OREANDA-NEWS. Fitch Ratings has affirmed Arcelik A.S.'s (Arcelik) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+' and National Long-term rating at 'AA(tur)'. The Outlooks are Stable. Fitch has also affirmed Arcelik's senior unsecured rating at BB+.

KEY RATING DRIVERS
Stable Financial Performance, Weak Free Cash Flow
Arcelik's 2014 financial results were broadly stable and within Fitch's expectations. The recent slowdown in the domestic economy continued to be balanced by international revenue growth, backed by market share gains and recent deterioration of the Turkish lira. Organic growth was higher than expected in both domestic and international markets with 5% organic growth vs a 13% reported growth. Free cash flow (FCF) remained negative due to elevated working capital (WC) needs. Fitch expects muted growth in the medium term as the domestic economy continues to be under pressure during the pre-election period, further sharp FX movements, and EBITDA margins to be in line with historical averages.

High Working Capital Needs
Arcelik has a high working capital to sales ratio due to the Turkish market practice of manufacturers financing a portion of customer purchases. WC needs improved to 36% of sales as of FYE2014 vs 39% in 2013, having been negatively affected by the lira devaluation and muted growth in the Turkish economy. Fitch does not forecast major unwinding in WC needs in the medium term. Until consumer confidence and consumption levels return to normalised levels, Fitch believes that the extent of cash outflow will depend on inventory and receivables management. Effective WC management remains key to Arcelik achieving positive FCF generation.

Strong Growth in International Markets
Arcelik has achieved strong top line growth in the past years outside Turkey, taking advantage of more price-conscious consumers in Western Europe as well as its previous marketing and distribution network expansion efforts. Further growth in developed markets in the short to medium term is likely as the company continues to capitalise on its present momentum and current market trends, although this may place pressure on profitability as Fitch believes that margins in international markets tend to be lower than Turkey.

We believe that recent investment/expansion plans in the ASEAN region is a positive step towards futher geographic diversification. Targeting markets where appliance penetration rates are lower than the rest of the world could also support strong revenue growth. The new refrigeration plant is expected to bring USD500m of extra revenues in the medium term and is likely to provide the first footprint for additional export opportunuties in the region. However, Arcelik's exposure to emerging markets is higher than its close peers, which might lead to more vulnerability to FX movements, political risks and volatile macroeconomic conditions.

Stable Adjusted Leverage
Arcelik's reported leverage is negatively affected by its higher than average working capital needs, as a significant portion of durable goods are sold on credit in Turkey. While this is partly financed by Arcelik, the consumer credit risk is covered by bank letters of credit. Fitch assumes approximately 120 days of domestic receivables comes from this business practice in Turkey and adjusts debt accordingly to reflect a more accurate peer comparison. On this basis, Arcelik's FFO-adjusted net leverage was 1.4x at end 2014 (from 1.2x at end 2013). Fitch expects slower deleveraging in the next two years until the political risk subsidies. However, we still forecast FFO adjusted net leverage slightly below 1.5x, supporting the rating.

Improved Debt Maturity Profile and Diversification
Taking advantage of the historically low interest rates, Arcelik has been diversifying its funding base in the past two years with the issuance of USD500m 2023 and EUR350m 2021 eurobonds. The issuances have improved Arcelik's debt maturity profile to approximately 4.5 years from less than two years in 2012. Fitch believes that diversifying the funding base away from short-term bank financing practices in Turkey is credit positive. Also, both Eurobonds are senior unsecured and have fixed interest rates, providing security for potential increase in interest rates in Turkey, and international markets in general.

Increased Macroeconomic Risks
Fitch believes that a prolonged decline in currency along with other domestic shocks from country's political crisis poses a risk for Turkish corporate ratings in general. Arcelik's FX exposure is balanced by its robust export revenues and hedging, but it is still vulnerable to higher than expected slowdown in domestic market and any cost increases that could result from lira devaluation

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Muted organic growth environment both in domestic and European markets until 2016.
- Revenues to be driven by greenfield investments and organic growth with no M&A forecasted.
- Stable profitability margins in line with historical averages, negative headwinds from FX movements to be balanced out by decreasing raw material prices.
- Further cash outflows from WC in line with revenue growth.
- Capital expenditures broadly in line with historical levels.

RATING SENSITIVITIES
Taking into account Arcelik's large cash position on its balance sheet, Fitch has changed its leverage sensitivities from receivable adjusted FFO gross leverage to available cash adjusted net FFO leverage.

Positive: Future developments that could lead to positive rating actions include:
- Receivable-adjusted FFO net leverage ratio below 1.5x.
- FFO margins consistently above 10%.
- FCF margin above 2% on a sustainable basis.

Negative: Future developments that could lead to negative rating action include:
- Receivable-adjusted FFO net leverage ratio above 2.5x.
- FFO margin below 8%.
- Consistently negative FCF.