ISTANBUL & LONDON--(BUSINESS WIRE)--Fitch Ratings has upgraded Turkey-based Merinos Hali Sanayi ve Ticaret A.S.'s (Merinos) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from B. Fitch has also upgraded Merinos' National Long-term rating to 'A- (tur)' from 'BBB+ (tur)'. All three ratings have Stable Outlooks.
The upgrades reflect the continued improved sales environment and pick-up in operating performance in 2010 and in the first nine months of 2011, which Fitch believes is sustainable. The rating action further captures Merinos' growing foreign exchange revenue from its geographically diversified exports and its leading share of the local branded machine-made carpet market which is slowly increasing to 40%. Fitch views this diversified revenue base, combined with Merinos' expansive sales and distribution network through its own dealership network, as a positive rating factor.
Merinos' export revenue covers its interim FX-denominated interest payments, easing Fitch's concerns about its already reduced FX exposure. Fitch believes Merinos's ability to raise additional debt will remain a function of its strong operating profitability and cash generation ability.
Fitch expects the group's EBITDAR margin to decline somewhat to approximately 17% in 2012 and 2013 from 18% in 2011 (in line with 9M11 figures) and 19.5% in 2010. Economies of scale realised in 2009 will be difficult to repeat, and should be offset by the toughening operating environment.
Merinos has reported positive free cash flow (FCF) since 2007, on the back of higher underlying EBITDA and significant working-capital inflows, easing Fitch's liquidity concerns. Fitch expects this trend to continue in the mid-term and support Merinos' de-leveraging plans. Net debt to EBITDA ratio improved to 1.6x at end Q311, from 1.9x at end-2010 and over 5x at FY09. FFO interest coverage also doubled from a year ago boosting the company's financial flexibility. Fitch believes the company will achieve a net debt to EBITDA ratio below 1.5x at end-2012 through the repayment of its TRY50m bond maturing in 2012.
Improvement in the business profile and diversification would be considered as a prerequisite for a rating upgrade. Also, a liquidity ratio above 1.2x would be considered positive for the ratings. Re-leveraging to gross debt to EBITDA above 4x and net debt to EBITDA above 3x, significantly lower cash flow generation and a contraction of EBITDA margins below 17% would be considered negative for the ratings.
Merinos is one of the top three machine-made carpet manufacturers in the world in terms of installed capacity, commanding around 40% of the fragmented Turkish market. The company also produces acyrilic and polypropylene yarn. Merinos is 60%-owned by Erdemoglu Holding, with the rest held by Erdemoglu family members. Erdemoglu Holding and the family also have interests in another carpet manufacturer focusing mainly on wall-to-wall carpets, Dinarsu, and a household furniture company within the Erdemoglu group of companies.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria 'Corporate Rating Methodology', dated 13 August 2010, available at www.fitchratings.com
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Corporate Rating Methodology