London, 28 August 2018 -- Moody's Public Sector Europe (MPSE) has today downgraded to Ba3 from Ba2
the long-term issuer ratings of the Metropolitan Municipalities
of Istanbul and Izmir, as well as the long-term issuer rating
of Turkey's Housing Development Administration (Toplu Konut Idaresi Baskanligi,
(TOKI) ). Existing National Scale Ratings (NSRs) of Aaa.tr
on Izmir and TOKI have been confirmed. The outlook is negative.
The action concluded the review for downgrade initiated on 5 June 2018.
The action follows Moody's decision to downgrade to Ba3 from Ba2 and assign
a negative outlook on the Turkish government bond rating on 17 August
2018. For full details, please refer to the sovereign press
release at: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_387786
The rating action reflects Moody's assessment of the heightened systemic
risk for Turkish sub-sovereigns due to their close operational,
financial and institutional linkages with the Turkish government.
Metropolitan Municipalities in Turkey, including Istanbul and Izmir,
cannot act independently of the sovereign and do not have enough financial
flexibility to permit their credit quality to be stronger than that of
the sovereign.
As per the application of Moody's Joint Default Analysis methodology for
regional and local governments, both cities' assigned baseline
credit assessment (BCA) is b1. Moody's lowered the cities BCA to
b1 from ba2 to reflect the increased systemic risk, as reflected
by the lower sovereign rating but also to reflect their weakening refinancing
and liquidity position, a result of currency devaluation and outstanding
foreign currency debt. The final rating of Ba3 incorporates one
notch of government support uplift.
RATINGS RATIONALE
RATIONALE FOR THE DECISION TO DOWNGRADE THE RATINGS AND ASSIGN NEGATIVE
OUTLOOKS
ISTANBUL AND IZMIR
The decision to downgrade the issuer ratings of Istanbul and Izmir to
Ba3 from Ba2 and assign negative outlooks takes into account the following:
(1) The high reliance on central government shared taxes and the exposure
to potential changes in legislation, such as tax redistribution.
The Metropolitan Municipalities of Istanbul and Izmir derive between 75%-80%
of their operating revenues from central government shared taxes,
(2) The strong dependence on the sovereign's macroeconomic and operating
environment. Istanbul and Izmir's local economic bases are heavily
integrated with that of the national economy, and (3) The exposures
to increased debt service costs arising from the depreciation of the Turkish
lira, especially for Istanbul, which has a high proportion
of foreign currency-denominated debt. This could exert additional
pressure on both cities' debt service.
Istanbul's rating encompasses a relatively high debt burden which
will remain elevated during 2018-19 and which faces upward pressure
on debt servicing costs due to depreciating Turkish Lira given the city's
large exposure to foreign currency debt. On the other hand Istanbul's
rating also reflects its large and diversified economy, continuing
robust operating performance, high self-funding capacity
and valuable asset base, which provides fiscal flexibility to accommodate
capital expenditures pressures and a strong likelihood that the Turkish
government would provide support if the city was to face acute liquidity
stress.
Izmir's ratings are constrained by the indirect debt of municipal-related
entities, the city's growing exposure to foreign currency
debt and the limited financial flexibility and legislative autonomy granted
by the Turkish system. At the same time the ratings reflect its
continued trend of very high operating balances, exceeding 50%
of operating revenues, allowing room for more rapid capital investments.
This should enable the city to avoid excessive debt accumulation and retain
its currently adequate liquidity position. Furthermore, Izmir's
credit profile benefits from the third largest economic base in the country
and a moderate likelihood that the Turkish government would provide support
if the city was to face acute liquidity stress.
TOPLU KONUT IDARESI BASKANLIGI (TOKI)
The decision to downgrade to Ba3 and assign negative outlooks to the issuer
ratings of TOKI reflects the very strong linkages between TOKI and its
support provider, the Government of Turkey. It also takes
into account (1) the credit profile of TOKI, which in Moody's view,
is closely linked to that of its owner, (2) its clear public policy
mandate and its key role in the development of the National Urbanization
and Social Housing Production Plan, and (3) Moody's assessment of
the very high likelihood that the central government would provide timely
support should the entity face acute liquidity stress.
TOKI's ratings reflect its status as the central government's
"Housing Development Administration", its strong linkages
with the government, given its strategic role in executing the government's
housing and urbanization policies and a very high likelihood that the
central government would provide timely support should the entity face
acute liquidity stress. The ratings also benefit from the stable
institutional and operational framework and recent debt assumption by
the central government making TOKI debt free. TOKI's financial
performance has always been influenced by the government's decision
on land allocations and investment targets. As a result,
we believe that TOKI's credit quality ultimately aligns with the
Government of Turkey's credit rating.
WHAT COULD MOVE THE RATINGS UP/DOWN
A downgrade of Turkey's sovereign rating would lead to a downgrade of
the three sub-sovereigns' ratings, given their close institutional,
operational and financial linkages. For both Istanbul and Izmir,
a strained liquidity situation could trigger a downgrade. In addition,
for Istanbul, downward ratings pressure may also arise from a sustained
growth in debt and debt servicing costs.
An upgrade of the sub-sovereigns' ratings is unlikely given the
negative outlook and would require an upgrade to Turkey's sovereign rating.
The sovereign action on Turkey published on Friday 17 August required
the publication of these credit rating actions on a date that deviates
from the previously scheduled release date in the sovereign release calendar,
published on www.moodys.com.
The specific economic indicators, as required by EU regulation,
are not available for these entities. The following national economic
indicators are relevant to the sovereign rating, which was used
as an input to this credit rating action.
Sovereign Issuer: Turkey, Government of
GDP per capita (PPP basis, US$): 26,893 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.4% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 11.9%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -2.6%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.6% (2017 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 17 August 2018, a rating committee was called to discuss the
rating of Istanbul, Metropolitan Municipality of; Izmir,
Metropolitan Municipality of; and Toplu Konut Idaresi Baskanligi.
The main points raised during the discussion were: The systemic
risk in which the issuer operates has materially increased. Other
views raised included: The issuer's fiscal or financial strength,
including its debt profile, has materially decreased.
The principal methodology used in rating Izmir, Metropolitan Municipality
of and Istanbul, Metropolitan Municipality of was Regional and Local
Governments published in January 2018. The principal methodology
used in rating Toplu Konut Idaresi Baskanligi was Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn" country modifier
signifying the relevant country, as in ".za" for South Africa.
For further information on Moody's approach to national scale credit ratings,
please refer to Moody's Credit rating Methodology published in May 2016
entitled "Mapping National Scale Ratings from Global Scale Ratings".
While NSRs have no inherent absolute meaning in terms of default risk
or expected loss, a historical probability of default consistent
with a given NSR can be inferred from the GSR to which it maps back at
that particular point in time. For information on the historical
default rates associated with different global scale rating categories
over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 person who approved Toplu Konut Idaresi Baskanligi credit ratings
is David Rubinoff, MD - Sub Sovereigns, Sub-Sovereign
Group, Journalists Tel: 44 20 7772 5456, Client Service
Tel: 44 20 7772 5454. The person who approved Istanbul,
Metropolitan Municipality of, and Izmir, Metropolitan Municipality
of credit ratings is Mauro Crisafulli, Associate Managing Director,
Sub-Sovereign Group, Journalists Tel: 44 20 7772 5456,
Client Service Tel: 44 20 7772 5454.
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.
Harald Sperlein
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mauro Crisafulli
Associate Managing Director
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service EMEA Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
