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Rating Action:

Moody's downgrades Turkish Airlines' CFR to B2; ratings placed on review for further downgrade

24 Mar 2020

DIFC - Dubai, March 24, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded Turk Hava Yollari Anonim Ortakligi's ("Turkish Airlines" or the company) corporate family rating (CFR) to B2 from B1 and probability of default rating (PDR) to B2-PD from B1-PD. The company's baseline credit assessment (BCA), a measure of standalone credit quality, has been downgraded to b3 from b1. The ratings have been placed on review for further downgrade.

Moody's also placed on review for downgrade its ratings on the two Enhanced Equipment Trust Certificates ("EETCs") of Turkish Airlines it rates: Bosphorus Pass Through Trust 2015-1A ("Bosphorus") rated Ba3 and the Japanese Yen-denominated, Anatolia Pass Through Trust ("Anatolia"), Class A rated Ba3 and Class B rated Ba3.

A full list of affected ratings and entities can be found at the end of this press release.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Turkish Airlines' credit profile, including its exposure to many key destinations across the world have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the airline remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Turkish Airlines of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The downgrade was prompted by Moody's view that there will be a very sharp decline in passenger traffic from March onwards because of the coronavirus outbreak and this will lead to the company's liquidity profile and leverage metrics to significantly weaken. From a regionally contained outbreak the virus has rapidly spread to many different regions severely denting air travel. The International Air Travel Association's (IATA) latest scenario analysis forecasts a decline in passenger numbers of between 11% and 19% for the full year 2020.

Moody's base case assumptions are that the coronavirus pandemic will lead to a period of severe cuts in passenger traffic over at least the next three months with partial or full flight cancellations and aircraft groundings, with all regions affected globally. The base case assumes there is a gradual recovery in passenger volumes starting in the third quarter. However there are high risks of more challenging downside scenarios and the severity and duration of the pandemic and travel restrictions is uncertain. Moody's analysis assumes around a 50%-60% reduction in Turkish Airlines' passenger traffic in the second quarter and a 20% fall for the full year, whilst also modelling significantly deeper downside cases and a more extended period of severely depressed volumes.

Unlike some of its European peers, Turkish Airlines' operational data for February was healthy with available seat capacity (ASK) and revenue passenger kilometers (RPK) for the month increasing 5.1% and 2.1% respectively year-over-year. This reflected a low level of direct exposure to China. However, with the international spread of the virus, the airline has had to cancel flights to a number of geographies, particularly in Europe to which it has high exposure. In 2019, 29% of revenues were derived from Europe and another 24% from the Far East. Moody's expects travel restrictions to deepen globally, which exposes the airline to further downside risks.

Moody's acknowledges that Turkish Airlines is currently focusing on managing its way through this very volatile market environment. The review process will focus on the current market situation and evolution of passenger traffic conditions and pre-booking trends. The review will also focus on the measures that the company is likely to take to manage the difficult operating environment and to support liquidity, including reducing operating costs and capital spending, managing capacity, and if required deferring aircraft pre-delivery payments and deliveries. Any measures the Turkish government may take to alleviate pressures on the airline will also be assessed.

Moody's classifies Turkish Airlines as a government-related issuer (GRI) because of the Government of Turkey's (B1 negative) 49.12% ownership stake held through its sovereign wealth fund. The CFR incorporates a one-notch uplift from the b3 BCA given Moody's 'strong' government support assumption and 'high' dependence assumption.

TURKISH AIRLINES RELATED EETCS

The review of the EETC ratings accompanies the review of the corporate family rating. Moody's assigns ratings to EETCs by notching above an airline's corporate family rating, based on certain legal protections, its opinion of the importance of the aircraft collateral to the airline's network, whether there is a liquidity facility, its estimates of the size of the projected equity cushion, and each Classes' position in the waterfall. Moody's estimates the equity cushions of the Bosphorus 777-300ER transaction at about 25% and at about 50% for the Class As of the Anatolia JPY-denominated A321-200 transaction. For the Class Bs on the Anatolia transaction, Moody's estimates the equity cushion at about 40%. Three aircraft serve as the collateral in each transaction.

The transactions are each subject to the Cape Town Convention as implemented in Turkish law, which is intended to facilitate the timely repossession of the collateral should a payment default occur. The Ba3 ratings on each transaction are one notch above Moody's Foreign Currency Ceiling ("FCC") for Turkey of B1. Each transaction's separate 18-month liquidity facility is external to the Turkish banking system and provides sufficient support to pierce the FCC. The reviews for downgrade reflect the uncertain impacts of the coronavirus on the global aviation market and Turkish Airlines' fleet. Notwithstanding the current environment, Moody's believes that Turkish Airlines will remain important to the Turkish economy, and its reliance on the global aircraft financing market make it unlikely that the government would prevent the airline from servicing its aircraft financing obligations should it otherwise impose a moratorium on the banking system.

Changes in the EETC ratings can result from any combination of changes in the underlying credit quality or ratings of the company, Moody's opinion of the importance of the aircraft collateral to the operations and/or its estimates of current and projected aircraft market values, which will affect estimates of loan-to-value.

LIQUIDITY

Moody's liquidity analysis assesses a company's ability to meet its funding requirements under a scenario of not having access to new funding, including rollover of existing loans, over the next 12-18 months. Under this approach, Turkish Airlines' liquidity is weak in light of the very challenging market conditions the airline and the broader industry is currently facing.

As at 31 December 2019, the airline had $2.5 billion of cash relative to short term debt of $1.3 billion and current portion of long term debt of $1.9 billion ($3.1 billion in total). Significantly lower pre-bookings and very depressed passenger traffic will lead to material cash burn at the least in the short term.

Turkish Airlines does not have any undrawn long-term committed facilities that in Moody's view can provide a solid liquidity buffer. However, the airline has strong banking relationships with local banks, including state owned banks, as evidenced by $2.5 billion of available uncommitted credit lines.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Turk Hava Yollari Anonim Ortakligi

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD; placed Under Review for further Downgrade

.... Corporate Family Rating, Downgraded to B2 from B1; placed under Review for further Downgrade

On Review for Downgrade:

..Issuer: Anatolia Pass Through Trust

....Senior Secured Enhanced Equipment Trust, placed on Review for Downgrade, currently Ba3

..Issuer: Bosphorus Pass Through Trust 2015-1A

....Senior Secured Enhanced Equipment Trust, placed on Review for Downgrade, currently Ba3

Outlook Actions:

..Issuer: Turk Hava Yollari Anonim Ortakligi

....Outlook, Changed To Rating Under Review From Negative

..Issuer: Anatolia Pass Through Trust

....Outlook, Changed To Rating Under Review From Negative

..Issuer: Bosphorus Pass Through Trust 2015-1A

....Outlook, Changed To Rating Under Review From Negative

PRINCIPAL METHODOLOGIES

The principal methodologies used in rating Turk Hava Yollari Anonim Ortakligi were Passenger Airline Industry published in April 2018, and Government-Related Issuers Methodology published in February 2020. The principal methodologies used in rating Anatolia Pass Through Trust and Bosphorus Pass Through Trust 2015-1A were Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018, and Passenger Airline Industry published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

Founded in 1933, Turkish Airlines is the national flag carrier of the Republic of Turkey and is a member of the Star Alliance network since April 2008. Through the Istanbul Airport acting as the airline's primary hub since early 2019, the airline operates scheduled services to 268 international and 50 domestic destinations across 126 countries globally. It operates a fleet of 230 narrow-body, 97 wide-body and 23 cargo planes.

The airline is 49.12% owned by the Government of Turkey through the Turkey Wealth Fund while the balance is public on Borsa Istanbul stock exchange. For the last 12 months ending 31 December 2019, the company reported revenues of $13.2 billion and a net profit of $790 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved Turk Hava Yollari Anonim Ortakligi credit ratings is Mario Santangelo, Associate Managing Director, Corporate Finance Group, Journalists Tel: 44 20 7772 5456, Client Service Tel: 44 20 7772 5454. The person who approved Bosphorus Pass Through Trust 2015-1A and Anatolia Pass Through Trust credit ratings is Russell Solomon, Associate Managing Director, Corporate Finance Group, Journalists Tel: 1 212 553 0376, Client Service Tel: 1 212 553 1653.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the website.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rehan Akbar, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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