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You can run, but you can’t hide: The short story of Turkey’s biggest private financial debacle

The mathematics of what may be Turkey's biggest financial debacle as the uncertainty over the national telecom operator's future continues to grow

You can run, but you can’t hide: The short story of Turkey’s biggest private financial debacle

PA Intelligence

Oger Telekom, owned in partnership by Lebanon’s Hariri family and Saudi Telekom, had bought a 55 percent stake in Turkey’s national telco operator (TTKOM) for $6.5 billion through the privatization of the Turkish state’s shares in 2005. According to the offical disclosures, Oger Telecom paid an upfront amount of $1.31 billion on November 14, 2005, where the remaining balance was to be paid in 5 equal instalments annually. After paying the first instalment ($1.44 billion) in November 2006, the company has decided to pay in full the outstanding balalnce ($4.3bn) to the Turkish government in March 2007 through an international syndication loan facility.

We had not heard anything again about Oger Telecom’s internal financial affairs until May 2013, when another refinancing scheme was announced which, according to the company disclosures, the company took out anotherloan, comprising facilities of $4.478 billion and211.97 million, in order to refinance and extend the tenor of some of the company’s debt — a $3.6 billion portion of a 2007 loan and a $1.35 billion deal from 2011 — as well as providing a dividend to shareholders.” This was reportedly the biggest syndication loan in Turkish banking sector’s history, totaling $4.75 billion in 2013 where there were 29 participants that included all of Turkey’s largest lenders, as well as a number of international banks.

As per a recent Bloomberg article, Oger Telecom has failed to make the scheduled payment on this loan, amounting to $290 million, in September 2016 thereby asking for an extension from its creditors, where, aaccording to the article, Akbank has about $1.5 billion in exposure to the loan, while Garanti Bankasi lent about $1 billion, accounting for 53% of the total debt raised for refinancing.

That being said, on closer inspection, we see a few oddities suggesting that the issue goes beyond what could have otherwise been seen as an unfortunate corporate mishap that could happen to anybody.

Since its privatization, Turk Telekom has distributed a total of $12.6 billion in dividends (at prevailing exchange rates) between 2006-2016 of which $7 billion was paid out to Oger Telecom. The cumulative net profit of Turk Telekom was about $14 billion between 2005-2015, corresponding to an average payout ratio of 90 percent.

Here is the interesting part: according to the company disclosures, Turk Telekom not only had no financial debt (literally), but a total cash of $2 billion sitting on its balance sheet as of the end of 2005. Fast forward to the third quarter of 2016, the company had a net debt of $3.5 billion translating into a net debt/equity ratio of 220 percent.

Financial footnotes show that 80 percent of the company’s outstanding financial debt as of the end of 2016’s third quarter is fxdenominated and floating, i.e. tied to changes in Libor/Euribor.

To put it simply, it seems that Oger Telecom has paid itself more than what it had paid to acquire Turk Telekom shares through fasttrack dividend payments, while saddling the company with a net debt of $3.5 billion, which could have been much lower had it opted to keep some of the dividends as retained earnings in order to finance its operations.

To put it more simply, Oger has skimmed roughly $3 billion out of the $7 billion it had collected in dividends since 2006 and still has an outstanding obligation of $4 billion. And the ridicilous part of this story is that this all happened in a publicly listed company which is partially owned by the Turkish Treasury.

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What now?

Well, it seems that Oger Telecom has already paid two installments of the 2013 refinancing loan, amounting to roughly $600 million, defaulting on the third installment due in September 2016. So, the outstanding unpaid balance should be around $4 billion. As per the banking regulations and the industry practice, we can reasonably assume that lenders must have taken Turk Telekom shares owned by Oger Telekom as collateral, which must have covered at least 100 percent (if not more) of the original loan.

At the time of the refinancing in May 2013 total market cap of Turk Telekom was about $14 billion, implying a market value of $7.7 billion for Oger Telekom’s shares (60% LTV if all of the shares were put up as collateral).

Based on Turk Telekom’s current market cap of $6.5bn, and after accounting for the two installments that have already been paid since 2013, the remaining loan balance ($4.1bn) has loantovalue (LTV) of 115 percent.

In other words, lenders could, in theory, recover only $3.6 billion of the outsanding debt if all of the shares that Oger held at the time were put up as collateral. “What is the big deal?one might ask. Lenders will sell the shares held as collateral and end up with a maximum loss of US$500mn at current market value.”

Here is the rub: Firstly, as per the privatization agreement, Oger Telecom or lenders (in case of litigation) will have to secure the government’s approval in terms of the prospective buyers. Considering rumors that the Haririscomplained in private conversations about the difficulities they have had with the government as a partner, it would be a curious case to see who would have the apetite to become partners with the Turkish government.

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Secondly, Turk Telekom’s net profit sharply declined to $330 million by the end of 2015, compared to average $1.2 billion annually between 2005 and2012 – largely due to fxlosses on its growing financial debt. This year’s net profit will most likely come at around $350 million which could fall further if the lira continues to depreciate, as the company’s underlying revenues are TL-denominated.

Let’s do the math then: if Turk Telekom generates a net profit stream of, say $500 million annually until the end of the concession in 2026, the prospective buyer is looking at a cumulative dividend of about $2 billion in the next 10 years. That is if the government would be kind enough to sustain an average payout ratio of 80 percent. And you bet the net present value of these future dividends will be far less than $2 billion, which is how much the new buyer will be willing to pay. Progovernment circles have already started to float the idea of purchasing of Oger’s shares by the Turkish Sovereign Wealth Fund, which would put the creditors at the mercy of government in terms of how much loss they will be incurring.

On the other hand, BBVA, the majority shareholder of Garanti Bankasi, is likely to have headaches in terms of loan loss recognition, as it fully consolidates Garanti’s balance sheet.

While the Turkish banking watchdog, BDDK, might be as lenient as necessary regarding the loan loss recognition of Oger’s debt, BBVA’s home country regulator and its shareholders might not be forgiving. At any rate, what has once been touted as an examplary privatization might end up being one of the biggest debacles in Turkey’s financial history.

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