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Rating Action:

Moody's downgrades Turkish Airlines' CFR to B3 from B2; negative outlook

15 Jun 2020

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

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.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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