On Sustained Investments And Expected Completion Of Garanti Sale; Outlook Negative For the 12 months ending December 2015, we calculate the following principal liquidity sources: Available cash and cash equivalents of about $461 million on Dec. 31, 2014; Approximately $150 million-$170 million in fees and dividends to be received from the group's portfolio companies; and About $2.1 billion proceeds from the disposal of its 14.89% stake in Garanti. For the same period, we calculate that the principal liquidity uses include the following: Short-term maturities and loan repayment of about $320 million. Dogus has established a track record in rolling over short-term debt and refinancing long-term debt; Operating and financing expenses and dividends amounting to about $240 million; Acquisitions and investments amounting to slightly below $200 million; and In our base-case scenario for liquidity, we do not factor any major investments. Dogus Holding's debt has some balance sheet-related covenants on its bank facilities, which are tested semiannually. In our view, the group has adequate headroom under these covenants. Outlook The negative outlook reflects our view that Dogus Holding may continue pursuing additional investments, instead of reducing the group financial debt. As such, we will monitor how the group will use the proceeds from the sale of the Garanti stake. Conversely, we could revise the outlook to stable if Dogus Holding uses the cash proceeds from the sale of Garanti stake to reduce the group financial debt, while committing to preserve the LTV ratio below 30%. An outlook revision to stable would also hinge on stronger-than-expected improvements of the Turkish economy's performance in 2015, leading to a positive impact on the operating performance of Dogus Holding's main subsidiaries. Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 30, 2015 4
Research Update: Dogus Holding 'BB/B' Ratings Affirmed On Sustained Investments And Expected Completion Of Garanti Sale; Outlook Negative Related Criteria Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 Rating Methodology For European Investment Holding And Operating Holding Companies, May 28, 2004 Ratings List Ratings Affirmed Dogus Holding A.S. Corporate Credit Rating Turkey National Scale BB/Negative/B traa-/--/tra-1 Ratings Withdrawn To From Dogus Holding A.S. Turkey National Scale NR traa-/--/tra-1 NR--Not rated. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 30, 2015 5
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