Bangkok--24 May--S&P Global Ratings
STOCKHOLM (S&P Global Ratings) May 24, 2016--S&P Global Ratings today raisedits long- and short-term corporate credit ratings on Koc Holding A.S. to'BBB/A-2' from 'BBB-/A-3'. The outlook is stable.
At the same time, we raised our long-term rating on Koc's unsecured debt to'BBB' from 'BBB-'.
The upgrade follows the outlook revision on Turkey (see "Republic of TurkeyOutlook Revised To Stable; 'BB+/B' Ratings Affirmed," published May 6, 2016,on RatingsDirect). It is also supported by Koc's solid operating results inrecent quarters and conservative financial profile. Following our outlook
revision on the sovereign, we don't expect the operating environment for Kocto weaken, to affect Koc's investees' operating performance or its investees'ability to pay dividends to Koc.
Our long-term rating on Koc is two notches higher than the sovereign foreigncurrency rating on Turkey because the company has passed our hypotheticalsovereign default stress test. We believe Koc's business and financial riskprofiles would allow the holding company to survive in the event of a
sovereign default. We consider Koc a domestic holding company and, as such, weregard its sensitivity to country risk as high. In our stress test, we haveassumed, among other factors, a price fall of listed assets to 30% of carryingvalue as of Dec. 31, 2015, and a 10% haircut on cash. The two-notch differencecompared with the sovereign rating is predominantly thanks to Koc's strong netcash position, which we expect will persist over the cycle. We view positivelythat the company's cash holding is dominated by use of hard currency. As ofMarch 31, 2016, 68% of total cash was in U.S. dollars, while 32% was inTurkish lira. On the same date, Koc had a net cash position of $778 million.That said, income streams in the form of dividends from investments arepredominantly generated in Turkish lira. We have assumed very limited dividendincome from all holdings, including the refinery Tupras, under ourhypothetical sovereign default scenario.
The stable outlook on Koc primarily reflects our assumption that the groupwill maintain its sound financial flexibility over the coming twoyears--including large cash balances and limited tolerance for total debt atthe holding company--and that the group's portfolio companies will deliver a
resilient operating performance, despite large exposure to Turkey. The stableoutlook also assumes that KOC will continue to pass our hypothetical sovereigndefault stress test. We also expect that Koc's net loan-to-value (LTV) ratio,will not exceed about 20%. LTV has been negative so far, given the holdingcompany's net cash position.
Further rating upside is unlikely. It would require the raising of oursovereign rating on Turkey, since our rating on Koc cannot be more than twonotches above the sovereign rating, in our view. It would also require animproved investment position, for example, through meaningful portfoliodiversification.
A downgrade of the sovereign would likely result in a negative rating actionon Koc, because of the constraints mentioned above. Downward pressure couldalso result if Koc was unable to pass our hypothetical sovereign defaultstress test. We might also consider a negative rating action if Koc's LTV
ratio increased beyond 20%, and if management was unable or unwilling to takemeasures to restore the capital structure in the near term. This could happenas a result of turbulent equity markets depressing asset values, or sizableadditional investments.