DIFC - Dubai, June 15, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded Turk
Hava Yollari Anonim Ortakligi's ("Turkish Airlines") corporate family
rating (CFR) to B3 from B2 and probability of default rating (PDR) to
B3-PD from B2-PD. The outlook is negative.
Moody's has also taken rating actions on the two Enhanced Equipment Trust
Certificates ("EETCs") of Turkish Airlines it rates. The Bosphorus
Pass Through Trust 2015-1A ("Bosphorus") has been downgraded to
B2 from Ba3 ratings and the Japanese Yen-denominated, Anatolia
Pass Through Trust ("Anatolia"), Class A has been confirmed at Ba3
while the Class B has been downgraded to B1 from Ba3. The outlook
on all the EETC ratings is negative.
These rating actions concludes the review for downgrade Moody's
had initiated on 24 March 2020. A full list of affected ratings
and entities can be found at the end of this press release.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL426617
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
The spread of the coronavirus pandemic, the weakened global economic
outlook, low oil prices, and asset price declines are sustaining
a severe and extensive credit shock across many sectors, regions
and markets. The combined credit effects of these developments
are unprecedented. The passenger airline industry is one of the
sectors most significantly affected by the shock given its exposure to
travel restrictions and sensitivity to consumer demand and sentiment.
Moody's regards the coronavirus pandemic as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
Moody's expects the coronavirus pandemic to significantly curtail global
demand for air travel for an extended period. Moody's assumes that
Turkish Airlines' 2020 passenger traffic to be down by about 60%
compared to 2019 in its faster recovery model and about 70% in
its slower recovery model. These scenarios also project that demand
and revenues will approach 2019 levels in 2023, and that disciplined
cost management and efficiencies gained while managing the operations
through the pandemic will support a meaningful recovery in profit margins
by 2023. The risk of more challenging downside scenarios remains
high and the severity and duration of the pandemic and travel restrictions
also remain highly uncertain, particularly given the threat of an
increase in the number of infections as social distancing practices ease.
On 24 March, Moody's downgraded Turkish Airlines' CFR
to B2 from B1 and placed these and its other ratings under review in order
to further assess the trends in operating conditions and the measures
that the company is taking in order to reduce cash burn. The severity
and duration of the pandemic and travel restrictions globally has been
greater than what Moody's had assumed in its base case at the time
of the 24 March rating action in which Turkish Airlines' passenger traffic
was assumed to fall 20% in 2020. Today's rating action
concludes the review and reflects the increasing duration and severity
of the coronavirus outbreak, the uncertainty of further coronavirus
outbreaks and extended restrictions on air travel, and consequently
the weaker than previously anticipated liquidity profile for Turkish Airlines.
Turkish Airlines is currently focusing on managing its way through this
very volatile market environment. The company has taken positive
initiatives to support liquidity, including reducing operating costs
and capital spending, managing capacity, and will look to
defer pre-delivery payments and new aircraft deliveries.
Short-time work allowance and reduction in salaries has materially
reduced employee costs in Q2. The company's focus in expanding
its cargo business in recent years has been a key strength in the current
environment with profitable cargo operations partially offsetting the
cash burn from the passenger segment. The airline has an efficient
and low cost structure relative to many European full service carriers
which should allow for a stronger recovery path once the environment stabilizes.
The company is likely to need to incur further debt during the coronavirus
pandemic, and similar to other industry players faces challenges
to recover its balance sheet in the next two to three years. Turkish
Airlines as of year-end 2019 had a growth plan incorporating an
overall fleet size increase of more than 135 aircraft over the next five
years. Moody's assumes that the airline will successfully
be able to defer most of its aircraft deliveries and related predelivery
payments that were scheduled for 2021 to 2023 in order to preserve cash,
but recognizing that there is little visibility at this time on the magnitude
of cash outflows related to this.
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 company's
baseline credit assessment (BCA), a measure of standalone credit
quality, has been downgraded to caa1 from b3. The CFR incorporates
a one-notch uplift from the BCA given Moody's 'strong' government
support assumption and 'high' dependence assumption.
TURKISH AIRLINES RELATED EETCS
Moody's rates three enhanced equipment trust certificates (EETCs) across
two Turkish Airlines EETC transactions, Series 2015-1 and
Series 2015-2. The first transaction, with $226.89
million outstanding, is secured by three Boeing 777-300ERs
delivered new to Turkish Airlines in 2015. The second, with
$53.2million and $8.8 million outstanding
in senior and junior classes, respectively, is secured by
three Airbus A321-200s delivered new in 2015. The downgrade
of the 2015-1 Class A reflects Moody's estimated loan-to-value
at or above 100% when including priority claims based on a steep
haircut to pre-coronavirus market value of the 777-300ER
of about 35%. Moody's expects long-haul passenger
demand to recover at a slower pace than domestic and regional travel,
which will slow the recovery in demand for large wide-body aircraft
like the 777, weighing on its value for an extended period.
The confirmation of the Ba3 rating on the 2015-2 Class A reflects
an estimated equity cushion of about 45% and the expectation that
the A321-200 will be in demand as passenger demand recovers,
supporting the market value of this model. The downgrade of the
Class B of the 2015-2 transaction reflects the estimated equity
cushion of about 35%, ten points lower than the Class A and
both before priority claims that could reach about ten points of value.
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 rating
on the 2015-2 Class A is one notch above Moody's Foreign Currency
Bond Ceiling ("FCC") for Turkey of B1. Each transaction has a separate
18-month liquidity facility that is external to the Turkish banking
system, which provides sufficient support to pierce the FCC.
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.
LIQUIDITY
Moody's liquidity analysis assesses a company's ability to meet its funding
requirements over the next 12-18 months under a scenario of not
having access to new funding unless it is committed, and does not
assume the rollover of existing loans. Under this approach,
Turkish Airlines' liquidity is weak in light of the very challenging market
conditions and material financial obligations due over the coming quarters
in combination with the absence of undrawn long-term committed
facilities.
As at 31 March 2020, the airline had about $1.8 billion
of cash relative to short term debt of $1.4 billion and
current portion of long term debt of $2.0 billion.
Of this $3.4 billion total, Moody's understands
that about $1.4 billion is with the Export Credit Bank of
Turkey (Turk Exim), a government-owned development bank mandated
to support the Turkish economy as part of the government's export-led
growth policy. While these loans are short-term in nature,
Moody's believes that the likelihood of loan rollovers by Turk Exim
is very high. However, even after excluding Turk Exim related
loan maturities, Moody's forecasts that the airline will have
liquidity of six to nine months under its various cash burn scenarios.
Turkish Airlines does not have any significant undrawn long-term
committed facilities that can provide a solid liquidity buffer to the
company. The airline has strong relationships with local banks,
including state owned banks, and Moody's understands that
the company has access to $2.7 billion of available uncommitted
credit lines. In Moody's view, the reliance on short-term
loans being rolled over and having uncommitted credit lines are weak sources
of liquidity, and this creates greater uncertainty in the currently
depressed macroeconomic environment and challenging industry outlook.
Moody's liquidity assessment does not incorporate Turkish Airlines'
access to uncommitted credit lines, which if included in its assessment,
would indicate a materially stronger liquidity profile.
The airline has more than $1 billion worth of unencumbered aircraft
including 25 737-800s. Moody's understands that the
company may undertake sale and lease back transactions for some of the
aircraft that it owns, which while would increase overall debt levels,
would also positively support liquidity.
OUTLOOK
The negative outlook reflects the continued uncertain prospects for the
airline industry, with risks of extended disruption to travel causing
further strain on the company's balance sheet and liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings are unlikely to be upgraded in the short term in the absence
of a materially improved liquidity profile that can cover cash needs over
12-18 months under Moody's downside scenarios. Positive
rating pressure would also arise if the coronavirus outbreak is brought
under control, travel restrictions are lifted, and passenger
volumes improve. At this point Moody's would evaluate the balance
sheet and liquidity strength of the company and positive rating pressure
would require evidence that the company is capable of substantially recovering
its financial metrics within a 1-2 year time horizon, in
particular debt/EBITDA trending towards 6.0x.
Turkish Airlines' ratings could be downgraded further if Moody's
expects deeper and longer declines in passenger volumes extending materially
into 2021 or if liquidity is weaker than what is currently forecasted.
Changes in 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. Near-term
updates to Moody's estimates of aircraft market values that reduce the
respective equity cushion could lead to further downgrades.
LIST OF AFFECTED RATINGS
Downgrades:
..Issuer: Turk Hava Yollari Anonim Ortakligi
....Corporate Family Rating, Downgraded
to B3 from B2, previously on review for downgrade
....Probability of Default Rating, Downgraded
to B3-PD from B2-PD, previously on review for downgrade
..Issuer: Anatolia Pass Through Trust
....Senior Secured Enhanced Equipment Trust
Class B, Downgraded to B1 from Ba3, previously on review for
downgrade
..Issuer: Bosphorus Pass Through Trust 2015-1A
....Senior Secured Enhanced Equipment Trust,
Downgraded to B2 from Ba3, previously on review for downgrade
Confirmations:
..Issuer: Anatolia Pass Through Trust
....Senior Secured Enhanced Equipment Trust
Class A, Confirmed at Ba3 previously on review for downgrade
Outlook Actions:
..Issuer: Turk Hava Yollari Anonim Ortakligi
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Anatolia Pass Through Trust
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Bosphorus Pass Through Trust 2015-1A
....Outlook, Changed To Negative From
Rating Under Review
PRINCIPAL METHODOLOGY
The principal methodologies used in rating Turk Hava Yollari Anonim Ortakligi
were Passenger Airline Industry published in April 2018 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
The principal methodologies used in rating Anatolia Pass Through Trust
and Bosphorus Pass Through Trust 2015-1A were Passenger Airline
Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811,
and Enhanced Equipment Trust and Equipment Trust Certificates published
in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852.
Alternatively, 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 269 international and 50 domestic destinations across 127 countries
globally. It has a fleet of 234 narrow-body, 102 wide-body
and 25 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 ended 31 March 2020,
the company reported revenues of $13 billion and a net profit of
$690 million.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are all solicited credit
ratings. Additionally, the List of Affected Credit Ratings
includes additional disclosures that vary with regard to some of the ratings.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL426617
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Rating Solicitation
• Issuer Participation
• Participation: Access to Management
• Participation: Access to Internal Documents
• Disclosure to Rated Entity
• Endorsement
• Lead Analyst
• Releasing Office
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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
