October 13, 2016 / 1:07 PM / a year ago

Fitch Rates Turkcell Finansman A.S. 'BB+'; Outlook Negative

(The following statement was released by the rating agency) LONDON, October 13 (Fitch) Fitch Ratings has assigned Turkcell Finansman A.S (TFS) 'BB+' Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) and 'AA(tur)' National Long-Term Rating. The Outlook on the IDRs is Negative while the Outlook on the National Rating is Stable. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS TFS was created as a separate entity out of the financing department of Turkcell (BBB-/Negative) in 4Q15. There have been no major changes in TFS's operations relative to those previously undertaken by Turkcell's financing department. TFS's ratings are based on potential support from the parent. Fitch believes Turkcell would have a strong propensity to support TFS given (i) its 100% stake and full operational control; (ii) the close integration of the subsidiary with its parent; and (iii) TFS's role in customer base acquisition for Turkcell. The one-notch difference between the ratings of Turkcell and TFS reflects the subsidiary's focus on a different segment (finance rather than telecom services) and its short operating history. These factors in Fitch's view moderately reduce the reputational risk for the parent or potential negative impact on other parts of Turkcell group in case of TFS's default. TFS provides Turkcell's retail customers with loans for the purchase of mobile devices. TFS's core product is small ticket unsecured loans with 24-36 month tenors. TFS plans to extend its product range but still focus on Turkcell's clientele for the foreseeable future. However, in the longer term Turkcell is considering developing TFS into a financial company providing loans also to non-Turkcell customers. TFS accounted for a small 4% of Turkcell's assets as of end-1H16, but in view of rapid growth (driven by booking of new business on TFS's balance sheet) and customer base potential Fitch expects TFS to exceed 10% of group assets in 2017. TFS sells its products directly via Turkcell branches. The company has countrywide coverage in Turkey with 3,300 sale-points. The business model, with a heavy reliance on digital integration with shops, allows TFS to limit fixed costs. TFS's internal debt/equity (leverage) limit is 10x (significantly more conservative than the regulator's 30x). At end-1H16 leverage was less than 1x, but Fitch expects it to increase to 5x by end-2017 as portfolio growth will far outpace capital generation. TFS expects to upstream dividends, but no concrete plans have been made yet. TFS plans to rely on loans from banks as a core funding source for 2016-2018. TFS's average asset duration is 11-12 months and therefore can be comfortably matched by bank funding. TFS does not plan to attract any parent funding due to tax implications. Given TFS's limited track record, it is not possible to make forecasts in respect to the company's performance. Currently TFS's loan pricing and net interest margin are in line with consumer loans of commercial banks. However, Fitch believes that Turkcell's management might tolerate moderate profitability at TFS given the customer acquisition benefits that it brings for the group. Fitch understands from management that default rates on customer loans issued by Turkcell's finance department have historically been moderate. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SUPPORT RATING TFS's ratings are likely to remain linked to Turkcell's ratings, and the Negative Outlook mirrors that of the parent, which in turn is driven by the Negative Outlook on the Turkish sovereign. The Long-Term IDR of Turkcell is at the Turkish sovereign level, and a negative action on the Turkish sovereign rating would likely be mirrored in Turkcell and TFS's ratings respectively. An equalisation of TFS's ratings with those of Turkcell is unlikely unless TFS's role in the Turkcell group strengthens and achieves a longer track record of operations and of support from Turkcell. A weakening of Turkcell's propensity or ability to support TFS may result in a widening of the notching from the parent. The rating actions are as follows: Long Term Issuer Local and Foreign Currency IDRs assigned at 'BB+', Outlook Negative Short Term Local and Foreign Currency IDRs assigned at 'B' National Long Term Rating assigned at 'AA(tur)', Outlook Stable Support Rating assigned at '3' Contact: Primary Analyst Aslan Tavitov Director +44 20 3530 1788 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Huseyin Sevinc Analyst +44 203 530 1027 Committee Chairperson James Watson Managing Director +7 495 956 9901 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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