Turkey-based investment holding company Dogus Holding still faces very high short-term debt maturities

  • Although Turkey-based Dogus Holding A.S. recently refinanced €2.4 billion of debt, it still has €103 million of debt maturing in the next 12 months.
  • Because Dogus only expects to receive about €40 million in dividends and interest a year, it will depend on achieving timely asset sales to pay its debt and interest through 2020.
  • We are therefore lowering our long-term rating on Dogus to 'CCC+' from 'B-' and our Turkish national scale rating to 'TrB+' from 'TrBB-'. Subsequently, we withdrew our global scale rating, at the issuer's request.
  • The negative outlook indicates that we could lower the rating by one or two notches if Dogus cannot execute all of its planned asset sales in 2019 and so repay the obligations due in 2020.
Despite recently refinancing about €1 billion of debt via secured short-term bank lines, Turkey-based investment holding company Dogus Holding still faces very high short-term debt maturities. It also exhibits weak liquidity and the capital structure may be unsustainable over the medium term, in our view. Management estimates that the companies Dogus has invested in will provide dividends of about €40 million a year to their parent. This will not be enough to cover interest payments of about €50 million-€60 million in 2019 and €85 million-€100 million in 2020, and operating expenses of about €60 million annually.
We consider Dogus' average debt maturity profile to be short, at less than two years. Dogus has €103 million in debt due in the first quarter 2020, with further significant debt maturities due across the next two years.
Management expects to pay its maturing debt by selling assets, mostly hotels located outside Turkey. Although it has successfully executed a number of disposals to date--including the Hilton Athens and Capri Palace--the company is exposed to delays and pricing risk. It continues to discuss further assets sales.
In our view, positive cash flows from the sale of the remaining assets are not certain, and will be very limited. We expect the average credit profile of the investment portfolio to remain low in the 'B' rating category.
Dogus provided adequate compensation for the recent €1 billion refinancing by offering security over its real estate operations and part of its tourism division. Given current market conditions in Turkey, the timing of the refinancing was not propitious. The refinancing increased nominal interest costs and extended principal and interest payments to six years.
Dogus used real estate assets of €3.6 billion as security for the refinancing, and will need to add further assets if the asset value goes below 115% of the loan. In our view, this compensates the bank for the proposed extension of the loan maturity.
We see a risk that Dogus will dispose of most of its international assets, which would weaken its business risk profile. Dogus has proposed selling a number of assets from its hotel portfolio. These include Istinye Park, the Grand Hyatt Hotel, Dogus Maslak Center, and N11.
Of necessity, Dogus' strategy will focus on asset sales in 2019 and 2020, as it will rely on the proceeds. The timing and value of sale proceeds are subject to market risk. Its strategic alternatives may also be limited. Some of the assets in Dogus' portfolio--for example, the media and tourism businesses and construction--have been underperforming for some time, in our opinion. We now assess Dogus' management and governance as weak.
Turkey's economy went into recession at the end of 2018, as confirmed by the Turkish Statistical Institute's March 11 national accounts data release. In seasonally- and calendar-adjusted terms, real GDP shrank 2.4% in the fourth quarter, following a 1.6% contraction in the third. We still consider that Turkey is going through a stagflationary adjustment, following last August's currency crisis.
We see domestic demand as the key weakness going forward, as investments continue to contract amid tighter international financing conditions, and the foreign-exchange debt burden rises due to the weaker lira and elevated lira interest rates. We therefore expect consumption to shrink in real terms during 2019, which will constrain valuations and cash flow generation at domestically focused manufacturers and retailers such as Dogus Otomotive. That said, tax incentives could somewhat support Dogus Otomative and the weak lira should also be beneficial for Dogus' tourism revenues.
We estimate Dogus' loan-to-value (LTV) ratio, a measure of leverage for investment holding companies, at above 45%. However, we have not received an updated validation report over the past quarter. Our LTV ratio is based on our estimate of total holding company debt at $1 billion. Given the current volatile macroeconomic situation in Turkey, we see a clear risk that asset prices could have fallen. Therefore, we applied a haircut to our estimated valuations for assets within Turkey. No haircut was applied to assets outside Turkey.
The refinancing process introduced a cross-guarantee mechanism that implies that all of the €3.2 billion in group debt is now guaranteed by the holding company. We consider guarantees to be atypical for holding companies. This mechanism increases Dogus Holding's exposure to its investee companies.
We view the financial risk profile as highly leveraged, given the high LTV threshold and limited cash flow adequacy. Dividend income is minimal, at €40 million. The key risks are the current short-term maturity profile and the cross-guarantees offered by the holding company on the refinanced maturities of its investee companies. Such guarantees are unusual among investment holding companies and further increases the credit risk to investees.
Although larger in U.S. dollar terms, Dogus' portfolio is weaker than those of rated peers, such as JSC Georgia Capital. Dogus' portfolio has few listed assets--we estimate only about 10% of the total portfolio is listed--and high asset concentration.
At the time of the withdrawal, the negative outlook indicated our view that Dogus could find it difficult to execute all of its planned asset sales. It depends on these sales to repay a significant amount of its short-term debt before it matures.
If Dogus could not carry through asset sales before year-end 2019, so that it could meet upcoming debt maturity and interest payments in 2020, we would likely have lowered the rating by one or two notches.
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