Turkish Airlines’ credit rating upgraded by Fitch Ratings

Investing.com -- Fitch Ratings has improved the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) of Turk Hava Yollari (IS:THYAO) Anonim Ortakligi (Turkish Airlines; THY) to ’BB’ from ’BB-’, with a stable outlook. The Bosphorus Pass Through Certificates Series 2015-1A class A notes have been affirmed at ’BB+’. Fitch has also upgraded THY’s Standalone Credit Profile (SCP) to ’bb’ from ’bb-’.

The SCP upgrade is based on Fitch’s anticipation of THY’s credit metrics stabilizing at more favorable levels than previously expected, with EBITDAR leverage predicted to be between 3.0x-3.5x from 2024 to 2027. The revision takes into account THY’s eased debt capacity compared to its peers.

The SCP also indicates THY’s foreign-exchange exposure and reliance on Turkey as a key market, as well as its strong market position being one of the top five carriers in Europe and the Middle East, with EBITDAR margins around 20%. The IDR is one notch above Turkey’s Country Ceiling of ’BB-’.

Fitch expects THY’s performance from 2024 to 2027 to normalize after a strong post-pandemic rebound. The agency predicts annual revenue growth in the high single digits, mostly driven by capacity growth, with limited benefits from increased pricing for passengers and cargo. However, pressure on margins is expected due to ongoing supply chain issues and increased costs, including personnel, airport, and handling. Fitch forecasts EBITDAR at around $5 billion in 2027, up from an estimated $4.7 billion in 2024.

THY’s strategic plan up to 2033 anticipates fleet growth to over 800 aircraft, transporting more than 170 million passengers, compared to 492 aircraft at the end of 2024, and an expected 600 at the end of 2026. The growth of the fleet and the development of AJet, THY’s low-cost subsidiary, will gradually improve THY’s business profile, but the investments may also lead to a mild leverage increase in the medium term.

THY has a comparable scale of operations and network breadth to other major network carriers in EMEA such as British Airways Plc, Air France KLM (OTC:AFLYY), and Deutsche Lufthansa AG (OTC:DLAKY). This supports its business profile and provides the foundation for sustained performance.

The majority of THY’s debt, including leases, is in hard currencies, but a high share of revenue is also generated in US dollars and euros, mitigating its FX exposure. Despite well-managed FX risk due to a geographically diversified revenue stream, the volatile lira can add to demand volatility.

THY is 49.12%-owned by Turkey Wealth Fund (TWF), which is fully state-owned, and the government directly or indirectly nominates seven out of its nine board members. However, all of THY’s non-equity funding is external and managed autonomously with independent operations and cash management.

THY’s Long-Term Foreign-Currency IDR exceeds Turkey’s ’BB-’ Country Ceiling, reflecting airlines’ exemption from Turkish regulation to convert a portion of exporters’ FC revenues into lira. In addition, nearly all of THY’s hard-currency external obligations are aircraft leases.

The Bosphorus Certificates are rated using a top-down approach, given the continued reduction in outstanding principal. The notes can tolerate stress up to ’A’, which is consistent with a maximum loan-to-value (LTV) of 73.2%. This is because their favorable amortization profile without balloon payments at maturity in March 2027 causes the LTV to fall rapidly closer to maturity. The collateral is three 2015 vintage B777-300ERs, which Fitch views as tier 2 assets.

THY had $5.9 billion cash at the end of September 2024, comprising $1.8 billion cash and $4.1 billion Fitch-adjusted cash equivalents. This was complemented by $6.6 billion of uncommitted and undrawn facilities at the end of 2024. This is sufficient to cover $0.3 billion debt maturities and about $2 billion of leases expenses expected for 2025. Fitch expects THY to generate positive free cash flow over 2024 to 2027.

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