OREANDA-NEWS. 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 on the IDRs and National Long-term rating are Stable.

Fitch has also affirmed the USD250m senior unsecured notes due 2020 at 'B' with Recovery Rating 'RR4'.

The rating affirmation incorporates our expectations that 2015 will be a difficult year following adverse effects on pricing power, costs and foreign currency-denominated debt from the depreciation of the Turkish lira and a potentially weakening consumer and business environment. However, we also expect that Yasar will continue to cope effectively with Turkey's volatile economy, drawing on its strength as an established player in a growing Turkish food and beverages and coatings markets. We also expect Yasar's profitability to continue to benefit from a fragmented retail industry and manageable competition characterising the Turkish food processing industry.

KEY RATING DRIVERS

High Foreign Currency Risk
Fitch calculates that a further 10% depreciation of the Turkish lira, without other cash or profit preservations measures, would cause funds from operations (FFO) leverage to increase by at least 0.5x. We estimate that over 65% of Yasar's debt at end-December 2014 was foreign currency-denominated, while most of its revenue is generated in Turkish lira.

Fitch acknowledges that the interest portion of Yasar's foreign currency exposure is largely hedged by swap contracts. Certain operating costs, especially in coatings, are foreign currency-denominated. Food exports provide some relief in terms of foreign currency generation, but remain limited, at under 10% of group sales.

Leverage Could Rise
Fitch expects the strong 2014 performance to continue, enabling further de-leveraging with FFO adjusted leverage likely to decrease to around 5.2x in 2015 (2014: 5.5x). However, if the depreciation of the Turkish lira since the beginning of 2014 does not reverse, a combination of higher debt in Turkish lira and potentially weakening free cash flow (FCF) could push Yasar's FFO adjusted leverage well above 5.0x, which is the upper limit for the current 'B' rating.

Healthy F&B Prospects
Yasar's leading market position in several food categories in a fragmented and stable market continues to underpin its ratings. Fitch expects the company to extend its strong 2014 performance in 2015 and that revenue, profit and profit margin should continue to grow, albeit a slower pace than in 2014.

Its food and beverage division saw 2014 revenue grow by 17% and EBITDA by 20% despite the Turkish lira depreciation and difficult consumer environment. Although input costs such as raw milk and meat prices have continued to increase, Yasar has managed to pass on these prices and maintained margins in 2014. We expect sales volumes to rise in 2015 despite continued price increases although growth may be limited in the long-term. Fitch believes that Yasar has the capacity to innovate and switch to higher-margin products and adapt to the challenging consumer landscape in Turkey.

Significant Improvement in Coatings
Revenue in the coatings business continued to grow (up by 20%) in 2014, driven by pent-up demand in the sector, while EBITDA margins were resilient in the low- to mid-teens. We expect EBITDA margins in 2015 to normalise at around 11%-12% as the market stabilises in line with general economic activity. Coatings contributed nearly 34% of group EBITDA in 2014 compared with just 11% in 2011. The significant improvement is due to cost rationalisations in 2009, the introduction of a stricter foreign exchange hedging policy and other efficiency programmes.

Limited FCF
FCF remained negative at TRY33.5m in 2014 (2013: negative TRY64.8m) and we project this to continue over 2015-17 due to high capex. Dividend leakage to minorities in the listed subsidiaries further depresses cash flow by TRY35m-TRY48m a year. However, Fitch believes Yasar retains the flexibility to postpone some of its capex, if need be, for example, in the event of a large unforeseen depreciation of the Turkish lira.

KEY ASSUMPTIONS

- Revenue growth remaining in high single digits over 2015-2018;
- Group EBITDA margin between 10.1% and 10.4% for 2015-2018;
- Capex between 2.5% and 4% of sales for 2015-2018;
-FCF to remain negative for 2015-17 before turning positive in 2018;
- TRY/USD exchange rate at 2.7 for 2015 in line with the average for the past three months
-Liquidity to remain adequate.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Operating shortfall, such as contracting revenue, further constraining cash flow and/or liquidity
- Adjusted gross debt/EBITDAR above 4.5x (2014: 4x) or FFO adjusted gross leverage above 5.0x on a sustained basis.
- FFO fixed charge coverage below 2.0x (2014: 2.0x) on a sustained basis.
- EBITDA margin falling below 8% (2014: 10%) for more than two financial years due to inability to pass on higher costs or due to increased competition.
- Sharp currency depreciation or economic downturn in Turkey affecting Yasar's operations.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Adjusted gross debt/EBITDAR consistently below 3.5x or FFO adjusted gross leverage consistently below 4.0x.
- FFO fixed charge above 2.5x.
- EBITDA margin remaining at or above 10% with improved pricing power.
- Negative FCF at no more than 1% of sales and maintenance of longer-dated debt profile mitigating refinancing risks.

LIQUIDITY

Liquidity was supported by unrestricted cash (as defined by Fitch) of TRY37m at end-2014, approximately USD280m 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 TRY305.3m in 2015.