dogus holding a.s. - dogusgrubu.com.tr · investments. excludes cash and debt at holding level. for...

CORPORATES

CREDIT OPINION14 March 2018

Update

RATINGS

Dogus Holding A.S.Domicile Turkey

Long Term Rating Ba2

Type LT Corporate FamilyRatings - Dom Curr

Outlook Negative

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Dion Bate +971.4.237.9504VP-Senior [email protected]

Rehan Akbar +971.4.237.9565VP-Senior [email protected]

Juvereya Shoab +971.4.237.9550Associate [email protected]

David G. Staples +971.4.237.9562MD-Corporate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Dogus Holding A.S.Update following sovereign rating action

SummaryDogus Holding's (Dogus Group) Ba2 rating is underpinned by (1) a moderate financial profile,with estimated market value-based leverage (MVL) of about 29.7% (using equity book valuefor unlisted assets) and 9.8% (using management fair value estimates) as of Dec-2017;(2) investments in a diversified group of businesses and sectors, a number of which havesignificant growth potential in the medium-term; (3) a growing proportion of offshoreoperations in food and entertainment sectors; and (4) its strategy to deleverage throughasset disposals, as demonstrated by the recent sale of a minority stake within its food andentertainment businesses for $200 million.

The ratings are constrained by (1) Dogus' geographical concentration of revenues, whichare mainly based in Turkey (Ba2 stable), and are linked to the performance of the Turkisheconomy; (2) an investment portfolio which is skewed towards growth businesses andtherefore many investments are not regularly paying dividends resulting in a low interestcover ratio of 0.1x ((FFO + interest expense)/ interest expense); (3) a limited degree ofliquidity available through its listed stakes in Dogus Otomotiv (DOAS) and Dogus REIT thatcovers about 0.67x of holding level net debt; and (4) increasing group debt and high exposureto foreign currency volatility, as almost all of Dogus Group's debt is denominated in USdollars or euro, though partially mitigated by some natural and active hedging.

Exhibit 1

Consolidated debt is at its historical peak, outpacing the average growth rate in consolidatedrevenue

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

5,000

10,000

15,000

20,000

25,000

Dec-13 Dec-14 Dec-15 Dec-16 Jun-17 (LTM)

In T

RY

millio

ns

Consolidated Revenue Consolidated Debt Debt / Book Capitalization

All figures are calculated using Moody's standard adjustments. LTM = Last twelve monthsSources: Reported consolidated financial statements and Moody's Investors Service

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MOODY'S INVESTORS SERVICE CORPORATES

Credit strengths

» Diversified business group with many discrete assets that provide an opportunity to exit/partially divest some investments asneeded

» Exposure to tourism, real estate and food & beverage sectors which have medium-term growth potential but are exposed topolitical and security concerns in Turkey

Credit challenges

» Although slowed down, ongoing investment needs of subsidiaries create uncertainty around future leverage and liquidity levels ofholding company and group but mitigated by management track record

» Reduced predictability of dividend inflows into holding company

» Slowing economic growth in Turkey translates into a challenging operating environment

Rating outlookThe negative outlook reflects the weaker liquidity profile due to the reduction of cash balances as a result of its investment strategyand loss of dividend income from Garanti Bank combined with limited visibility on future dividend income from its investments.

Factors that could lead to an upgradeAn upgrade is unlikely at this time given Dogus' operational concentration in Turkey, exposing the company to the heightened risksassociated with the operating environment in Turkey. The ratings are also constrained by an investment portfolio that has yet tomature to a level where the holding company regularly receives a diversified dividend income stream through its investments andsubsidiaries. In addition, Moody's expectation would be for MVL to be below 30% and FFO interest coverage above 3.0x on a sustainedbasis.

Factors that could lead to a downgradeThe rating could be downgraded if MVL were to increase above 40% and FFO interest coverage were to remain below 2.0x. Weakerliquidity, particularly if holding level cash is less than upcoming debt maturities (assessed over a rolling 12-18 months forward-lookingview) could also create negative rating pressure.

Negative pressure on Turkey's sovereign rating could also place downward pressure on Dogus Holding's ratings.

ProfileHeadquartered in Istanbul, Turkey, Dogus Holding A.S. is an investment holding company owned by the Sahenk family. It comprisesmore than 200 companies, which are active in seven sectors: automotive, construction, media, tourism & services, real estate, food& entertainment and energy. The company's main activities are tied to the Turkish economy, but the company is aiming to createregional leaders in their respective industries. As of end-June 2017 (LTM), Dogus Holding reported consolidated assets of TRY33.6billion and revenue of TRY17.9 billion.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 14 March 2018 Dogus Holding A.S.: Update following sovereign rating action


Key indicators

Exhibit 2

KEY INDICATORS

Dogus Holding A.S. -Private

12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017(F)[5]

Estimated Portfolio Value (USD bn) [1] 6.5 7.7 4.9 3.8 3.1

MVL using Equity Book Value [2] 9.4% 15.7% 14.9% 30.5% 29.7%

MVL using Equity Fair Value [3] 5.4% 9.5% 6.8% 11.2% 9.8%

(FFO + Interest Expense)/Interest Expense

[4]5.7x 1.1x 0.5x 0.1x 0.0x

[1] Portfolio value is estimated by using the equity book value for unlisted investments (disclosed in the 'operating segments' footnote of the audited financials) and market value for listedinvestments. Excludes cash and debt at holding level. For 2017, the ownership stakes and book value of unlisted investments are as of June-17. Market value of listed investments is as ofDec-17.[2] Market Value Leverage (MVL) is calculated by dividing net debt at holding level by estimated value of investment portfolio. Book value of equity used for unlisted investments andmarket value for listed investments.[3] Calculated using management provided fair value estimates for unlisted investments and market value for listed investments. For 2017, fair value estimates of unlisted investments areassumed to be the same as 2016.[4] FFO at parent level for Dogus Holding is calculated as sum of service fees, dividend, interest, and rental income less opex, interest and tax paid.[5] Moody's forecasts (F) are Moody's opinion and do not represent the views of the issuerSources: Company data, FactSet and Moody's Investors Service

Detailed credit considerationsInvestment portfolio mix has been evolvingAll of Dogus' investments are unlisted apart from DOAS and Dogus REIT, which per our calculation represent around 20% of the totalinvestment portfolio using book value of equity for unlisted investments. The Group's investment portfolio value has historically beenbolstered by the high equity valuation of its Garanti Bank stake, of which the remaining 10% stake was sold in 2017 for $908 million.The proceeds were used for loan repayment, investments and capital injection into Group companies. The total proceeds of ca. $4.9billion received since 2011 have been used to reinvest in other businesses and has led to a more balanced investment portfolio mix(Ba for the Asset Concentration sub-factor). However, the shift from a portfolio with a concentrated exposure in the mature financialservices business to a more diversified portfolio but with unlisted and growth-oriented investments means that our analytical visibilityhas reduced and valuation into these investments has become challenging, given the limited information. (Ba for Investment StrategyFactor).

Since 2013, Dogus expanded its business diversity by investing in a new business segment - food and entertainment - with around 170restaurants currently in operation. It has however recently sold a minority stake for $200 million in the food and entertainment sectorwhich has a per management estimates has market value $1.2 billion compared to its investment of $298 million. In addition, theholding company won a 30-year concession in February 2014 to develop a port area (Galataport project) located In Istanbul for $702million. The port is nearing completion (to be ready by end 2019) and we expect this to result in increased dividend contribution fromits tourism companies and recurring cash flows from real estate and retail as the location will be used to develop a number of otherprojects such as a hotel, office buildings, restaurants and a retail area.

Furthermore, the business profiles of certain key investments, particularly in the real estate, food and tourism sectors, have beengradually improving as growth is generated through economies of scale and synergies. Although the operating environment for Turkey'stourism sector remains at risk to heightened political events and renewed terrorist attacks, which in the past has negatively impactedperformance. This is mitigated through significant tourism, food and entertainment investments the has been made outside of Turkey.

Rising group leverage combined with currently challenging operating environment is weakening credit profileConsolidated revenues for the Dogus Group have increased significantly from TRY8.6 billion in 2013 to TRY17.9 billion as of June 2017(LTM). However, consolidated debt has also increased from about TRY8 billion ($3.7 billion) to TRY21.3 billion ($6.45 billion) overthe same period which were used to fund long term projects. Although our analytical approach for investment holding companiesis to focus on parent level financials, we also monitor Dogus Holding's consolidated metrics given the interlinkages between thevarious operating companies and the tendency for the holding company to maintain majority stakes in the investees. In particular, the



consolidated Group's cash flow generation ability and debt capacity are meaningful indicators on the credit quality of the Group as awhole and on the ability of the holding company to service its own debt.

One of the key credit metrics to assess leverage for investment holding companies is the market value-based leverage (MVL) ratiowhich is calculated by dividing net debt at the holding level with the estimated equity value of the investment portfolio. Under ourpractice for calculating the portfolio value, we use the net asset value or carrying value of investment at the holding company level forunlisted companies and market-derived value for listed companies.

We estimate Dogus Holding's investment portfolio value to be about TRY11.7 billion as of Dec-2017 using the market value of equityfor DOAS and Dogus REIT and book value of equity for unlisted investments as of June 2017.

Exhibit 3

Decline in listed portfolio due to sale of Garanti Bank stakeListed and unlisted investments

DOAS 1,324

Dogus REIT1,014

Dogus Insaat3

Media366

Tourism3,167

Energy-504

Other investments3,568

Adjustments2,742

Unlisted investments9,342

Market value as of December 2017 is used for listed investments and equity book value as of June 2017 is used for unlisted investments. All investment values are based on effectiveownership stakes. Adjustments are to reflect the net asset value of unlisted investments by excluding the holdco level debt and cash.Sources: Company data, FactSet and Moody's Investors Service

Under these assumptions, we assess MVL to have been 29.7% as of December 2017 (Ba for the Market Value Leverage sub-factor).We note however that the MVL is 9.8% using management provided fair values for unlisted investments. Our rating takes intoconsideration the challenges in assessing a valuation to the unlisted investments but we also acknowledge that using the book valueof equity could be a conservative approach for some of the investments. We use management provided fair values as a data point inour rating assessment but also recognize that raising liquidity from the divestment of unlisted investments is more time consuming anduncertain and the realized valuations may potentially be lower than anticipated.

High geographical concentration but diversified across sectorsThe investments and assets of Dogus Holding are highly concentrated in one market, with more than 77% of the company'sconsolidated assets in Turkey (B for the Geographic Diversity sub-factor). Turkish economic growth is expected to slowdown in 2018(GDP growth projected to slow to 4% from 6.7% for 2017) which would lead to operating challenges for the Dogus Group given thatmany of its investments are sensitive to a slowdown in the domestic economy. It is however worthwhile noting that the company hasbeen increasing revenue exposure from international operations through investments abroad, particularly in Europe.

Volatility in foreign exchange (FX) rates continues to be a risk for corporates in Turkey that have structural currency mismatchesbetween their financial assets and liabilities. Active risk management measures employed by the Group provide some comfort thatin periods of volatile currency markets, the Group will prudently manage FX risk but nevertheless significant US dollar and eurodenominated debt means that the material lira depreciation over the past 12-18 months will increase the cost of servicing its debtobligations.

Geographic concentration risk is partially mitigated by a degree of business diversity reflecting investments in seven different sectors.We note that a number of these investments remain in a growth stage and rather than distributing dividends, they have beenredeploying operational cash flows into the businesses themselves. As an input to our methodology grid, we have used five sectorsrather than the identified seven in order to reflect the materiality of dividends and assets (Baa for the Business Diversity sub-factor).



Historical track record of balancing growth with prudent financial policiesDogus has not set a target leverage ratio that it will adhere to whilst managing its portfolio but over an investment cycle, managementdoes not want leverage at Corporate Dogus (consolidated Group excluding financial services) to exceed 35% on a net debt/assetbasis (29.7% as of 30 June 2017). The company chooses its investments while assessing the costs and risks, and avoids investing inspeculative instruments such as derivatives. We understand minimum cash balances at the holding level, as a policy, should not fallbelow $200-$250 million but historically have stood at higher levels (Ba for Financial Policy factor).

Dogus has characteristics of a conglomerate, and although non-recourse debt is raised at the subsidiary level, the holding companydoes on occasion extend financial support to its subsidiaries through capital injections and shareholder loans. Many of the key unlistedinvestments are also either wholly-owned or majority-owned by the company. There is therefore a degree of contingent liabilityexposure for Dogus Holding, and execution risk on certain highly capital intensive projects (such as the EUR1.4 billion Salipazariport development project) could adversely impact the credit profile of the holding company. Over the medium-term, this project isexpected to result in increased dividend contribution from the tourism businesses and recurring cash flows from real estate and retail asthe location will be used to develop a number of other projects such as a hotel, office buildings, restaurants and a retail area.

Uncertainty around dividend streams leading to inadequate cash coverageWithin Dogus Holding's investment portfolio, Garanti bank has historically been one of the single largest and one of the mostconsistent dividend payers to Dogus Holding. Given the company has sold its stake in Garanti Bank in 2017 future dividend inflows willbe lower but over time, we expect this to be partially offset by increase in dividend inflows from other business segments. For example,Dogus Holding's growing property portfolio which include shopping malls (Istinyepark Shopping Mall and Gebze Centre), buildings andoffices have provided another consistent income stream with rental income and service fees amounting to about TRY215 million in2017.

Between 2013-2016, our estimate of Dogus Holding's FFO interest coverage averaged 1.8x, but this is likely to be less than 1.0x for thenext few years (Caa range for FFO Interest Coverage sub-factor).

Liquidity analysisDogus Holding's liquidity as of December 2017 was relatively weak for a Ba2 rating with a cash balance of ca. TRY1,196 million at theholding level (B for Liquidity sub-factor). This is sufficient to comfortably cover the holding company's expected debt maturities in theyear 2018 but is not sufficient to cover all the maturities in 2019. We recognise however that management's strategy to divest in someof its assets (as seen with the recent disposal of a minority asset for $200 million) as well as track record of refinancing approachingdebt maturities, could alleviate approaching liquidity pressures. Holding level liquidity tends to vary at any given period as the holdingcompany disposes of investments and makes new investments and provides capital increases to some companies while receiving cashfrom others.

We believe that Dogus Holding over the past years has built a track record of balancing the financial needs of existing subsidiaries andnew investment opportunities with managing the liquidity and debt structure at both the holding company and group-wide level. Inthe last two to three years, group debt has continued to increase while holding level net debt is also material. The high levels of debt isa concern given the limited visibility on future cash inflows to service and repay the debt. We expect debt levels to reduce as assets aresold over the next 12 months.

Similar to how the holding company has financially supported its subsidiaries in recent years, we expect that management will usevarious levers to upstream cash to the holding level should there be a need - for instance through special dividends if the holdingcompany is facing refinancing risk. For 2017, Dogus Holding has received about TRY426 million from sources such as rental income,service fees, interest income and dividends.



Rating methodology and scorecard factors

Exhibit 4

Rating Factors

Dogus Holding A.S. -Private

Investment Holding Companies Industry Grid [1][2] Current

12/31/2017

Moody's 12-18 Month

Forward View

Factor 1 : Investment Strategy (10%) Measure Score Measure Score

a) Investment Strategy Ba Ba Ba Ba

Factor 2 : Asset Quality (40%)

a) Asset Concentration Ba Ba Ba Ba

b) Geographic Diversity B B B B

c) Business Diversity Ba Ba Ba Ba

d) Investment Portfolio Transparency Ba Ba Ba Ba

Factor 3 : Financial Policy (10%)

a) Financial Policy Ba Ba Ba Ba

Factor 4 : Estimated Market Value-based Leverage (MVL) (20%)

a) Estimated Market Value-Based Leverage Baa Baa Baa Baa

Factor 5 : Debt Coverage and Liquidity (20%)

a) (FFO + Interest Expense) / Interest Expense [3] 0.02x Caa 0x - 1x Caa

b) Liquidity B B B B

Rating:

a) Indicated Rating from Grid Ba2 Ba2

b) Actual Rating Assigned Ba2

[1] Ratios are based on holding level numbers and involves estimation of investment portfolio value[2] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures[3] FFO at parent level for Dogus Holding is calculated as sum of service fees, dividend, interest, and rental income less opex, interest and tax paid.Source: Moody’s Investors Service



Ratings

Exhibit 5Category Moody's RatingDOGUS HOLDING A.S.

Outlook NegativeCorporate Family Rating -Dom Curr Ba2

Source: Moody's Investors Service



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