Protecting Against Rising Credit Risk in Turkey with the FRISK® Score

Protecting Against Rising Credit Risk in Turkey with the FRISK® Score

CreditRiskMonitor has identified several corporations based in Turkey that are exposed to severe financial risk. Our company is a leading web-based financial risk analysis and news service designed for credit, supply chain and financial professionals. Subscribers include thousands of risk professionals from around the world, including employees from more than 35% of the Fortune 1000. Three core features of the service include:

  • Commercial credit report coverage spanning more than 58,000 global public companies and counting
  • The FRISK® score, which is 96% accurate in predicting U.S. public company financial stress and bankruptcy risk
  • Proprietary subscriber crowdsourcing data, which is derived from thousands of financial professionals globally

FRISK® Shows the Danger

Being one of many emerging and frontier markets currently experiencing widespread economic challenges, Turkey’s debt crisis has been sparked by a collapse in the Turkish Lira. According to CreditRiskMonitor’s FRISK® Stress Index, which measures aggregate financial distress across any country or industry, Turkey has shown a 71% increase in risk since the end of 2007 (prior to the 2008 Great Recession):

FRISK® Stress Index for Turkey
An appreciable spike in the FRISK® Stress Index for Turkey indicates that the country is more risky now than it was during the Great Recession.

Within this index, nearly 45% of the companies are currently trending in the FRISK® “red zone.” The FRISK® red zone represents higher-than-average financial risk and covers the lower half of the FRISK® scale, which includes companies with a score between “5” and “1,” the latter representing up to a 50% chance of bankruptcy within the next year. See the chart below:

The FRISK® score

CreditRiskMonitor recommends that subscribers should monitor all companies in the red zone closely. Companies with a FRISK® score of “3” or less have the greatest risk of corporate failure and if circumstances permit, it can often be prudent to reduce risk exposure. 

Collapsing Lira Driving a Credit Contraction

With the rapid deterioration in the Turkish Lira, Turkish corporations with debt denominated outside of their home country will have difficulty repaying the principal. Over the last 12 months, the Lira has collapsed by nearly 50% relative to the U.S. dollar and the Euro. Therefore, if a bank or bond investor is to be repaid in full, the company will effectively need to come back with twice the amount of cash, excluding any positive effects from currency hedging. Below are nine companies with high financial leverage and where a significant portion of their debt structure is exposed to foreign currency risk:

CompanyIndustryFRISK® ScoreDebt/AssetsDebt/Equity
Dogtas Kelebek Mobilya Sanayi ve Ticaret ASFurniture251%6.36
Petkim Petrokimya Holding ASChemicals456%1.68
Vestel Elektronik Sanayi ve Ticaret ASElectronics435%2.36
Arcelik ASElectronics538%1.30
Borusan Mannesmann Boru Sanayi ve Ticaret ASIron/Steel535%0.82
Anadolu Isuzu Otomotiv Sanayi ve Ticaret ASAutomobiles533%0.89

 

You should take extra care in evaluating the financial health of these companies if any are your counterparties, as they are at increased risk of corporate failure in today’s environment.

For example, Vestel Elektronik Sanayive Ticaret AS is a billion-dollar multinational provider of appliances and electronic devices. About one-third of revenue is generated within Turkey with the rest derived from international sales. However, the company’s FRISK® score has trended between a FRISK® score of “3” and “4,” indicating heightened financial risk for more than a year.

Vestel FRISK® score
Vestel Elektronik is far more leveraged in 2018, leading to a lower FRISK® score.

Regarding performance, Vestel Elektronik has reported net losses in three of the last four quarters. Its interest coverage ratio, calculated as annualized EBITDA over interest expenses, has been very weak for many years, but it actually fell below 1x in the most recent quarter. The balance sheet has become significantly more leveraged as well. An important source of funding are short-term bank loans, whereby less than 10% of the debt structure is classified as long-term. 

Unfortunately, this puts the company at risk. In fact, Vestel Elektronik’s working capital deficit has widened to the worst level in its history at negative $3.4 billion. Specifically, short-term debt and accounts payable now exceed cash and accounts receivable by 2.2 times. Since debt capacity is thinning, the firm will need to start generating serious cash flow in order to avoid further financial distress.

Bottom Line 

Unfortunately, there are multiple emerging and frontier markets experiencing serious economic stress. We previously covered Argentina’s severe economic challenges, and its problems have only become worse since then. Likewise, Turkey is in a precarious situation. Now more than halfway through 2018, short-term rates in Turkey have been pushed higher to help support the Lira, but this hasn’t made a meaningful impact. Turkey has shown extremely high inflation and a steep current account deficit. Due to instability, multiple credit agencies downgraded Turkey’s sovereign credit rating a few months ago and the Lira is now down nearly 50% year over year.

As we have done with Turkey, anyone can use the FRISK® Stress Index for free to help determine where aggregate financial risk exists across any specific country or industry. Subscribers can then identify which operators are exposed to corporate failure through our proprietary FRISK® score and then look to adjust risk exposure. The six companies mentioned above should be monitored as they have high financial leverage and will be required to repay it in relatively expensive foreign currency. CreditRiskMonitor has the tools and resources to help you stay ahead of counterparty financial risks such as these.

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.