October 9, 2017 / 2:58 PM / 9 months ago

Fitch Affirms Yasar at 'B'; Outlook Stable

(The following statement was released by the rating agency) LONDON/MOSCOW/MILAN, October 09 (Fitch) Fitch Ratings has affirmed Turkish food group Yasar Holding A.S.'s (Yasar) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'B' and affirmed its National Long-Term rating at 'BBB(tur)'. The Outlooks are Stable. Fitch has also affirmed the USD250 million senior unsecured notes due 2020 at 'B' with Recovery Rating 'RR4'. The rating affirmation incorporates Fitch's expectations that over 2018-2020 continuing growth funds from operations (FFO), stabilisation of working-capital outflows and lower capex needs will bring Yasar's leverage down to levels more commensurate with its current rating. The improving performance of the Turkish economy and the recent stabilisation of the currency should sustain internal demand and benefit Yasar's profits from the second half of 2017. Yasar remains vulnerable to material falls in the Turkish lira but has demonstrated its ability to cope effectively with Turkey's volatile economy, drawing on its strength as an established player in the growing Turkish food and beverages and coatings markets. KEY RATING DRIVERS Trading Improving in 2H17: Yasar's revenues and profit margin suffered from an increase in the prices of raw materials over 2H16 and 1H17, during a difficult consumer environment linked to political instability and a weakening of the Turkish Lira. Yasar did not manage to pass through the impact of increased costs to customers. This resulted in particular in considerably lower profitability in the coatings business. However, Q317 results are encouraging and point to a recovery of Yasar's operating performance. Limited Free Cash Flow: We project that Yasar will continue to generate negative or modest FCF over 2017-2020. In 2017 we expect some improvement in free cash flow (FCF) to minus TRY65 million from minus TRY229 million in 2016, mostly thanks to the normalisation of its working-capital movements, while capex should stay at the high level of TRY180 million. The significant FCF outflow in 2016 was mostly related to increased demands in working capital as the company stopped using factoring for its receivables. Yasar has conducted major investments in 2016 and management intends now to prioritise deleveraging. Therefore, we expect reduced capex from 2018 and forecast FCF to turn positive from 2019, although at a level of less than 1% of revenue. Gradual Recovery From Leverage Peak: We project net FFO adjusted leverage will stay at a high level of 5.8x at end-2017 (2016: 5.7x), despite the recent stabilisation of the dollar/lira rate and our expectation of its moderate adverse impact on debt in 2017. We then project FFO adjusted net leverage will fall below 5.5x from 2018 thanks to FCF generation. High Foreign-Currency Risk: Yasar is vulnerable to the movements of the Turkish Lira against the US Dollar as a result of its high proportion of hard currency debt (around 60% at end-June 2017). In the short term we take comfort from the stabilisation of the exchange rate over 2017 and from the company's proven ability to pass through commodity price increases to its end-customers, although with some time lags of up to six to 12 months. For the longer term, we estimate that Fitch's expectation of further lira depreciation of around 5% annually over 2018-19 should not result in a material increase in leverageover our four-year rating-case horizon. Healthy Food and Beverage Prospects: Yasar's leading market position in several food categories in a fragmented and stable market continues to underpin its ratings. Fitch expects Yasar's revenue in its food and beverage division to grow at around 10% annually over 2017-20 driven both by price/mix and volumes growth. Yasar's position in the industry as one of few producers able to offer products with strong hygiene standards, its brand recognition and good innovation efforts should continue to benefit its performance. Ongoing market trends of urbanisation, consumers moving to modern trade and a shift towards packaged products are also beneficial in the long term for the company. Resilience Thanks to Diversification: Yasar's diversified operations in food and beverages and coatings provide some protection from volatility in raw material prices from one division to the other. Historically, meat, dairy, animal feed, fish, coatings, and tissues have not followed the same price and demand cycles. Fitch believes that Yasar tends normally to absorb cost increases in the short term. However, given its important market shares and established relations with its distributors, as well as the good recognition of its brands, we believe it is able to pass them on fully, although with some time lags. DERIVATION SUMMARY Similar to its closest peers in the food and beverage sector, Premier Foods (B/Negative), Labeyrie Fine Foods SAS (B-/Withdrawn in August 2017) and PSJC Beluga (B+/Stable), Yasar enjoys solid market shares and holds a portfolio of leading and recognised brands in its market. Yasar benefits from higher product diversification compared to these peers. This is contrasted by a large portion of hard currency debt (around 60% of debt at end-June 2017), which also makes the company more vulnerable to any macroeconomic instability in its home country. Another point of weakness for Yasar is its historically negative FCF, while Premier Foods and Labeyrie have both generated positive FCF over recent years. The IDRs of all these companies also reflects broadly high and at times volatile leverage, with FFO adjusted net leverage on average in the 4.5x-6x range. The only exception is Beluga, which has much lower leverage at around 3x. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - revenue growth remaining in high single digits over 2017-2020; - group EBITDA margin of around 10% over 2017-2020; - capex of 4.6% of revenue in 2017, 3.8% in 2018, 3% afterwards; - negative FCF over 2017-18, turning to around 1.0% FCF margin afterwards; - USD/TRY at 3.5x, 3.65x and 3.85 at year ends of 2017, 2018 and 2019 respectively in line with Fitch's house view. - liquidity to remain adequate. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO adjusted net leverage consistently below 4.5x - FFO fixed charge above 2.5x - EBITDA margin remaining at or above 11% with improved pricing power - Neutral to positive FCF together with maintenance of longer-dated debt maturity profile mitigating refinancing risks Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Operating shortfall, such as contracting revenue, further constraining cash flow and/or liquidity - FFO adjusted net leverage above 5.5x (2016:5.7x) on a sustained basis - FFO fixed charge coverage below 2.0x (2016: 2.3x) on a sustained basis - EBITDA margin falling below 9.5% (2016: 10.8%) for more than two financial years - Sharp currency depreciation or economic downturn in Turkey affecting Yasar's operations LIQUIDITY Sufficient Liquidity: Liquidity was supported by unrestricted cash (as defined by Fitch) of TRY5 million at end-2016, approximately USD350 million in undrawn uncommitted (as typical in Turkey) bank lines, as well as strong relationships with both local and international banks. This is sufficient to cover Yasar's near term debt maturities of TRY343 million in 2017. KEY RECOVERY RATING ASSUMPTIONS The recovery analysis assumes that Yasar would be considered a going concern in bankruptcy and that the company would be reorganised rather than liquidated. We have assumed a 10% administrative claim. Going-Concern Approach: Yasar's going concern EBITDA is based on December 2016 LTM EBITDA. The going-concern EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the valuation of the company. The going-concern EBITDA is 20% below December 2016 LTM EBITDA to reflect the company's historical swings in operating margins and exposure to volatility in the lira. The EV/EBITDA multiple applied is 4.8x, reflecting the strong (although not dominant) market shares within specific product categories and the long-term growth potential of Turkey. The applied distressed multiple reflects an average (weighted by each segment's profits) between the food business (5x), coatings (4x), and tissues and others (3x). Fitch applies a waterfall analysis to the post-default enterprise value (EV) based on the relative claims of the debt in the capital structure. Our debt waterfall assumptions take into account debt at 31 December 2016. All of Yasar's debt is unsecured. The waterfall results in a 'RR2' Recovery Rating for senior unsecured debt. However, the recovery rating is capped at 'RR4' due to the Turkish jurisdiction. Therefore, the dollar senior unsecured notes due 2020 are rated 'B'/'RR4'/50%. Contact: Principal Analyst Marialuisa Macchia Associate Director +39 02 8790 87213 Supervisory Analyst Tatiana Bobrovskaya Director +7 495 956 5569 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Committee Chairperson Giulio Lombardi Senior Director +39 02 8790 87213 Summary of Financial Statement Adjustments Restricted Cash: Fitch has assumed TRY110 million in 2016 (2015:TRY90 million) of restricted/not readily available cash to reflect lower cash balances during the year compared with the year-end. This is used for working-capital demands (averaged during the year). Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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