Research Update: Turkey-Based Investment Company Dogus Holding Downgraded To 'B+'; Ratings Placed On CreditWatch Negative Primary Credit Analyst: Per Karlsson, Stockholm (46) 8-440-5927; per.karlsson@spglobal.com Secondary Contact: Marta Bevilacqua, Milan + (39)0272111298; marta.bevilacqua@spglobal.com Table Of Contents Overview Rating Action Rationale CreditWatch Related Criteria Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 1
Research Update: Turkey-Based Investment Company Dogus Holding Downgraded To 'B+'; Ratings Placed On Overview Dogus Holding has asked for an extension of maturity dates on part of its bank loans, which we believe reflects weaker performance of some investee companies. The refinancing process has not been finalized and it's therefore unclear whether the banks will receive appropriate compensation We are therefore lowering our ratings on Dogus to 'B+' from 'BB-', and to 'trbbb+/tra-2' from 'tra/tra-1', while placing all outstanding ratings on CreditWatch negative. The CreditWatch indicates that we could lower the ratings by several notches if we believe the proposed transaction is tantamount to a debt restructuring in which banks are not sufficiently compensated under the revised terms. Rating Action On April 18, 2018, S&P Global Ratings lowered its long-term issuer credit rating on Turkey-based investment company Dogus Holding A.S. to 'B+' from 'BB-'. The short-term issuer credit rating remains at 'B'. At the same time, we lowered our Turkey national scale ratings on Dogus Holding to 'trbbb+/tra-2' from 'tra/tra-1'. We placed all our ratings on Dogus Holding on CreditWatch with negative implications. Rationale We understand Dogus Holding has requested an extension of the maturity dates of some of its loans. We believe this is a result of lower-than-expected returns from some investee companies, and the current market situation in Turkey, which makes it difficult for management to execute asset sales as planned. We lowered the ratings because we see a risk that the value of Dogus Holding's portfolio has declined significantly, and that its loan to value (LTV) has WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 2
increased to more than 30%. As such, it's unclear whether Dogus Holding's management will be successful in its strategy to dispose of assets, which implies that it could become difficult to meet debt maturing in 2019. At this stage, it's uncertain whether the banks will agree on the proposed debt extensions. Therefore, we still see a risk of a selective default. However, we currently view the proposed refinancing as opportunistic. We believe Dogus Holding would be able to meet its debt obligation in 2018 even if the proposed extension does not materialize, but would be dependent on asset sales to meet obligations due in 2019. The same is not necessarily true for all the portfolio companies. We note that Dogus Holding's management has recently sold 17% of its stake in D.Dream Group for about $200 million, and understand it is evaluating further asset sales. We regard as positive that Dogus Holding has relatively significant assets that could be offered to banks as collateral, as compensation for the proposed extension. We understand that several of Dogus Holding's investee companies are in similar discussions with bank lenders. The group's combined debt totals about $6 billion, according to management. At this stage, we think that banks could get some security packages for smoothing the debt-maturity schedule. However, it is still unclear whether the negotiations will be successful, and therefore also if we will assess the lenders as receiving appropriate compensation. If Dogus Holding is able to extend its maturities, this could improve its debt maturity profile. But we see a risk that if banks agree to extend the maturity dates and, potentially, lower interest charges, they could receive less than the amount stipulated in the initial loan agreement. The Turkish lira has weakened significantly against the U.S. dollar and euro, in which Dogus Holding's main obligations are denominated. In the past, this was somewhat mitigated by cash holdings in hard currency and by part of the group's operating activities being in a currency other than Turkish lira. However, the amount of cash at the holding level has decreased following large investments. We equally see a risk that cash flows in the form of dividends from investee companies have been lower than expected. We understand that management projects increased dividends from portfolio companies from 2019, since more projects will be operational. We continue to view Dogus Holding's business risk profile as being at the lower end of our weak category, and expect that there will continue to be material swings in the value of unlisted assets. When we resolve the CreditWatch, we will also review the profitability potential from all of the key investee companies. We see a risk that the recent situation in Turkey could weigh on asset values and that Dogus Holding's LTV ratio has deteriorated significantly. Recent years' volatility in asset prices clearly indicates that Dogus Holding is highly exposed to the Turkish market, which faces increased political tension, policy constraints, rising inflation, and exchange rate and domestic tensions that may very well continue to restrain growth and asset prices over the medium term. Also, there is inherently greater uncertainty regarding the value of unlisted assets. Nevertheless, we acknowledge that, in recent years, Dogus Holding has started to diversify its WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 3
investments outside Turkey. According to management, about 70% of its investments in tourism and marina operations are outside Turkey. Under our base case for Dogus Holding, we assume: A risk of the LTV ratio being higher than 30%. Because of the volatile environment in Turkey, including an unstable political situation that affects the economy and the dollar-to-lira exchange rate, we continue to expect material volatility in the LTV ratio. We now see a risk that the cash flow adequacy ratio may fall below 0.7x in 2018 and Dogus Holding will be reliant on asset sales to repay maturing debt if the refinancing falls through. Because we treat Dogus Holding as an investment holding company, we expect management to sell assets occasionally to meet its debt obligation. Liquidity We believe Dogus Holding's liquidity has weakened and anticipate that its sources of funds will be below 0.9x uses of funds over the 12 months started March 31, 2018. Therefore, we think that Dogus Holding will be dependent on asset sales or refinancing of its debt. We still believe, however, that the group has a good standing in its local market, as shown by a recent Turkish lira 350 million bond issue. We also consider that management has a sound relationship with local banks, although we believe that Dogus Holding will face problems refinancing outside Turkey. We also believe that, in the current situation, Dogus Holding will depend on the willingness of its banks to extend its loans. We also note that the liquidity situation at some of the investee companies is more challenging; but we don't expect they will receive any major support from Dogus Holding. According to management, there is no cross default from any of the major investee companies. Dogus Holding's principal liquidity sources for the 12 months started March 31, 2018, include: According to management, cash and cash equivalents at the holding level of around $150 million, down from $667 million the year before. Dividends from portfolio companies and service, rental, and fee income of around $50 million. Principal liquidity uses over the same period: $108 million of short-term debt, most of which is due in March 2019, according to management. Operating cost, interest expenses, and dividend payments of $100 million $150 million, according to management. CreditWatch We aim to resolve the CreditWatch on Dogus Holding within the next three months. If the proposed debt maturity extension materializes, we will evaluate to what extent the banks have been compensated. If we conclude that the banks WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 4
would receive less than agreed in the initial loan contract, we could lower the rating to selective default before subsequently raising it to reflect any benefits of the restructuring; however, that is not our base-case expectation. If the proposed debt maturity extension is unsuccessful, we could potentially lower the rating by one or more notches if we believe Dogus Holding will be unable to meet upcoming debt maturities, or if the portfolio companies are generating insufficient cash to improve Dogus Holding's cash flow ratios. We could also lower the rating if we believe the value of Dogus Holding's asset portfolio has weakened significantly relative to loans outstanding. Alternatively, we may affirm the rating if Dogus Holding's prospective liquidity position is materially bolstered by asset sales, a successful refinancing, or other means, such that upcoming debt maturities are comfortably covered on a continuing basis. Related Criteria General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables, Aug. 14, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Corporates - Industrials: Methodology: Investment Holding Companies, Dec. 1, 2015 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 5
General Criteria: Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009 Ratings List Downgraded; CreditWatch Action To From Dogus Holding A.S. Long-Term Issuer Credit Rating B+/Watch Neg BB-/Negative Short-Term Issuer Credit Rating B/Watch Neg B Turkey National Scale Rating trbbb+/watch Neg/trA-2 tra/--/tra-1 Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 6
Copyright 2018 by Standard & Poor s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an as is basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. STANDARD & POOR S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor s Financial Services LLC. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 18, 2018 7