Investing.com -- Moody’s Ratings has downgraded the long-term corporate family rating (CFR) of Vestel (IS: VESTL ) Elektronik Sanayi Ve Ticaret A.S. (Vestel) to Caa1 from B3. The downgrade also includes the probability of default rating (PDR) to Caa1-PD from B3-PD and the instrument rating on Vestel’s $500 million guaranteed senior unsecured notes due 2029. The outlook for Vestel has shifted from stable to negative.
The downgrade reflects concerns over Vestel’s weakening liquidity position and underperformance in its operating performance in 2024. This has significantly weakened Vestel’s credit metrics and exposed its vulnerability to macroeconomic instability and competition.
Vestel’s liquidity has been assessed as weak, based on its ability to meet liquidity requirements, including debt repayments and cash operating needs, over the next 12-18 months. Despite the issuance of a $500 million international bond in May 2024 to replace a significant portion of short-term debt with long-term debt, Vestel’s short-term debt balance increased by the end of the year. The company also has no committed credit facilities and a cash balance of only TRY2.7 billion.
The company’s operating performance in 2024 was weaker than expected, with a revenue decline of 12% and a drop in Moody’s adjusted EBITDA of 72% to TRY3.6 billion from TRY12.8 billion the previous year. This weak performance and increased indebtedness led to an increase in debt to EBITDA from 3.6x to 17.9x and a reduction in EBIT interest coverage from 0.9x to -0.1x.
Vestel’s sales in Europe and Turkiye suffered due to the significant appreciation of the Turkish lira against the euro and intensified competition from Chinese competitors. Domestic sales also declined due to reduced spending power and lower purchases by consumers as a result of the government’s efforts to reduce inflation.
Moody’s expects Vestel’s operating performance to improve and cash outflow to reduce over the next 1-2 years due to easing domestic inflation and potential opportunities to grow sales to the US. However, the company is expected to remain free cash flow negative for the next 2-3 years, which will continue to strain its liquidity.
The Caa1 CFR reflects Vestel’s good market position for televisions and household appliances in Turkiye and Europe, its strong diversification, high-quality production facilities in Turkiye, and growing mobility electronics and energy storage business. However, the rating also reflects the highly competitive nature of Vestel’s business, a structurally declining TV market in Europe, high leverage and low profitability, and weak liquidity due to reliance on short-term debt and limitations on incurring additional debt.
The negative outlook reflects the risk that Vestel may not be able to reduce its negative free cash flow over the next 12 to 18 months and will continue to require increased debt funding, which would further raise liquidity risk.
An upgrade of the rating is currently unlikely due to the negative outlook. The outlook could stabilize if Vestel significantly improves its liquidity position. Conversely, Vestel’s ratings could be downgraded if the company’s liquidity deteriorates further and it is prohibited from raising additional debt under its bond documentation.
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