Turkiye Petrol Rafinerileri A.S. : Fitch Affirms Tupras at 'BBB-'; Stable Outlook

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Fitch Affirms Tupras at 'BBB-'; Outlook Stable Ratings Endorsement Policy

15 Jan 2014 8:52 Nv1 (EST)

Fitch Ratings-Warsaw/London/Moscow-15 January2014: Fitch Ratings has affirmed Turkiye Petrol Rafinerileri AS.'s (Tupras) Long-term local and foreign currency lssuer Default Ratings (IDRs) at '888-' and its National Long-term rating at 'AA+(tur)'. Tupras's USD700m notes due in 2018 have been affirmed at '888-'. The
Outlooks are Stable.
The Stable Outlook reflects ourforecast that in 2015 Tupras's credit metrics will return to levels commensurate with the '888-' ratings, ie, funds from operations (FFO) net leverage of below 2.5xon a sustained basis. This is despite tight refining margins that should persist until at least 2015 and the adverse impact ofthe recent sharper-than-expected depreciation ofthe Turkish lira. We expect Tupras's credit metrics to have been stretched in 2013 and to remain so in 2014, ie, FFO adjusted net leverage of between 2.5xand 3x, as it completes the Residuum Upgrading Project (RUP) atthe lzmit refinery, pays generous dividends and implements high capexuntil2015, leaving limited rating headroom.
KEY RATING DRIVERS Turkish Downstream Leader
Tupras's ratings are driven byits dominantdownstream and marketing position in Turkey, where the company
is presentlythe onlyoil refiner. lt owns and operates ali four existing oil refineries in Turkey (888-/Stable) and has a 59% share ofTurkish oil products (2012 data). With its total refining capacityof28.1 million metrictons (MT) at end-2012, the companyis one ofthe largest downstream companies in Europe.ln 2013, Tupras produced nearly 22.5MT of oil products, a 2.9% increase yoy, which are mainlysupplied to the domestic market (80% ofproduction wlumes).
Tupras operates in the domestic fuel distribution market through its 40%-owned fuel distributor Opet Petrolculuk AS. lts strong market position supports its financial profila. We expect that following the commissioning ofthe RUP in November 2014, Tupras will improve its E81TDAmargins to about4.5%, or levels reported in 2007-2011, from the 2.5%-3% forecast for 2013-2014. Refining is the main profit contributor for Tupras (88% of 2012 operating protit), with the remainder generated bythe fuel distribution segment.
Foreign Exchange Risks until 2015
Tupras's RUP project loans are denom inated in US dollars. Acontinued depreciation ofTRYagainst the dollar could substantiallyworsen Tupras's credit ratios and may lead to a breach of loan covenants, in particular in
2014, when headroom underthe covenants will be lowest. The 23% drop in the Turkish lira in 2013 to nearly
2.18 TRYfor 1 USO highlights this risk. Fitch's updated sovereign forecastforTRYis 2.2 TRYfor 1 USO in 2014 on average and 2.1 TRYfor 1 USD in 2015 on average. We believe thatTupras's currencyriskshould diminish when the RUP becomes operational in 2015, ie, itstarts generating US dollar-linked revenues and E81TDA
Turkish Market Offers Growth Potential
Fitch sovereign analysts forecast Turkey's real GDP growth of 3.2% in 2014 and 3.8% in 2015, which we believe should translate into higher demand for oil products due to increasing domestic vehicle fleet and air travel.
Debt-Funded Capex
In 2008 Tupras began implementing the RUP to increase lzmit refinery's capacityto produce 3.5MT of light and
medium products thatare compliantwith Euro 5 standards. Atend-3013, Tupras had spent USD2bn outof estimated USD2.7bn on the RUP, which was mainlyfunded bydeband reported 85% overall project completion for the RUP. Afterthe project completion, e>pected lo be in November 2014, the lzmit refinerywill increase the Nelson Complexity lndex(a measure of refineries' technological sophistication) lo 14.5 from 7.78 currenUy(based on design capacity).Tupras e>pects thatthe RUPwill generate an additional USD550m per year in EBITDAat oil prices of USD85/bbl due lo an improved produci mix. We estimate Tupras's latal capexin
2013-2016 atovarTRY5.3bn, mostofwhich is dabt-fundad.
Profit Margins and Working Capitai Volatility
Tupras's refining margins have been underconsiderable pressure in 2012-2013, declining lo about USD2.6/bbl in 9M13, tram USD5.3/bbl in 2011.To mitigate the impaci of declining margins, Tupras has extensivelyused vendorfinancing byagreeing more fawurable paymentterms with suppliers, in particular Iran, and utilising accounts receiwble factoring on a non-recourse basis with the factoring companies ofTurikish banks, thus decreasing its overall working capitai needs. In our rating case, we e>pect that Tupras's refining margins will remain under pressure until alleast 2015 when the RUP becomes fullyoperational. We aIso
e>pect Tupras lo continue optimising ils woriking capitai buiuntil ilcan demonstrate consistentoperational
profitability,!ha ratings would saa li!Ua upsida.
Replacing lranian Oil is no Longer a Priority
In November2013, the US State Departmentextended six-month Iran sanctions waivers lo Turkey, among
other countries, in eJCChange fortheir reduced purchases of lranian crude oil eariierthis year. Under the Genew accord signed that month, the U.S. and five other countries agreed lo suspend efforts lo further reduce lran's crude oil sales, allowing consuming countries lo continue buying their 'current average amounts of crude oil'. In
9M13, Iraq bacarne Tupras's principal cruda oil source bysupplying naariy28% ofits cruda oil, whilalran supplied 25% ofTupras's total crude, down from 45% in 2011. Tupras's fawurable location and coastal refineries give ilaccess lo a wriety of crude sources.
lmpaciof Receiwbles Factoring
Tupras's !rade receiwbles subject lo factoring were TRY1.7bn alend-3013, up !rom TRY1.5bn alend-2012. lf the factoring amounts were included into Tupras's indebtedness, ils FFO adjusted neleverage would have reached 2xin 2012 and about4xin 2013-2014 before improving lo under2.5xin 2015. Tupras has factoring limits mainlywith Yapi Kredi Factoring, a subsidiaryofYapi ve Kredi Bankasi AS.(BBB/Stable), a related party
50/50 owned byKoc Holding AS, Tupras's controlling shareholder, and UniCreditS.p.A (BBB+/Negative), as
wall as with Garanti Factoring, a subsidiaryofTurkiya Garanti Bankasi AS. (BBB/Stabla) and ls Factoring, a subsidiaryofTurkiye ls Bankasi AS. (BBB/Stable).
Large Dividends lo Continue
Tupras's ratings are constrained byits generous dividend policy, which is unlikelyto change overthe rating horizon, despile negative free cash flow. Tupras pays aut around 90% ofits nelprofit or 100% ofdistributable incarne, orthe maximum allowed underthe Turkish law. Fitch e>pecls Tupras lo continue ils generous dividand policyat laast until2014 bacausa its 51%-sharaholdar Enai Yatirimlari AS.naads lo rapaytha remaining USD331m (end-2013 data) of acquisition-related debt in 2014-2015.
RATING SENSITMTIES
Negative: Future developments that could lead lo negative rating action include:
-Failura lo improva credi!ratios lo lavals commensurate with !ha 'BBB-' ratings in 2015, ia, FFO-adjusted nel leverage of below 2.5x and FFO fixed charge covar well above 5x
-Substantial delays in the RUP completion, even though we see this risk as less likelygiven thatthe RUP was
85% complete atend-2013
-Substantiallyhigher capexdue lo an e>pansion into upstream in 2014, leading lo slower-than- e>pected deleveraging
-Negative rating action on the sovereign and l or substantial further devaluation ofTurikish lira beyond Fitch's
e>pectations.
A positive rating action is currenUyunlikelygiven the company's constrained business profile as a pure downstraam and marikating companyand !ha limited lavaraga haadroom a!lha current ratings.

LIOUIDITY AND DEBT STRUCTURE

Sufliciant Liquidity

Tupras's end-3013 cash balances ofTRY3.8bn more than cowred TRY2bn in short-term debl. Tupras mainlains significant amounls of deposils with related Yapi Kredi- TRY1.9bn alend-3013. Nea y97% of Tupras's deposits were denominated in USD at end-3013.

USD-Denominated Borrowings

Tupras's debtconsisls mainlyofthree 2011 loans to finance the RUP and USD700m 4.125% coupon bonds due Nowmbar 2018 (36% oftotal dabt at and-3013). Tha USD1.1bn loan insurad by CESCE and tha USD624m loan insured bySACE haw 12 years to maturitywith no principal and interest repaymenls in the

grace period of2012-2016. The USD359m loan has sewn years to maturitywith no principal repaymenls in the

first four yaars. In total, Tupras has drawn USD1.59bn at and-3013 to financaloan insuranca paymants and capex (neay USD1.1bn at end-2012). RUP loans accounted for 46% of tolal debt alend-3013.

Atend-0313 Tupras had unused uncommitted credilfacilities ofUSD8.7bn (excluding lines related to factoring).

Contaci: Principal Analysl Jakub Zasada, ACCA Associate Director

[phone]

Supervisory Analyst Maxim Edelson Director

[phone]

Fitch Ratings Moscow

Valowya Street, 26

Moscew

Committee Chairperson

Alex Grifliths

Senior Director

[phone]

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Applicable criteria, 'Corporale Rating Methodology: lncluding Short-Term Ratings and Parent and Subsidiary

Linkaga', dated 5 August 2013, ara awilabla atwww.fitchratings.com.

Applicable Crileria and Relaled Research:

Corporale Rating Mathodology: lncluding Short-Tarm Ratings and Parantand Subsidiarylinkaga

2014 OuUook: EMEAOil and Gas

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