TURKEY. Publication Date: November 25, Global Knowledge supported by Local Experience. Lider Filo (LDR Turizm A.Ş.)

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1 Sovereign* National International TURKEY Corporate Credit Rating Operational Leasing Long Term Short Term Foreign Currency BBB- A-3 Local Currency BBB- A-3 Outlook FC Stable Stable LC Stable Stable Issue Rating - - Local Rating BBB- (Trk) A 3 (Trk) Outlook Stable Stable Issue Rating BBB- (Trk) A 3 (Trk) Sponsor Support 3 - Stand Alone BC - Foreign Currency BBB- - Local Currency BBB- - Outlook FC Stable - LC Stable - *Affirmed by Japan Credit Rating Agency, JCR on October 7, 2016 Analysts: Zeki Metin ÇOKTAN / zekic@jcrer.com.tr Merve HAYAT/ merve.bolukcu@jcrer.com.tr Net Profit Margin (%) ROAA (%) Fleet Market Share (%) Equity / Total Assets (%) ROAE (%) Net Working Cap. / T. Assets (%) Strengths Cumulative asset growth trend though maintaining its small market share Capitalization level outperforming sector averages Increasing fleet size serving a wide customer base Boutique service concept aiming for high customer satisfaction Expected increase in cash flows thanks to continuously upward sales figures Asset quality and predictability of revenue supported by the wellreputed clientele base minimizing collectability risk Enhanced strategic targets promising further growth thanks to an experienced management team and well organized risk management infrastructure Improved corporate governance principles with regard to transparency Growth potential of the operational lease sector through increasing awareness and outsourcing of fleet management operations as evidenced by the declining vehicle per client Lider Filo (LDR Turizm A.Ş.) F i n a n c i a l D a t a * * * * 2011* Total Assets (000 USD) 68,735 60,001 47,095 27,762 13,318 Total Assets (000 TRY) 199, , ,515 49,349 25,156 Equity (000 TRY) 43,692 42,571 32,552 21,399 8,707 Net Profit (000 TRY) 1,649 9,619 2, Net Sales (000 TRY)** 36,693 27,254 17,540 8,876 1,820 Vehicle Sales Revenue (000 TRY) 37,500 24,343 5, Net Profit Margin (%) ROAA (%) ROAE (%) Equity / Total Assets (%) Net Working Capital / T. Assets (%) Asset Growth Rate(%) n.a Fleet Market Share (%) * End of year **Including only rental revenues Overview LDR Turizm A.Ş. (hereinafter referred to as Lider Filo or the Company) was founded in 2010 under the name LDR Turizm Dış Ticaret LTD. ŞTİ before changing its title to LDR Turizm A.Ş. in. The brand LİDER FİLO was registered by the Turkish Patent Institute in 2011 to LDR Turizm A.Ş. The sole owner of LDR Turizm A.Ş. is Metin Barokas over the four year period. The Company mainly operates in the field of operational leasing under the brand name Lider Filo with a fleet of 3,182 vehicles as of 1H2016. The Company sustains its country-wide operations with a workforce of 62 (FYE:53) through its head office in Istanbul and 3 branch offices in Istanbul, Izmir, and Ankara. Constraints Pressure on net profitability from financing expenses including high interest payments and FX movements majorly derived from bank loans The need of market share improvement through hike in sales revenue for Company growth Lack of alternative funding channels and structures to satisfy particular needs of the companies operating in the sector Fierce competition leading to margin pressure in view of price sensitivity Low level of profitability impeding internal equity generation Growing perception of pressure in the markets due to risks arising from the current social unrest, political instability on economic influences, global environment and the recent unsuccessful coup attempt Absence of sector-specific laws and public authorities to regulate the activities of the firms and supervise the sector Publication Date: November 25, 2016 Global Knowledge supported by Local Experience Copyright 2007 by JCR Eurasia Rating. 19 Mayıs Mah., 19 Mayıs Cad., Nova Baran Plaza No:4 Kat: 12 Şişli-İSTANBUL Telephone: Fax: +90 (212) Reproduction is prohibited except by permission. All rights reserved. All information has been obtained from sources JCR Eurasia Rating believes to be reliable. However, JCR Eurasia Rating does not guarantee the truth, accuracy and adequacy of this information. JCR Eurasia Rating ratings are objective and independent opinions as to the creditworthiness of a security and issuer and not to be considered a recommendation to buy, hold or sell any security or to issue a loan. This rating report has been composed within the methodologies registered with and certified by the SPK (CMB-Capital Markets Board of Turkey), BDDK (BRSA-Banking Regulation and Supervision Agency) and internationally accepted rating principles and guidelines but is not covered by NRSRO regulations.

2 1. Rating Rationale In the assignment of Lider Filo s ratings, quantitative and qualitative assessments regarding the Company s on and off balance sheet financial positions, shareholder structure and market conditions in its fields of activities, asset quality, debt level, funding resources and structure, profitability indicators, liquidity profile, efficiency, income streams, expectations about the future and growth strategies have been taken into consideration. Independent auditor s reports prepared in accordance with IFRS, projections, JCR Eurasia Rating s own research and records and other non-financial figures were drawn upon in the determination of the assigned ratings. Moreover, information and clarification provided by the Company itself and statistics provided by the Association of Car Rental Institutions (TOKKDER) were also drawn upon for further assessments. Fundamental rating considerations are as below; Satisfactory Equity Level Despite Descending Path Although Lider Filo has lowered its share of equity within its funding structure since FYE, the ratio continues to outperform its peers average and indicates a strong equity base. The Company finances its assets mainly through short and long term bank loans and its own equity. Asset Quality via Low Level of Doubtful Receivables Leading to a Successful Risk Management Trade receivables and lease contracts resulting from sales revenue are exposed to credit risk. The insignificant impaired receivables ratios are the result of established and effective risk management departments. While the non-performing loans level recorded in the Company s balance sheet increased and displayed an on-going increase over the previous years, it remained insignificant. Credit risk related with receivables is considered to have a limited effect on the Company s financial strength. Therefore, both the receivables and low level impaired loans contributed to the Company s asset quality and the balance sheet composition. Broad Experience and Qualified Senior Management Team The sole shareholder of Lider Filo, Metin Barokas has diversified experience and a reliable reputation in the sector. The experience and background senior management team in the operational lease sector contribute to the Company s portfolio value. The Company benefits from a highly experienced team and presence of a well-functioning control organization compatible with its size. Natural Hedging for FX Position Foreign currency risk mainly arises from EUR borrowings from financial markets. As of FYE, the Company carried a short position of TRY 15.05mn. Considering the short FX position, the volatility of the TRY against the EUR will distress the Company s FX position. Moreover, the Company tackling foreign currency risks resulting from foreign currency denominated transactions through natural hedges where borrowings in foreign currency denominations are matched with lease receivables of similar terms. Therefore, FX risk related with lease receivables is considered to have a limited effect on the Company s financial strength. Recent Improvements in Corporate Governance Principles Preparations for transparency for the bond issuance originally improved the extent of compliance with Corporate Governance Practices. The negligible overdue loans emphasize the effective implementation of risk management processes. On the other hand, the projected bond issuance requires a higher compliance level and is expected to contribute to the Company's market perception. The Company provides essential information regarding its activities and disclosed documentation on its website in terms of transparency. The Low Level of Client-Base Concentration Risk Thanks to its well-diversified customer base, credit risk is diminished by abating the risks associated with domestic economic influences. Customer credit risks and performance are evaluated on a continual basis. The top 10 of the Company s 556 customers constitute 23.38% and top 50 customers 50.79%, of total revenue, indicating a moderate concentration risk level. Upward Asset Growth Path but with Still Low Market Influence Company sales revenue increased in parallel with the increase in the number of Company operational lease contracts in a variety of regions and sectors. Although Lider Filo has established a relatively low market share in the industry, it continues to follow an upward growth path since establishment with the exception of a slight drop in FYE. The fleet size of Lider Filo increased by LDR TURIZM A.Ş. 1

3 approximately 15% to 2,851 in line with that of the sector. Asset base growth performance was 43.64% as of FYE, higher than the previous year s 38.42%. The Company s fleet size market share remained above 1% for the last two years. The Company targets a market share of 3% within the next 5 years. Strong Liquidity Profile and Net Working Capital Lider Filo s liquidity indicators of net working capital exhibited an ongoing trend during the previous three-year period while the interest coverage ratio followed an upward trend in the same period before reversing below the reference values in FYE. Manageable Debt Burden and Efforts to Diversify Funding Base The Company has initiated efforts to diversify funding channels through bond issuances. Although the issue details have not certainly been determined yet, it is expected that the structure of the principal and coupon repayments will be designed in line with the cash flow dynamics. However, the Company has sufficient limits with respect to its funding lines from the banking sector. Dependency on external funding to support growth increased financial expenses due to interest payments of bank loans and fluctuations in FX downwardly affected the net profit of the Company. The bond issuances, particularly in a leasing sector with scarce alternative funding sources, present the advantages of reducing funding costs, relieving the balance sheet and lengthening the maturity of borrowings, together leading to a positive effect on liquidity management. Steadily Increasing Revenue Underpinned by Operational Lease Activities The main operating field of Lider Filo is short and long term rent-a-car and VIP transfer under the brand name Lider Filo with an expanding fleet size. As well as its yacht renting operations, Lider Filo s property portfolio also triggers a rise in its cash flow generation through rental income support via high quality real estate investments also providing capability of to be converted into cash in need relieves liquidity. Continuing Growth Potential of the Sector The fleet lease industry in Turkey has maintained its trend to outperform GDP during previous years, even during times of recession in the automobile industry. In addition, the contribution of SMEs to the growth of the industry has followed an upward trend in recent years as indicated by the declining vehicle number per client. The average number of vehicles per customer has continued to decrease for the sector from 6.6 in FYE to 5.9 in FYE. On the other hand, the stated figure including long term contracts was 4.3 for Lider Filo in FYE. Initiation of Payment Systems and Mobile Services (Smartphone) Applications Additionally, Lider Filo also initiated a system to allow payments via credit cards in addition to effective utilization of DDS (Direct Debiting System). These are also assessed as factors to curb its credit risks to a certain extent with regard to collection & monitoring difficulties as also evidenced by declining average collection period. Moreover, Lider Filo Mobile Services (Smartphone), provides instant access to the roadside assistance to its customers in the case of meeting any trouble while travelling around Turkey. Ongoing Financial Expenses Dependency on external funding to support growth increased financial expenses due to bank loan interest payments and fluctuations in FX. Increased financial expenses downwardly affected the net profit and in parallel the internal equity generation capacity of the Company. Low Level of Profitability Impeding Internal Equity Generation Although net profit from principal activities sustained its ongoing upward trend in the reporting period, the main reason of the diminished profit was the negative impact of the foreign currency position arising from financial liabilities and partially rising interest expenses. Level of financing expenses in general and exchange gains & losses in particular continue to have determining roles on large fluctuations in profitability indicators and internal equity generation capacity across periods. Therefore, such indicators pertaining to net profitability as return on average assets (ROAA) and return on average equity (ROAE) ratios depicting the utilization level of its assets and equity dropped to 1.26% and 4.94%, respectively, in FYE. Ongoing Market Uncertainties Political instability, social tensions, rising interest rates, devaluation of the TRY against the USD, tightening liquidity structure, the deceleration in economic activities, unrest in countries in the Middle East and near regions and the recent unsuccessful coup attempt suppress the market outlook and are taken as important indicators reflecting LDR TURIZM A.Ş. 2

4 the vitality of the sector. The effects of these circumstances have led to a contraction in Turkey s international trade volume with neighboring countries as well as deterioration in the risk appetites of both local and foreign investors, pressured trade volume and profit margins and deteriorated asset quality through weakened debtservicing capabilities of the real sector. With respect to the above mentioned factors, JCR Eurasia Rating has assigned the Long Term International Foreign Currency and Local Currency Ratings as BBB-, the same as that of the Sovereign Ratings of the Republic of Turkey, and has also assigned Long Term National Local Grade as BBB- (Trk) in JCR Eurasia Rating s notation system, which denotes an adequate investment grade. As there are no additional legal and/or financial collateral guarantees provided separately for the repayment of the bond issued by Lider Filo, the rating assigned for the TRY dominated bond issuances has been assigned as the same as the Company's Long and Short Term National Local Ratings. Driving factors that can contribute to any future positive changes in ratings and outlook status such as sizable cash equity injection and an increase in the equity level; improved internal capital generation through increased revenue via improving profitability and/or paid-in capital support for its capital base against potential losses; increase in market share and fleet size; diversified funding profile; continued financial performance and a more diversified customer base indicating lower credit risk may result in a positive rating action. The potential factors for a negative rating action include: an increase in financing costs lowering profitability ratios, deterioration in asset quality, limited access to financial markets, reduction of debt and interest payment capacity, slowing of revenue, narrower profit margins, deterioration in capital adequacy and liquidity levels, deterioration in net working capital and increased volatility in economic outlook. 2. Outlook A Stable outlook has been assigned for the short and long term outlooks of the Company due to the resilient and predictable revenue streams supported by the clientele structure, asset quality, economic prospects in the domestic and international markets, foreign currency position, term structure of financial liabilities and the efforts of diversifying the access channels to the financial markets via bond issuances in the relief of short and medium term liquidity management and implementation of boutique services in order to expand its customer base and satisfaction. On the other hand, outlooks regarding the grades may be downgraded due to the following factors: limited access to financial market and narrowing loan channels, deterioration in debt and interest payment capacity, possible insufficient capacity for revenue generation to meet the liabilities, narrower profit margins through deceleration of operations, decreasing investor appetite, downgrade of the sovereign rating of Turkey and growing turmoil in the domestic and international markets. The growth potential of the operational lease sector through increasing awareness and tendency regarding the outsourcing of fleet management operations by the largescale institutions and expected-to-increase demand by SMEs as also evidenced by the declining vehicle per client indicators during the recent years, which would add more lanes for growth of the currently underpenetrated industry. Developments in the Company's debt level, net working capital level, adequacy of cash flows, improvements in revenue, resolution of the political uncertainties and tensions, restoration of the economic performance to potential levels, improvement in the profit margin, economic growth in the domestic and international markets, development of macroeconomic indicators regarding revised moderate GDP growth period and increased funding channels are the factors that will continue to be closely monitored by JCR Eurasia Rating and can contribute to any future positive changes in ratings and outlook status. Moreover, the possible effects on the Company of the risk and opportunities to arise out of restructuring process of the organs of the state following the failed coup attempt together with realization level of budgeted profits and ultimate effects of a prospective bond issue on the Company s financial statements are other issues to be monitored for further assessments in the following periods. 3. Sponsor Support & Stand Alone Assessment The Sponsor Support notes and risk assessments carried out reflect the financial and nonfinancial standings and expected supportive potential of the sole shareholder Metin Barokas. It is considered that the main controlling shareholder has the willingness and propensity to supply LDR TURIZM A.Ş. 3

5 long term liquidity or equity to the Company as and when financial needs arise and the adequate experience to provide efficient operational support. However, JCR Eurasia Rating was unable to obtain the adequate knowledge and conviction on whether the Barokas family has the sufficient funds to support the Company when financial needs arise. The Stand-Alone Note is formed regarding the Company s internal resource generating capacity, core profitability indicators, debt level and maturity profile, assets quality, equity structure, market share, sustained growth rates, organizational structure, management perspective, existing risk situation and the risks associated with the environment and financial markets. Therefore, JCR Eurasia Rating believes that the Company has enough experience and infrastructure to manage the risks individually as long as it maintains its existing customers, sustainability of revenue. On the other hand, in addition to the absence of sectorspecific laws and regulations, no public authority or professional organization exist to provide the Company and the sector in general with financial relief and to eliminate the possible systemic risks to arise therein. After assessing all factors stated above, the Sponsor Support and Stand Alone Notes of the Company have been determined as 3 and BC, respectively. A Sponsor Support Note of 3 denotes a situation depending on economic conditions. 4. Company Profile a. History & Activities The Company was established on August 11, 2011 to provide for the purchasing, sales, procurement, leasing, hiring and intermediate trade and brokerage of land, sea, and air transportation vehicles, the establishment and operation of a tourism agency, and hotel, restaurant, motel, campsite, cafe, discotheque and bar management. The Company changed its established name from LDR Turizm Dış Ticaret LTD. ŞTİ to LDR Turizm A.Ş. in December. b. Shareholders, Subsidiaries & Affiliates The table below indicates the shareholding structure of Lider Filo and the changes in its paid-in capital. 100% of Company shares belong to Metin Barokas. Between the period of and, the paid capital of the Company cumulatively increased by TRY 20.25mn to TRY 30mn. Shareholder Structure of LDR Turizm A.Ş. FYE(%) FYE(%) FYE(%) FYE(%) FYE2011(%) Metin Barokas Isak Barokas <1 Total (TRY-000) All shares are registered and there are no privileges on shares. Currently, the Company has no affiliates but has three representative offices in Istanbul, Ankara and Izmir. c. Organization & Employees The organizational chart of the Company consists of eight main units; sales & marketing, finance, accounting, purchase, second hand sale, VIP transfer, and short term leasing. All units report directly to the Vice General Manager. The Senior Management of the Company is comprised of the CEO and sole shareholder Metin Barokas, the General Manager Bülent Çoşkunarda, and the Vice General Manager Burçin Baybatur Kök. It is concluded that the senior management have the adequate qualifications to administer their duties and that the Board successfully performs its duties of leading, supervising, and inspecting. Company activities are held locally in Turkey through its headquarters in Istanbul and branches in Ankara, Istanbul and Izmir. As of FYE, the staff force of the Company was 62, increasing from 53. d. Corporate Governance As the Company is not publicly traded, the corporate governance discipline is not a field that is required to be taken into consideration. On the other hand, implementing corporate governance best practices set by the Capital Markets Board (CMB) improves efficiency, stakeholder value, and market perception. The Company s annual financial results are subject to independent audit reports prepared in accordance with International Financial Reporting Standards (IFRS). No special law has been enacted and no regulatory or supervisory public authority has been established to regulate the activities of the firms in the sector. In line with its future plans, Lider Filo also established a corporate governance department during LDR TURIZM A.Ş. 4

6 2016 for the effective and timely management of investor relations. Although the lack of an investor relations department, establishment of a risk management division and functional committees within the Board independent board members, and dividend policy is evaluated as a constraining factor for the overall transparency. The webpage of the Company is well organized and provides information about its history, vision and mission, senior management, disclosure of shareholders general assembly, audit reports, organization chart, and biographies of board members and senior managers. The Board of Directors holds its meetings regularly and in necessary and urgent conditions. In the field of social responsibility, the Company takes part in charitable events. We, as JCR Eurasia Rating, are of the opinion that the senior management of the Company is adequate in terms of education, experience, and managerial skills. e. The Company Strategies The Company aims to strength its position in the operational leasing sector by increasing its brand reputation and meet customers needs through a strong, dynamic, and experienced staff. The main principle of Company is to follow a sustainable growth via profitable projects, rather than focusing on increasing fleet size. Main operating in the field of short and long term rent-acar and VIP transfer services, Lider Filo has an ambitious yet feasible strategy of becoming a strong player in the sector and extending its reach to a wide range of regions. The main goals of the Company are: To provide its customers with boutique service To increase brand awareness To develop solution partnerships To offer customized services in financial and technological advances The fleet leasing operation includes damage management, vehicle financing, replacement vehicles, tire management, and maintenance management. Lider Filo has also maintained its focus on customer satisfaction through webbased facilities and offering a mobile access of failure reporting, accident notification, theft notification, tire operations, key operations, and vehicle replacement. The Company offers the latest model Mercedes vehicles with drivers and a multilingual staff to its individual and corporate customers with the VIP Transfer Service and has been awarded certification by the Ministry of Transport, Maritime Affairs and Communication. Moreover, Lider Filo Mobile Services (Smartphone), provides instant access to the roadside assistance to its customers in the case of meeting any trouble while travelling around Turkey. 5. Sector Overview & Operational Environment In the operational leasing model the lessee cannot include depreciation costs within the tax base but can include the monthly rental expenses invoiced by the lessor as the title of ownership of the leased vehicle remains with the lessor. Contracts in the operational leasing business are of a specific period, generally 3 years, and are noncancellable. However, providing that the lessee abides by the penal clause stipulated by the contract, the lease contract may be terminated before the end of the lease period by notification in the pre-determined notice period. For the second-hand sales of the vehicles following their leasing period companies utilize several second-hand sales channels, mainly with a focus on wholesale. In addition to the absence of any regulatory and supervisory authority, no specific law and regulations to arrange the operational leasing business activities have been enacted yet. Prediction of vehicle values at the end of the lease period is one of the corner stones of the operational leasing business as the residual value (RV) largely affect the transaction s profitability. In estimating the RV, a number of variables are taken into consideration; how and where the vehicle is going to be used (mileage, probability of accidents, etc.), development of general macroeconomic conditions, predictability of amendments in relevant regulations particularly tax laws, volatility of exchange rates, and competition level in the sector. Irrational estimation of residual value by the urge of fierce competition is one of the most significant risks for the sector. On the other hand, prediction of second-hand prices of the vehicles at the end of the lease period is much easier compared to that of machinery and equipment owing to the second-hand market depth. The costs of services as insurance, servicing, repair, and the replacement of parts and vehicles are also carried by the LDR TURIZM A.Ş. 5

7 lessor and correct estimations of these are significant for appropriate pricing at the initial price offering stage. Throughout the lease period, companies are exposed to several risks including credit risks, interest and currency risks, operational risks, and price risks. As exchange profits/losses generated by F/X positions exert significant pressure on profitability through the floating exchange rate regime in Turkey, companies generally utilize natural hedges on a transaction basis by matching of borrowings in foreign currency denominations with lease receivables of the similar terms. The periodicity of revenues is deteriorated to an extent by acceleration of profits/losses into early periods because lease receivables of future periods in foreign currency denominations are not included in the balance sheet, thus causing dislocation of actual performance levels across the periods. Vehicle purchases include VAT payments while the deduction of the VAT from the relevant tax base requires a certain period through accruals over monthly lease payments and outstanding payments at the end of the lease period through the sale of the vehicles in secondhand market. These elapsed times involve cash outflows and need to be financed by the companies. Beginning in 2005 with the involvement of foreign companies in the sector, the market size of the Turkish fleet leasing sector was estimated to have reached TRY18.00 bn and the fleet lease industry in Turkey had a total size of 277,225 vehicles at the end of (: 236,930) according to estimations by the Association of Car Rental Institutions (TOKKDER). The fleet leasing sector is a part of the automotive industry, a driving sector of the economy. The leasing sector procured a total of 123,073 vehicles in, 82,777 of which are replacements. Per some surveys, the fleet leasing sector continues to grow with the demand of large-scale companies. As nearly 90% of the economy is composed of the activities of SMEs and nearly 6% of these companies adopt fleet leasing the operational leasing sector has growth potential and a positive outlook. In addition, out of the nearly 2 million vehicles used for commercial purposes in Turkey, only 10% are utilized via operational leasing activities. On the other hand, the contribution by SMEs for the growth of the industry has followed an upward trend in recent years as indicated by the declining vehicle number per client: Client Structure Number of Clients 42,634 33,116 26,189 Vehicle Per Client Source: TOKKDER Despite the fluctuating trend, the segment C still ranks 1 st - covering more than half of the vehicles utilized by the sector: Segment Distribution of Vehicles (%) B C D E-F (SUV) LCV Source: TOKKDER With the exception of FY, the average terms of maturity have significantly shortened during the recent years, as shown in the table below: Maturity Distribution of Lease Contracts (%) < 18 months months months >42 months Source: TOKKDER The majority of contracts in the sector are denominated in EURO currency. The contracts in TRY and USD denominations follow a fluctuating trend: FC Distribution of Lease Contracts (%) EURO USD TRY Source: TOKKDER Considering that the person per vehicle figures in Turkey is much higher than in Europe and other developed countries, LDR TURIZM A.Ş. 6

8 ,149 1,953 2,488 2, OPERATIONAL LEASING the automotive sector in Turkey has significant room for growth, which in turn will contribute to the growth momentum of the operational leasing sector. The widespread use of commercial fleet leasing and the effective utilization of its tourism potential in the European and American markets are driving forces behind the sector s high business volume. Similar strategies could not be put into effect in Turkey due to regulative impediments, the Road Transportation Law, and imbalances in macroeconomic dynamics in the overall economy. The amendment to the Road Transportation Law introduced in 2009 in particular caused difficulties and a contraction in the commercial fleet car rental sector. The absence of national standardization, lack of supervision, widespread unregistered business volume, and ambiguity of regulating authority issue among ministries continue to remain important issues of the sector. During the current year, the sector has been adversely affected by the rapidly rising exchange rates and financing expenses and increase in special consumption tax. the liability side. In other words, as of FYE, 77.50% of the funds generated by the Company were utilized to finance current assets, a figure that slightly increased from 76.57% compared to the previous year, while the portion used in operational lease constituted 91.47% of the total current assets (FYE: 95.10%) ANNUAL Asset Growth Rates (%) CUMULATIVE On the other hand, over the last five-year period, the assets based cumulative growth performance of Lider Filo performed a significant upward trend and reached a rate of % as of FYE. Association of Car Rental Institutions (TOKKDER) was founded in Istanbul, Turkey in 1996 to represent rent-a-car and fleet leasing companies. Currently with 104 members in Turkey, it covers nearly 71% of the sector. Lider Filo is also a member of this association. TOKKDER has been a member of LEASEUROPE, a federation of financial leasing, daily rental and operational leasing associations in Europe with 45 members in 33 countries, since Fleet-Market Share ( %) TOKKDER published a code of ethical rules in 2011 for its members on its website, including a principle authorizing its Board to supervise its members with regard to compliance with these rules. 6. Financial Foundation Following an enhancement period of market influence contraction in market share since FYE2010, the market share of Company has continued to follow an upward path with the exception of FYE, despite its low level. a. Financial Indicators & Performance i. Indices Relating to Size Sector Vehicles (Number) Fleet-LDR Despite competition in the operational leasing sector and inter/national economic circumstances, Lider Filo s total assets performed well and its annual growth rate indicated an increase of 43.64% in assets from TRY mn to TRY mn as of FYE. Inventories including vehicles under operating lease contributed to the growth rate in terms of assets, while long term bank loans and financial leasing liabilities contributed to the growth rate on 3,000 2,500 2,000 1,500 1, LDR TURIZM A.Ş. 7

9 OPERATIONAL LEASING Lider Filo has shown a steady growth in terms of fleet size. The Company s fleet of 36 vehicles at the end of 2010 reached 2,851 at the end of (1H2016: 3,182). Lider Filo has also cumulatively outperformed the sector in terms of growth in the number of vehicles during this period. Long term rental was at a faster pace compared to daily rental including VIP Transfer and second hand sales depending on the management decision. 300, , , , ,000 50,000 0 Fleet-Sector Fleet-LDR ii. Indices Relating to Profitability 3,000 2,500 2,000 1,500 1,000 In the assessment of profitability indicators, analyses of gross profitability indicators in terms of their contribution to the sustainability of business activities and net profitability indicators in terms of their contribution to the internal equity generation capacity of the Company included the resiliency level of revenues regarding cash generating capabilities of its client portfolio, the current and expected impact of financial expenses on profitability, the fleet efficiency regarding returns and operating expenditures of the vehicles and thorough estimations of residual values. The strong revenue among Company assets indicates the role played by the Company s expanding operational volume in driving asset growth. Revenues including operating lease and sale of vehicles under operating lease constituted the principle source of revenue for the Company with a share of 92.27% of total sales revenue. The remaining sales revenue was comprised of revenue from transfer of passengers and other sales. ROAA (%) ROAE (%) Residual value (RV) estimations have not been subject to significant adjustments during FYE as indicated by limited fluctuations in depreciation expense figures although these figures continue to have notable effects on net profit margin from activities. RV estimations are analysed every three months and in extraordinary situations. The factors considered in RV analyses are based on: The depreciation / gain data that occurred in the previous period (max.3 months) Current market conditions and amounts New purchase conditions and costs The Company s size and volume of operations grew steadily over the reviewed period though excessive financing costs while profits caught up with increasing sales. The key profit indicators of Return on Average Assets (ROAA) and Return on Average Equity (ROAE) followed an upward pattern until FYE but reversed back and slightly dropped to 1.26% and 4.94%, respectively. In line with the expansion of the Company s equity and assets onwards, profitability indicators fluctuated as a result of the financing needs of the Company s investments. Despite the pressure on financing expenses from FX loss and loans interest payments, the ratios managed to gain positive values over the reporting period. The profit from principal activities noticeably increased by 41.70% to TRY 20.24mn in FYE while the net profit indicated a considerable drop to TRY 1.65mn in FYE downwardly affected the internal equity generation capacity, compared to the previous year s profit of TRY 9.62mn, as a result of increased expenses derived financing costs of interest payments and FX losses. On the other hand, the sustainability of the Company s revenue streams is a factor that further increases its ability to meet financial expenses. Sales / Asset (%) The increasing volume of revenue from operating lease of TRY 36.70mn indicated an almost 35% increase compared to the previous year s lower sales revenue figures of TRY LDR TURIZM A.Ş. 8

10 27.25mn. Sales among total assets slightly dropped to 48.97% in FYE as a result of higher growth rates in assets compared to sales revenue. Regarding the Company s nature of business, the financing expenses within the expense composition have continued to have the largest share. Moreover, well-reputed clientele and high concentration level of lease receivables within a three-year period supporting resiliency and predictability of revenues. b. Asset Quality Asset quality and efficiency of the Company was assessed by the evaluations included the granularity level of lease receivables based on non-cancellable contracts from a well-diversified client portfolio; over-collateralization issue prevalent in the sector through the dual collateral structure mainly consisting of assignment of lease receivables and pledges on assets used in operational leasing activities; receivables turnover and impairments; fleet efficiency; and level of non-earning assets. The assets used in operational lease were treated as current assets taking into consideration the depth of the second-hand vehicle market in Turkey and low percentage of the total second hand sales of the sector therewithin. The main operating field of the Company is the operational leasing of vehicles. The future lease payments receivable under non-cancellable contracts are mostly composed of well-reputed and well-diversified clients, supporting Lider Filo in maintaining its asset quality level. The total amount of lease receivables obtained through its operational lease activities regarding 141 vehicles signed in 2016 for TRY 7.99mn to be collected 2016 onwards. The ratio of current assets to non-current assets was %. Vehicles under operational lease with a share of 70.89% of total assets stated under non-current assets are considered as inventories in JCR Eurasia Rating s methodology. Company assets largely consisted of current assets with a share of above 70% throughout the reporting period due to the nature of operations including vehicles under operational lease. range of commercial regions. The rental income from these rents increased by 38.60% to TRY 792k and there are no operating expenses for these investment properties. There are mortgages of TRY 7mn and TRY 8mn on investment properties. In addition, trade receivables held the same share of 1.87% of total assets for the last two years and the average collection period was 27 days (FYE: 23). Lider Filo does not have any significant overdue receivables due to its customer base which is spreading over many industries and numbers. The Company s management strategy of provisioning for full doubtful receivables contributed to the asset quality. Additionally, the Company embraced a more prudent liquidity attitude considering the current economic outlook and increased the share of its liquid assets in total assets to 3.44% as of FYE from the previous year s 0.74%. Lider Filo served 683 clients at the end of FYE. This implies an increase of 49.78% in the number of customers compared with the previous year (FY:456). Diversified lease receivables and continuation of the reputation and cash generating capabilities of its clientele within its portfolio bearing moderate level of sectorial concentration and notably increasing granularity in terms of client contract receivable basis provide Lider Filo sustenance of its asset quality. The average number of vehicles per customer decreased to 4.32 for the Company regarding long term contracts, compared to 5.9 for the sector. The share of VAT receivables from tax administration within the total assets maintained its downward trend and decreased to 6.07% as of FYE from 7.60% as of FYE (a 14.75% YoY increase in line with the asset growth) despite increases in its fleet size. Although only to be deducted from output VAT on second hand vehicle sales and rents, these receivables shall provide a liquidity advantage to the Company in the following years. 100% 95% 90% 85% Non-Revenue Earning Vehicles 5.6% 0.4% 0.3% Revenue Earning Vehicles 7.7% 10.8% 8.6% Despite its slightly lower level, inventories were the largest item among total assets with a share of % in FYE, followed by tangible assets with an increased share of 14.27%. The tangible assets consist majorly of investment properties including buildings in rent in a wide 80% 75% 70% 65% 60% 99.6% 99.7% 94.4% 92.3% 91.4% 89.2% LDR TURIZM A.Ş. 9

11 The ratios of revenue earning vehicles have fluctuated during the reporting period, they continue to imply satisfactory levels of productivity for the Company. c. Funding & Adequacy of Capital The main considerations in the evaluation of the funding mix and adequacy of capital were changes in the Company s leverage stance, convenience level regarding accession to external resources and efforts to generate alternative funding channels, compatibility of the funding terms as to function as natural hedging instruments with those of its receivables and equity level and its generation dynamics. The funding needs of the Company are met principally through bank loans, its own equity and other short term trade payables. As of December 31,, 21.86% of total resources were composed of equity, of which 68.66% was paid-in capital and 27% was retained earnings (TRY 11.79mn). An increase in the indebtedness level coupled with a decrease in net profit engendered a decrease in the share of equity in total resources. In FYE, the Company s total liabilities notably increased by 61.71% to TRY mn from TRY 96.17mn, derived from the growth in long term bank loans and financial leasing liabilities. Thus, the sound increase in liabilities buttressed the increase of the debt ratio to 78.14% from 69.40% FYE and consequently the equity to liabilities coverage declined to 27.98% from 44.08%. Short Term Liabilities / Total Assets (%) Long Term Liabilities / Total Assets (%) Equity+Minority Interest / Total Assets (%) A relatively high portion (60.44%) of the total financial liabilities were based on long term loans with a maturity structure between 1 to 3 years and utilized to finance operations. Under these circumstances, although the longterm maturity based borrowing eases the liquidity management, the conditions embedded in the borrowing agreement exerts pressure to financing expenses to a certain extent. Moreover, to diversify funding sources and extend the maturity profile of its liabilities, the Company projected a bond issue in the foreseeable future depending on economic conditions. Considering the risk report sent by the Company in November,2016, total credit lines including cash lines worth TRY mn have been extended to Lider Filo by financial institutions, around 70% of this line has been drawn upon. 7. Risk Profile & Management a. Risk Management Organization & its Function General Information In the absence of any sector-specific laws and public authorities to regulate and supervise the sector and to eliminate possible systemic risks, strict risk management challenges arise in the operational leasing sector in Turkey. The Company is exposed to various risks such as credit, foreign currency and liquidity as a result of its operations in the operational leasing sector. On the other hand, Lider Filo takes necessary measures to act proactively in terms of risk management in order to ensure that its business operations are not adversely affected Despite the increase in the leverage ratio over the last three consecutive year period, the level of equity remains adequate and the debt burden is manageable regarding the absolute values of equity. The Company meets its funding needs particularly through long term liabilities that provide comfort to the liquidity management The risk policy of the Company maintains the goal of ensuring Lider Filo s expansion, sustainably increasing corporate value and realizing fiscal and planned objectives. The risk management practices focus on the unpredictability of the financial markets and aim to identify, monitor and manage risks through various financial and operational activities and precautions in order to preserve capital and sustain profitability. The Company s risks related to its business are managed at the senior management and Board level who have the adequate qualifications and experience to administer their duties as the entity currently does not have a dedicated risk management department. Briefly, the Company s risk management organization, implementations and procedures as well as such factors as LDR TURIZM A.Ş. 10

12 utilization level of natural hedges; monitoring and elimination of the risk exposures particularly the ones exerted by foreign currency positions; the diversification level of the Company s portfolio on the sector and client bases; absence of public regulatory and supervisory authorities to eliminate possible systemic risks and risk appetite of the Company in view of the operational lease business environment were effective in the evaluation of risk management practices of the Company. b. Credit Risk Credit risk arises principally from trade receivables without the shares of related parties, and time & demand deposits in banks. When combined, the Company s maximum credit risk exposure corresponded to 5.32% of the Company s total assets (FYE: 2.61%). Thus, credit risks resulting from the Company s operations remain rather limited regarding both the low level of receivables and doubtful receivables with regard to total assets stood at a negligible fully-provisioned TRY 796k. (FYE: 0.40%). Top 10 Industries Vehicles % Contract Receivables (TRY) Conculting ,93% ,88 19,68% Textile ,35% ,86 16,44% Food & Beverage ,29% ,23 8,72% Finance - Economics 153 9,78% ,49 9,96% Agriculture&Farming 140 8,95% ,24 8,40% Construction 127 8,12% ,44 11,40% Transportation&Logistic 121 7,74% ,19 8,52% Health 88 5,63% ,50 5,83% Furniture 80 5,12% ,50 5,66% Tourism 64 4,09% ,15 5,38% Top 10 Industries Total ,48 On the other hand, the Company s portfolio on client basis indicated fewer granularities as its top 10 clients had a concentration value of 24.42% in contract and 23.38% in revenue as of FYE (the top 50 clients had a concentration value of 51.96% in contract and 50.79% in revenue). c. Market Risk The financial structure of Lider Filo was exposed to market risk, mainly through fluctuations in interest and exchange rates. Market risk exposures are monitored by sensitivity % analysis. The Company s financial debt was totally comprised of fixed rate financial liabilities of TRY mn, helped the Company to avoid bearing interest rate risk. Therefore, the fluctuations in the interest rates did not directly affect the Company s current interest payment obligations. The companies operating in the sector tackle foreign currency risks resulting from foreign currency denominated transactions under the floating exchange rate regime in Turkey through natural hedges where borrowings in foreign currency denominations are matched with lease receivables of the similar terms. On the other hand, Lider Filo has been exposed to currency risk through the translation of foreign currency denominated assets and liabilities into Turkish Lira. Foreign exchange risk arises from the difference between future transactions and recognized assets and liabilities % of total bank loans were based on EUR while 74.41% of lease receivables were based on foreign currency, where the gap between these two figures pressuring the FX position of Company Total Foreign Currency Position / Total Assets (%) Total Foreign Currency Position / Equity (%) The Company s foreign currency position (against USD and TRY with Euro being the Company s functional currency) with regard to assets and equity significantly increased during FYE in absolute and relative terms. The Company was short in USD and Euro against the TRY. The total balance sheet FX position to assets and equity ratios of the Company were 7.53% and 34.45%, respectively, at the end of FYE. Due to the FX risk exposure, the Company s net profit/loss indicated a variance of approximately (+/-) TRY 1.51mn at the end of FY, assuming an increase or decrease of 10% in exchange rates and that all other variables remain constant. On the other hand, Lider Filo s service revenues are denominated to a large extent in foreign currencies, which provide natural hedging for the Company. However, it should be noted that these figures were based on the adjustments made by JCR Eurasia regarding inclusion of EUR and USD lease receivables within assessment of the FX position. LDR TURIZM A.Ş. 11

13 d. Liquidity Risk The potential mismatch between the timeline of the cash inflows and the cash outflows due to debt & trade payable repayments generates an uncertainty and liquidity risk. Liquidity profile of the Company was assessed by evaluating constituents and terms of liabilities; maturity structure of future lease receivables; asset turnovers; working capital indicators and level of free cash flows. The book value of the Company s financial liabilities including bank loans and trade borrowings exposed to liquidity risk was TRY mn as of FYE, an increase from TRY 91.03mn in the previous year. The ultimate responsibility for liquidity risk management belongs to the board of directors, and the Company monitors its projected and realized cash flows on a continual basis and ensures that the maturities of financial assets and liabilities match, generating sufficient funds and leverage reserves where necessary. The main constituents of the Lider Filo s liquidity profile are short and long term borrowings from financial institutions, contractual monthly lease payments from clients, proceeds from vehicle disposals in the second-hand market and retained profits. Moreover, to diversify funding sources and extend the maturity profile of its liabilities, the Company planned for a bond issue in the near future. The depth of the second-hand vehicle market in Turkey together with the low share of the total second hand sales of the sector and non-cancellability entailment of the Company s lease contract receivables, 51.35% (FYE: 49.49%) of which are expected to mature during FYE2016, underpin the predictability level of Lider s expected proceeds from the second-hand sales and lease contracts. shortened during the previous years, contributory to the liquidity profile in the medium term Net Working Capital / Long Term Liabilities (%) Net Working Capital / Non-current Assets (%) Net Working Capital / Equity (%) The cash and cash equivalent balance of the Company increased by % to TRY 6.88mn as of FYE, comprising both a free cash buffer and reserved deposits as assurance for operations. Despite increasing funding needs due to growth of the Company s activities and investments, the remarkable steady increase in the net working capital since establishment confirmed the easing of the liquidity management. Moreover, the levels of Lider Filo s liquidity indicators regarding the net working capital, also called operating liquidity, (including inventories and assets used in operational lease) have been increased among non-current assets and equity. On the other hand, the ratio of NWC to long term liabilities significantly decreased as a result of augment of 50.45% in long term liabilities, mainly stemming from bank loans growth. In this regard, the coverage of net working capital to non-current assets and to equity increased to their highest levels of % and %, respectively, while net working capital to long term liabilities fell to 98.73%. Interest Coverage Ratio Up to 1 year Between 1-5 years 20 90,000,000 80,000,000 Receivables from Future Operational Leases - TRY ,000,000 60,000, ,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 The concentration of the Company s lease receivables within a year period is 51.35% of the total lease receivables. However, the terms of the lease contracts have The Company s interest coverage ratio significantly halved to % in FYE, reversing back its ongoing trend compared to previus years, was well below the adequate level. On the other hand, the steadiness of progressive increase in revenue secure the interest payments. LDR TURIZM A.Ş. 12

14 e) Operational, Legal Regulatory & Other Risks In the scope of operational risk, Lider Filo reported no losses ensuing from transactions, system and human errors in FYE along with absence of penalties brought against the Company by regulatory and supervisory authorities over the last year. The senior management carries out duties to avoid probable operational risks when required due to the absence of no specific unit. 8) Budget & Debt Issue Lider Filo projected a year-end asset size of TRY mn in FYE2016 and TRY 343mn in FYE2017 with an annual growth rate of 43.95% and 19.23%, respectively. In accordance, the equity is expected to increase by 9.26% in FYE2016. The share of equity within the funding mix is expected to decline slightly to 16.59% in FYE2016. (FYE2017: 17.71%). The Company also projects an increase of 53.65% in liabilities reaching TRY mn in FYE2016. The planned budget and growth strategy projections during FYE were modified during FYE2016. Lider Filo aims to increase its market share in the sector. The Izmir and Ankara branches were launched as a part of its strategy to expand. The Company projects to expand its activities between FY and FY2017 by increasing its assets by 71.72% on a cumulative basis Annual Assets Growth Rate Annual Liability Growth Rate Annual Equity Growth Rate The fleet lease industry in Turkey has maintained its trend to outperform GDP during the previous years even at times recession had been observed in the automobile industry. In addition, the contribution by the SMEs for the growth of the industry has been following an upward trend in recent years as indicated by the declining vehicle number per client. In this regard, JCR Eurasia Rating believes that the Company has the potential to meet its obligations considering that it maintains its operational lease activities and sufficient revenue generating capacity. Debt Issue Depending on the economic conjuncture, the Company may issue a bond in the near future. Lider Filo projected to extend its funding channels through bond issuances particularly in a leasing sector with scarce alternative funding sources. As a result of a more diversified funding base, the Company will be able to benefit from an improving liquidity quality. The Company s projected issuance of debt instrument in the amount of TRY 60mn with 6,12 and 18 months maturity is expected to reflect a more balanced funding mix and maturity structure. The Turkish operational leasing industry grew by 17.01% in FYE whereas Lider Filo grew by 14.59% in terms of number of vehicles, resulting in a limited loss of market share. However, the Company has maintained its growth and market share increase in the sector since establishment. Lider Filo estimates to reach 4,250 vehicles as at the end of FYE2017 by growing 49.07% between and LDR TURIZM A.Ş. 13