Koc Holding A.S.A further downgrade of Turkey or the imposition of capital controls would probably...

Koc Holding A.S.

Primary Credit Analyst:

Per Karlsson, Stockholm (46) 8-440-5927; [email protected]

Secondary Contact:

Marta Bevilacqua, Milan + (39)0272111298; [email protected]

Table Of Contents

Credit Highlights

Outlook

Our Base-Case Scenario

Company Description

Business Risk: Fair

Financial Risk: Modest

Liquidity

Rating Above The Sovereign

Issue Ratings - Recovery Analysis

Ratings Score Snapshot

Related Criteria

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 1, 2019 1

Koc Holding A.S.

Credit Highlights

Issuer Credit Rating

BB-/Stable/B

Overview

Key Strengths Key Risks

High portfolio liquidity, with more than 85% of assets listed

directly or indirectly, and actively traded on the Borsa Istanbul.

Most investments are in Turkey (unsolicited FC: B+/Stable/B), which

experienced extreme currency volatility and an inflation rate above 20% in

2018, with real GDP expected to contract by 0.5% in 2019.

Thanks to a strong balance sheet, demonstrated resilience against

the significant macroeconomic volatility in Turkey during 2018.

Moderately concentrated investments, with the three largest assets, Tupras,

Ford Otosan, and Yapi Kredi Bank, representing about 60% of the portfolio.

A material part of investee companies' combined revenues

(approximately 55%) are mainly in or linked to U.S. dollars and

euros.

Cash primarily held at Turkish banks with lower credit quality than Koc.

Continued strong cash flow adequacy ratios, according to our

forecast, of 4x-5x over 2019-2020, thanks to high dividend inflows

from Tupras and Ford Otosan.

Average creditworthiness of the investment portfolio that we estimate to be in

the 'B' rating category.

Prudent financial policy and cash management, ample financial

flexibility, and a long track record of a net cash position, with a

total cash balance of TRY10.2 billion at year-end 2018.

Large depreciation of the investment portfolio in dollar terms during 2018,

due to macroeconomic volatility in Turkey, to about $7.8 billion as of Dec. 31,

2018, compared with a valuation of about $13 billion at year-end 2017.

Koc Holding A.S.' high share of listed assets, well diversified portfolio, very prudent financial policy, and unleveraged

balance sheet underpin the ratings. S&P Global Ratings expects Koc will remain committed to its financial policy. We

understand that management has limited tolerance for net debt at the parent level, and the loan-to-value (LTV) ratio

has been negative over the past six years. Despite the inherent volatility in the investment portfolio's value, we

therefore assume the LTV ratio will remain well below 20% at all times. Furthermore, we expect cash flow adequacy to

remain strong in 2019-2022 after rising to about 5.0x in 2018, following increasing dividends from Tupras. These

positives are tempered by volatility in asset values, which fell more than $4 billion in 2018. Despite this decrease, Koc's

LTV remained negative in 2018 because its cash continued to exceed debt.


Chart 1

Chart 2


Koc Holding A.S.

Despite a very strong balance sheet, the T&C assessment limits the rating. Koc has a very strong balance sheet, with a

net cash position, but cash is primarily held in Turkey. In addition, most of Koc's investments are in Turkey and it is

listed on the Turkish stock exchange. Therefore our long-term ratings on Koc are in line with our 'BB-' transfer and

convertibility (T&C) assessment on Turkey. The T&C reflects the likelihood that Turkey will limit companies' ability to

exchange local currency for another currency and send it to another country to honor debt-service obligations, in case

of a sovereign default.

We view management as conservative and expect the company to maintain strong liquidity. Two Eurobonds totaling

Turkish lira (TRY) 7.9 billion ($1.5 billion) are outstanding at the parent level. This compares with year-end 2018 cash

of TRY10.2 billion, 80% of which is denominated in U.S dollars. In February 2019, Koc received approval from the

Capital Markets Board to issue up to $1 billion in additional debt. We therefore expect that Koc will try to issue a new

dollar bond within the next few months to refinance the $750 million bond due in April 2020. Even if Koc is unable to

tap the Euromarket, we expect it to still meet the April 2020 debt maturity because it keeps 80% of its TRY10.2 billion

cash ($1.9 billion) in U.S.-dollar deposits (as of Dec. 31, 2018).

Outlook

The stable outlook on Koc primarily reflects our stable outlook on Turkey and our 'BB-' T&C assessment. We expect

that Koc will maintain its sound financial flexibility over the coming two years, including large cash balances and low

debt at the holding company, with an LTV ratio well below 20%. We also expect that its portfolio companies will

deliver resilient operating performance, despite the weak macroeconomic environment in Turkey.

Downside scenario

A further downgrade of Turkey or the imposition of capital controls would probably lead us to downgrade Koc. We

believe a negative rating action is unlikely to be triggered by other factors at this stage, because we don't foresee any

major changes in Koc's financial policy or its investment position. However, any sign of a less liquid Turkish capital

market that makes it more difficult or time consuming to dispose of assets could lead us to revise our assessment of

Koc's investment position. Pressure on the ratings could also build if Koc were unable to pass our sovereign stress test.

This could happen if its debt maturity profile were to shorten and, at the same time, Koc held materially less cash in

hard currencies. Nevertheless, we see this as unlikely.

Upside scenario

In our view, the ratings on Koc cannot be higher than our T&C assessment on Turkey. We could, therefore, upgrade

Koc if we raised our rating and T&C assessment on Turkey, or if Koc were to permanently transfer a meaningful

amount of cash to a country with a higher T&C assessment to service its debt. An upgrade would also hinge on our

expectation that Koc will continue to adhere to its prudent financial policy and not make any major changes to its

investment portfolio.

Our Base-Case Scenario


Koc Holding A.S.

Assumptions Key Metrics

• GDP contraction in Turkey of about 0.5% in 2019,

compared with growth of 3.2% in 2018 and 7.4% in

2017.

• Dividend, interest, and fee income of TRY3.5

billion-TRY4 billion ($0.95 billion-$1.05 billion) in

2019 and 2020.

• Operating expenses of about TRY500 million.

• Interest costs of TRY360 million-TRY420 million.

However, this may change depending on Koc's

potential bond issuance.

• Similar dividend payments as in 2018.

• No major acquisitions or disposals that would

materially change our view of Koc's leverage.

2018A 2019E 2020E

LTV (%)* (5.5) Less than 0 Less than 0

Cash flow adequacy (x) 5.0 4.0-5.0 4.0-5.0

*S&P Global Ratings adjusted. LTV--Loan to value.

A--Actual. E--Estimate.

Base-case projections

We forecast strong cash flow adequacy ratios, despite macroeconomic volatility. Dividends from Tupras increased by

TRY1 billion to about TRY1.3 billion in 2018. This was due to the full repayment of acquisition debt incurred to

acquire Tupras in 2017, and the completion of investments by the company. In turn, Koc's cash flow adequacy ratio

improved to 5.0x in 2018 from 3.2x in 2017. We expect the 2019 dividend inflow to be similar to the 2018 level,

resulting in cash flow adequacy ratios of 4.0x-5.0x.

The net cash position supports an LTV ratio below 0%. At year-end 2018, Koc's outstanding debt totaled TRY7.9

billion, compared with cash of around TRY10.2 billion. We believe the group will maintain its very conservative

financial policy following a long history of having net cash. Therefore, we expect that Koc's LTV ratio will remain well

below 20%, and note that it has headroom under this ratio.

Company Description

Koc has roots dating back to 1926 and has been listed on the Borsa Istanbul (Istanbul Stock Exchange) since 1986. The

holding company controls a large number of listed and unlisted companies operating in the energy (Tüpras, Aygaz,

Opet, and Entek), consumer durables (Arcelik A.S.; BB+/Negative/--), finance (Yapi ve Kredi Bankasi A.S.

B+/Stable/B), and automotive industries (Tofas and Ford Otosan joint ventures with Fiat Chrysler Automobiles NV

and Ford Motor Co.). Koc reported consolidated sales of TRY143 billion ($29.8 billion) in 2018.


Koc Holding A.S.

Chart 3

Business Risk: Fair

Our assessment of Koc's investment position reflects its diverse portfolio, liquid assets, and management's investment

discipline.

In our view, the rating on Koc is further supported by its investee companies, which export a significant part of their

production. This implies that dividends to Koc are, at least indirectly, protected from currency depreciation. Among its

investee companies, Ford Otosan, Tofas, and Arcelik derive around 80%, 80%, and 69% of their revenue from

international sales, respectively, while refinery group Tupras' sales are U.S.-dollar linked. We believe this diversity will

support Koc if the Turkish lira continues to depreciate against the U.S. dollar, and inflation pressure rises. In addition,

these entities are active in industries that we believe carry only moderate sensitivity to country risk. Typically, all Koc's

investee companies have low leverage.

That said, we note that the recent depreciation of the Turkish lira against the U.S. dollar has materially reduced Koc's

investment portfolio in dollar terms. We estimate the portfolio was worth about $7.8 billion as of Dec. 31, 2018

(TRY40.8 billion), at an exchange rate of TRY5.26/$1, despite moderate increases in domestic share prices in

second-half of 2018. This compares with a valuation of about $13 billion at year-end 2017. Moreover, Koc receives all

of its dividends in Turkey.

Approximately 85% of Koc's assets are listed directly or indirectly, and are actively traded on the Borsa Istanbul,

supporting the liquidity of the portfolio. Although some assets are indirectly listed, we don't differentiate them from

directly listed assets in our analysis, since the intermediate SPVs have no debt. We believe Koc can dispose of the

assets at any time, and has management control, meaning this does not affect liquidity. In addition, Koc exerts control


Koc Holding A.S.

over most of its assets, which facilitates strategic planning, financial policy, and access to dividends.

Koc's investments are diversified, ranging from financial institutions to auto manufacturing, retail, consumer durables,

and oil refining. However, the three largest assets--Tupras, Ford Otosan, and Yapi Kredi Bank--constitute about 60% of

the portfolio.

Chart 4


Koc Holding A.S.

Chart 5

Following the downgrade of Yapi--in which Koc has a 35.47% stake--to 'B+' (see "Six Turkish Financial Institutions

Downgraded On Heightened Credit Risks And Ongoing Depreciation Of The Turkish Lira", published Aug. 18, 2018,

on RatingsDirect), and in view of the effect of the lower sovereign rating on some of Koc's other investee companies,

we assess the weighted credit quality of Koc's investment portfolio to be in the 'B' category. Of the investee companies,

Arcelik has the highest rating, 'BB+'.

In relation to peers, Koc has more headroom under its modest financial risk profile, given the net cash position. We

also view Koc's financial policy as very prudent. However, in relation to its peers, Koc is more exposed to unstable

country risk, given most of its investments are in Turkey. Although Koc was able to weather instability in Turkey in

2018, we consider that the performance of investee companies may be affected in the future, which has the potential to

decrease the company's cash flow, among other metrics. Furthermore, we believe Koc's operations are more exposed

to weak institutions, high inflation rates, and forecast GDP contractions in 2019 than peers, which weighs on our

overall assessment.

Peer comparisonTable 1

Koc Holding A.S.--Peer Comparison

Koc Holding A.S. Wendel JAB Holding Company S.a r.l. EXOR N.V.

Issuer credit

ratings

BB-/Stable/B BBB/Stable/A-2 A-/Negative/-- BBB+/Stable/A-2


Koc Holding A.S.

Table 1

Koc Holding A.S.--Peer Comparison (cont.)

Koc Holding A.S. Wendel JAB Holding Company S.a r.l. EXOR N.V.

Business profile Fair Fair Satisfactory Satisfactory

Portfolio size

(adjusted; mil. $)

8,502 8,059 26,077 24,828

Weight of listed

assets (%)

89.0 48.7 62.3 66.5

Largest asset (% of

portfolio)

29.9 42.7 51.5 30.0

Three largest

assets (% of

potfolio)

61.2 74.2 79.1 78.8

Three largest

assets

Tupras, Ford Otosan,

and Yapi Kredi Bank

Bureau Veritas, Stahl,

and IHS

Kuerig Dr Pepper - ACORN, Jacobs

Douwe Egberts - ACORN, and Coty -

JAB Cosmetics

FCA Group, PartnerRe,

and Ferrari

Cash flow leverage Modest Modest Modest Modest

Loan to value

ceiling (%)

20 20 20 20

Loan to value (%) (2.5) 6.6 20.1 14.4

Financial Risk: Modest

Our view of Koc's financial risk reflects the net cash position at the holding level. This results in a very robust ratio

against the appraised value of the company's investment portfolio of TRY40.8 billion as of Dec. 31, 2018. We believe

the group has a very conservative financial policy, given its long history of being in a net cash position. We therefore

expect its LTV ratio to remain well below 20%, which provides ample headroom.

We base our analysis on Koc's stand-alone financial risk profile, meaning the parent company's group accounts, rather

than the consolidated accounts.

Financial summaryTable 2

Koc Holding A.S.--Financial Summary

(Mil. TRY) 2018 2017 2016 2015 2014

Portfolio as adjusted 38,555 48,897 37,167 30,085 31,170

Net debt as adjusted (2,244) (2,165) (1,847) (1,441) (1,075)

Loan to value (%) N.M. N.M. N.M. N.M. N.M.

Dividend & fees income 3,765 2,019 1,850 1,173 939

Operating charges and tax expenses 436.3 384.6 439.1 359.0 277.0

Interest expenses 324.0 238.0 136.0 81.0 58.4

Cash flow cover (x) 5.0 3.2 3.2 2.7 2.8

Dividend paid 1,029 935 849 585 490

N.M.--Not meaningful (net cash position).


Koc Holding A.S.

Liquidity

We assess Koc's liquidity as strong and anticipate that sources of funds will exceed uses by 5x-6x, since the company

has no short-term debt and a large cash balance. The first major debt maturity is in 2020 when the $750 million bond is

due. Moreover, Koc's liquidity position remains strong in our stress test. We believe Koc has solid relationships with

local banks because it is one of the largest investment holding companies in Turkey and has a large portfolio of listed

assets on the stock exchange. We believe Koc has very prudent financial risk management, including a process that

monitors foreign exchange exposure. It also takes measures to lower the effect of currency depreciations by taking out

loans in currencies that correspond with its revenues. We believe Koc is likely able to service its debt, even without

dividend income or asset disposals, due to its strong cash position and long-dated debt maturity profile.

Koc has two bonds outstanding (each $750 million), which are due in 2020 and 2023. We, therefore, consider that Koc

would likely be able to absorb any high-impact, low-probability events in the near term without additional financing.

The company's ratio of sources to uses would qualify it for a higher liquidity assessment. However, we believe that Koc

keeps most of its cash at lower-rated domestic banks and its standing in international credit markets would likely be

weakened by turmoil in Turkey.

Principal Liquidity Sources Principal Liquidity Uses

(As of Dec. 31, 2018)

• Cash and cash equivalents of $1.9 billion (TRY10.2

billion) mainly held at various Turkish banks, with

about 80% in U.S. dollars, but no undrawn,

committed credit facilities.

• Dividends, interest, and management fees from

portfolio companies of TRY3.5 billion-TRY4.0

billion.

• No short-term debt.

• Interest and operating expenses of about TRY1.0

billion.

• Dividends of about TRY1.0 billion per year.

Debt maturities

• $750 million bond maturing in 2020.

• $750 million bond maturing in 2023.

Rating Above The Sovereign

We assess that our rating on Koc could exceed the sovereign rating by two notches, but cap the rating at the level of

our T&C assessment because the majority of Koc's cash is located in Turkey. This reflects our view of the likelihood

that the government would restrict access to foreign exchange liquidity for Turkish companies.


Koc Holding A.S.

We rate Koc above the 'B+' foreign currency rating on Turkey because it passes our sovereign default stress test, under

which we assume that the value of investee companies declines by about 70%, Yapi Kredi Bank defaults, and Koc's

cash is 10% lower. Under this scenario, we assume that Koc has no access to capital markets and the Turkish lira

depreciates by 50% against the U.S. dollar.

Issue Ratings - Recovery Analysis

Key analytical factors

• We rate Koc's unsecured facilities (a $750 million bond due in 2020 and $750 million bond due in 2023) at 'BB-' with

a '3' recovery rating. We forecast meaningful recovery (rounded estimate 65%) in the event of a default.

• We cap the recovery rating at '3' because the bonds are unsecured. We assume, based on empirical analysis, that

the size and ranking of debt and non-debt claims will change before a hypothetical default.

• The recovery rating on the facilities is supported by limited prior-ranking liabilities but constrained by the unsecured

nature of the bonds.

• We value Koc as a going concern, given that its major portfolio companies have leading positions in the Turkish

market and it has a well-diversified portfolio across five different industries.

• In our hypothetical default scenario, we assume weak growth and exchange rate volatility lead to fiscal deterioration

or inflationary pressures in Turkey. This political turmoil, along with domestic tensions, would depress the share

price and operating results of Koc's portfolio companies over the medium term, leading to a default.

• We have valued Koc using a discrete-asset valuation approach, where we believe the value of the unstressed

company would be equal to the value of its assets when the net present value of the investment holding company is

positive. We have applied a 80% realization rate considering the company's liquidity.

Simulated default assumptions

• Year of default: 2023

• Jurisdiction: Turkey

Simplified waterfall

• Gross recovery value: $1.80 billion

• Net recovery value for waterfall after admin. expenses (5%): $1.71 billion

• Value available for unsecured claims: $1.71 billion

• Unsecured claims: $2.31 billion

• Recovery range: 50%-70% (rounded estimate: 65%)

Ratings Score Snapshot

Issuer Credit Rating: BB-/Stable/B

Business risk: Fair


Koc Holding A.S.

• Country risk: High

• Industry risk: Intermediate

• Investment position: Fair

Financial risk: Modest

• Leverage/cash flow: Modest

• Funding and capital structure: Neutral

Anchor: bbb-

Modifiers

• Liquidity: Strong (no impact)

• Management and governance: Strong (no impact)

• Comparable ratings analysis: Neutral (no impact)

• Stand-alone credit profile: bbb-

Sovereign foreign currency rating: B+

Sovereign transfer and convertibility: BB-

Rating above the sovereign methodology: (Capped at the T&C)

Related Criteria

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• Criteria - Corporates - General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016

• Criteria - Corporates - Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016

• Criteria | Corporates | Industrials: Methodology: Investment Holding Companies, Dec. 1, 2015

• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate

Issuers, Dec. 16, 2014

• General Criteria: Group Rating Methodology, Nov. 19, 2013

• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013

• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And

Assumptions, Nov. 19, 2013

• General Criteria: Methodology: Industry Risk, Nov. 19, 2013


Koc Holding A.S.

• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,

Nov. 13, 2012

• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Ratings Detail (As Of March 1, 2019)

Koc Holding A.S.

Issuer Credit Rating BB-/Stable/B

Senior Unsecured BB-

Issuer Credit Ratings History

29-Aug-2018 BB-/Stable/B

13-Jul-2018 BB+/Stable/B

02-Feb-2017 BBB-/Negative/A-3

15-Nov-2016 BBB-/Stable/A-3

22-Jul-2016 BBB-/Negative/A-3

24-May-2016 BBB/Stable/A-2

02-Mar-2016 BBB-/Positive/A-3

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

Additional Contact:

Industrial Ratings Europe; [email protected]


Koc Holding A.S.


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