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Rating Action:

MOODY'S ASSIGNS A (P)Ba3 RATING TO THE PROPOSED USD 300.0 MILLION GUARANTEED NOTES OF VESTEL (ISSUED THROUGH VESTEL ELECTRONICS FINANCE LTD).

25 Apr 2005
MOODY'S ASSIGNS A (P)Ba3 RATING TO THE PROPOSED USD 300.0 MILLION GUARANTEED NOTES OF VESTEL (ISSUED THROUGH VESTEL ELECTRONICS FINANCE LTD).

Approximately USD 500.0 million of Debt Securities Affected

London, 25 April 2005 -- Moody's today assigned a (P)Ba3 rating to the proposed up to USD 300.0 million senior notes issued by Vestel Electronics Finance Ltd, a finance vehicle, and guaranteed on a senior unsecured basis by Vestel Elektronik Sanayi ve Ticaret Anonim Sirketi ("Vestel" or the "company"). The outlook on the proposed senior notes is stable.

Affected ratings are as follows:

- (P)Ba3 rating assigned to the proposed up to USD 300.0 million senior notes

- Ba3 rating on the existing USD 200.0 million senior notes due 2007 will be withdrawn following redemption of the existing notes through the proposed refinancing

Vestel plans to raise up to USD 300.0 million senior notes and use the net proceeds to (i) redeem the existing USD 200.0 million senior notes due May 2007 issued by Vestel Electronics Finance Ltd (the same financing vehicle which will be the issuer under the proposed notes), (ii) refinance a portion of current short-term debt and (iii) fund working capital requirements. In addition, in Moody's view, the net proceeds of the proposed issuance may be also used to finalise the acquisition of Vestel White Goods together with cash and cash equivalents available on B/S. The completion of the tender for the existing bond and the offering of the new USD 300.0 million will be cross conditioned upon the success of the other, unless such conditions are waived by Vestel.

While the notes will be guaranteed on a senior unsecured basis by Vestel Elektronik Sanayi ve Ticaret Anonim Sirketi, none of the company's subsidiaries will be guarantors under the indenture. Therefore, Moody's notes that the proposed senior notes will be structurally subordinated to the indebtedness raised at the operating subsidiaries' level including Vestel White Goods, which accounts for approximately 16% of the company's consolidated debt.

The indenture governing the proposed senior notes mainly reflects the terms and conditions of the existing notes. However, certain covenants have been revised to include (i) a change in the definition of restricted payments test which will be based on 25% of the company's consolidated net worth compared to 50% cumulative consolidated adjusted net income provision used in the previous indenture, (ii) the increase of total Debt (gross of notes payables and letter of credits)/EBITDA leverage ratio from 3.0x to 4.0x and (iii) the introduction of the fixed charge coverage ratio at 2.25x. While these changes may lend to the company some additional financial flexibility, however, Moody's cautions that the new terms of the notes would allow for a more aggressive financial strategy and increased likelihood of cash flows upstreamed to the company's shareholders.

The (P)Ba3 rating assigned to the notes pierces the Turkey's B1 sovereign ceiling for foreign currency debt of issuers domiciled in Turkey to reflect (i) the significant portion of exports and non-TL-denominated cash flows in the business, (ii) the continued importance of the export sector to the Turkish economy, (iii) currently stabilising trends in the Turkish economic environment, and (iv) Moody's estimates of the risk that the government would impose a moratorium in a crisis situation and of the likelihood that Vestel could continue servicing its debt even if a moratorium were imposed.

However, Moody's cautions of the negative trends currently experienced by the credit which reflects the continued decline in operating performance experienced by the company starting in financial year 2003. While Moody's recognises that the reduction in gross margin from 24% in 2002 to 18% in 2003 and 16.3% in 2004 is partly related to the revaluation of the Turkish Lira against the US dollar and the Euro, Vestel's declining profitability also reflected a more aggressive competitive environment, a material price decline especially in DVD players and digital products, increasing labour and energy costs and price volatility of a number of major product components (i.e. LCD and Plasma panels).

Moody's also notes that the full consolidation from financial year 2004 of the partly-owned Vestel White Goods (refrigerators, air conditioners and washing machines) believed to command higher operating margins was not sufficient to off-set the decline in profitability experienced in electronic goods.

Although the company's management has taken some actions to optimise procurement management, reduce production costs and achieve efficiency gains, Moody's cautions that continued price erosion may continue to depress Vestel's profitability going forward, in particular in the lower-end product categories.

In addition, while the company intends to continue to significantly expand its production capacity to support growth in new geographic markets (i.e. Russia, CIS countries and Central Asia), Moody's cautions that an aggressive investment strategy may weaken returns on investments in a scenario of declining profitability and highly competitive market environment.

More positively, the (P)Ba3 rating reflects (i) the company's leading market position in the European colour TVs and DVDs market, (ii) Vestel's cost competitive advantage and its proven ability to service customer needs, (iii) the quality of the company's trade receivables which are largely denominated in foreign currencies and (iv) the conservative capital structure and solid liquidity profile with approximately NTL 596.0 million cash on B/S at the end of December 2004.

Moreover, Moody's anticipates that the expected acquisition by Vestel of a majority stake in Vestel White Goods would be mainly credit neutral as the rating agency recognises the strategic rationale behind the proposed acquisition and foresees limited cash out-flows related to the transaction. The company, which currently owns 35% of the target, intends to increase its stake to approximately 73% of Vestel White Goods' share capital. Moody's understands that the company will acquire the Zorlu family's stakeholding in Vestel White Goods through a private transaction and that the total consideration will reflect the price defined through the IPO of the targeted entity.

In Moody's view, a further decline in operating performance coupled with a steady deterioration in the return on investments as well as a material cash out-flow related to funds upstreamed to the company's shareholders would put pressure on the rating. Conversely, an upgrade of Turkey's B1 sovereign rating would put upward pressure on the bond rating.

The proposed notes will be sold in a privately negotiated transaction without registration under the United States Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance will be designed to permit resale under Rule 144A.

The assigned ratings assume there will be no material variations to the draft legal documentation reviewed by Moody's, and assume that these agreements are legally valid, binding and enforceable.

Headquartered in Istanbul, Turkey, Vestel is a leading manufacturer of consumer electronic products, mainly televisions and digital equipment, and white goods. The company is one of the largest OEMs in Europe with a market share of 26% (in volume terms) of the colour and flat screen televisions sold in the EU. For financial year ended 31 December 2004, Vestel reported consolidated sales and EBITDA of NTL 4,404.7 million (USD 3,282 million) and NTL 362.0 million (USD 269.7 million), respectively, for a total debt of NTL 636.9 million (USD 474.9 million), excluding letter of credits and notes payables.

London
Francesco Sebastiani
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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