S&P downgrades Turkish appliance maker Arcelik’s credit rating, outlook stable

Investing.com -- S&P Global Ratings has downgraded the long-term issuer credit rating of Turkish appliance manufacturer, Arcelik (IS:ARCLK), from ’BB’ to ’BB-’, and its senior unsecured debt to ’B+’ from ’BB’. This downgrade is due to Arcelik’s worsened profitability, primarily resulting from the dilutive impact of the recent acquisition of Whirlpool (NYSE:WHR) Europe, high staff costs, and intense competition in Europe.

In 2024, Arcelik’s S&P Global Ratings-adjusted EBITDA margin fell to 3.9%, down from 6.7% in 2023. The company’s dependence on costly local currency short-term funding is also straining its ability to cover interest payments. S&P predicts Arcelik’s EBITDA interest coverage ratio will remain at 1.0x-1.5x in 2025 and 2026.

Arcelik has been raising significant debt at its operating subsidiaries, including a €500 million syndicated term loan. This move, according to S&P, increases the subordination risk for lenders to its senior unsecured notes.

Despite these challenges, S&P maintains a stable outlook for Arcelik. The rating agency believes that the company will gradually improve its profitability in the next 12-18 months, thanks to successful integration of Whirlpool Europe and dedicated cost-saving initiatives. These measures are also expected to gradually improve Arcelik’s ability to cover interest payments.

Arcelik is working towards achieving €100 million-€150 million of cost synergies with Whirlpool Europe, largely through the elimination of office positions across Italy, Poland, and the U.K., and subsequent optimization of its manufacturing footprint. The company is also looking to achieve additional cost savings through digitalization initiatives, which will support better productivity and faster execution of cost synergies.

In terms of financial forecasts, S&P predicts that Arcelik will improve its S&P Global Ratings-adjusted EBITDA margin to about 4.5%-5.0% in 2025 and further to 5.0%-5.5% in 2026, up from the 3.9% achieved in 2024. However, these metrics remain lower than the 6.7% achieved in 2023, before the acquisition of Whirlpool Europe.

Arcelik’s EBITDA interest coverage ratio is expected to remain at 1.0x-1.5x over the next 12-18 months due to its reliance on expensive local-currency short-term debt. The company issued three short-term local-currency bonds in 2024 with coupon rates of 44%, 46.5%, and 47%, highlighting the current high cost of short-term funding in Turkey. However, S&P forecasts that Arcelik will be able to refinance its working capital-related short-term debt, thanks to its strong relationship with local banks and its positive track record of accessing bank and capital market financing.

Arcelik is expected to achieve neutral to negative Turkish lira (TRY) 1 billion free operating cash flow (FOCF) in 2025 and 2026 due to high restructuring expenses. This would be a significant improvement from the negative TRY24.8 billion achieved in 2024.

The partnership with Whirlpool in Europe presents cost synergies and business diversification opportunities but also carries execution risks. The transaction combines both companies’ European manufacturing assets and brands under a newly established business, of which Arcelik owns a 75% stake. The partnership increases Arcelik’s manufacturing capabilities and presence in Europe, but also carries execution risks given the large provision for restructuring costs and potential delays in achieving targeted cost synergies.

The stable outlook reflects S&P’s view that Arcelik will gradually improve its S&P Global Ratings-adjusted EBITDA margin toward 4.5%-5.0% in 2025 and further to 5.0%-5.5% in 2026. The company is also expected to maintain its EBITDA interest coverage ratio within the 1.0x-1.5x range and sustain debt to EBITDA within the 4.0x-5.0x range, while generating neutral to negative TRY1 billion FOCF in the next 12-18 months.

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