Fixed Income Analysis /
Turkey

CCI: Few credit concerns despite future challenges; reiterate Hold

  • In the past two months, CCOLAT 24s have somewhat underperformed the group of the strongest Turkish corporate credits

  • The reason for that could be the bonds’ already very tight spread, placing them firmly inside the sovereign curve

  • We reiterate our Hold recommendation

Tellimer Research
11 May 2020
Published byTellimer Research

Reiterate Hold. In the past two months, CCOLAT 24s have somewhat underperformed the group of the strongest Turkish corporate credits. The reason for that could be the bonds’ already very tight spread, placing them firmly inside the sovereign curve. The recently reported Q1 results and management comments about the effect of the early days of the Covid-19 pandemic suggest CCI is well prepared to address a severe contraction in revenues: leverage is low, liquidity is high, FX risks and raw material costs are largely hedged, and headroom under the debt covenants is ample. We reiterate our Hold recommendation.

First signs of Covid-19 pandemic show in Q1 results. Disease-related lockdowns were imposed in CCI’s key markets – Turkey, Pakistan and Kazakhstan – on different dates, starting from mid-March. According to management, the lockdowns effectively cut off the on-premise channel of distribution – restaurants and cafés – which represented c30% of sales volume. The decline in sales was not yet seen in the Q1 results, but Q2 will see a significant decline in volumes and, quite likely, an increase in working capital. After translating CCI’s reported financials into US dollars, we notice that, in Q1, revenues increased by 6% yoy to US$429mn, EBITDA added 7% yoy (coming in at US$63mn) and the EBITDA margin was roughly unchanged, at 15%. Debt fell to US$870mn, net leverage was flat at 1.1x and interest coverage remained high at 7x (Table 1 on page 2 of the downloadable PDF).

Low leverage, strong liquidity and managed FX risk. In Q1, CCI’s debt stood at US$870mn; net debt was at US$410mn, with the net debt/EBITDA ratio at 1.1x, the lowest level in at least five years. Despite an FX mismatch between largely hard currency debt and revenues earned in a mix of depreciating local currencies, CCI has successfully managed its FX position through hedging. A new wave of depreciation in TRY, PKR and KZT does not pose a significant credit risk because of the low level of debt, high interest coverage and high cash reserves covering short-term debt, including accrued interest at a ratio of 2:1 and FX hedging. Taking into account that c72% of cash, US$330mn, was held on US$ accounts and a US$150mn cross-currency swap, we estimate that less than 40% of debt was exposed to FX risk. The company plans to repay half of the short-term debt due in 2020 and refinance the rest. But, even if the refinancing plan fails, CCI has more than enough cash to repay the 2020 maturities out of pocket. There are no significant debt maturities until 2024 and net leverage covenant of 3.25x and interest cover of 4x leave substantial headroom if the company requires debt funding.

Guidance suspended; measures taken to curb the effect of Covid-19. Like many other companies, CCI suspended its bullish 2020 guidance and focused on measures to mitigate Covid-19’s effect on the business. Those include cutting costs, substantially reducing the product mix, scaling back on all non-essential and uncommitted capex to deliver positive operating cash flows through the crisis, and readying itself for the recovery. Restrictions on dividend payments imposed by the Turkish authorities meant a cut in shareholder distributions of c47% to TRY239mn, helping to preserve cash.