Fitch Ratings has affirmed Turkiye Petrol Rafinerileri A.S.'s (Tupras) Long-term local and foreign currency Issuer Default Ratings (IDR) at 'BBB-'. Fitch has also affirmed the National Long-term rating at 'AA+(tur)' and the foreign-currency senior unsecured rating 'BBB-' of Tupras's USD700m notes maturing in 2018. The Outlooks are Stable.

Tupras's ratings are driven by its dominant position in Turkish downstream and marketing where the company maintains a 100% share in domestic refining capacity. However, we expect credit metrics to be stretched for the next two years as Tupras builds its Residuum Upgrading Project (RUP) at the Izmit Refinery, leaving it limited room to deviate from our expectations without the possibility of negative rating action. When combined with continued generous dividends, we forecast the increased capex will lead to FFO net leverage peaking at around 3.2x in 2013-2014 before improving to a level commensurate with the current ratings of below 2.5x in 2015.

KEY DRIVERS: Turkish Downstream Leader
Tupras owns and operates all four crude oil refineries in Turkey ('BBB-'/Stable) and has a 64% share in Turkish oil products (2011 data). With its total refining capacity of 28.1 million metric tons (MT) at end-2011, the company is one of the largest independent refining companies in Europe. In 9M12, Tupras produced 16.4 million MT of oil products, a 1.3% increase yoy. The company mainly supplies its products to the domestic market - 78% - and for exports - 22% of its production volumes. Tupras also operates in the domestic fuel distribution market through its 40%-owned fuel distributor Opet Petrolculuk A.S. (Opet). Tupras's strong market position translates into solid profits and operating cash flows. Its EBITDA margins remained in the 4.5%-6% range in 2007-2011. Refining is the main profit contributor for Tupras (89% of 9M12 operating profit), with the remainder generated by the fuel distribution segment.

Fitch recently upgraded Turkey to 'BBB-'/Stable. The agency expects that Turkish GDP have increased by 3% in 2012, and will increase by 3.8% in 2013 and 4.5% in 2014, which should translate into higher domestic demand for oil products.

Debt-Funded Capex
In 2008 Tupras began implementing the RUP to increase the capacity of its Izmit Refinery to produce 3.5 million tons of light products compliant with Euro V standards. Together with other projects, this will increase its total capex spend to TRY5.8bn (USD3.2bn) in 2012-2015, up from TRY1.9bn in 2007-2011. After completion, which the company forecasts for November 2014, the Izmit Refinery will increase a Nelson Complexity Index to 14.5 from 7.78 now (based on design capacity). The RUP will enhance the company's business profile due to an improvement in the refining product mix and substantially increase EBITDA. In October 2011, Tupras signed a USD2.1bn long-term financing for the project with 10 international banks, mainly export credit agencies at LIBOR + 3.05%. The company expects to spend most of the RUP capex over 2012 and 2013, of which about USD1.2bn had been spent by the end of November 2012. Tupras maintains that the RUP's progress is in line with the schedule, as are the total costs of the project.

Intensifying Domestic and Regional Competition
There are currently several greenfield refinery projects in various stages of completion that may increase competition in oil products in Turkey and the neighbouring region over the medium to long term. The key project is a joint venture between the State Oil Company of the Azerbaijan Republic ('BBB-'/Stable) and Turcas Petrol A.S. ('B'/Stable) with a design capacity of 10 million MT, which the partners estimate to commission in 2016. The agency believes that over the medium term, Tupras will continue dominating the local refining sector despite intensified competition from this and other projects, partly due to growing domestic fuel consumption in Turkey.

Replacing Iranian Oil Supplies is a Priority
Iran has been a principal supplier of crude to Tupras accounting for 47% (9.7 m tons) of Tupras' total crude purchases in 2011. In December 2011, the US introduced new sanctions against Iran that came into effect in July 2012. Tupras received a waiver from US sanctions until December 2012 with a requirement to decrease purchases of Iranian oil by 20%. Fitch understands that the waiver has been extended by another six months. In the meantime, Tupras continues to reduce the share of Iranian crude purchases that dropped to 32% in Q312.

Fitch believes that the risks of replacing Iranian crude are manageable. Tupras's principal Izmit and Izmir refineries are located near seacoasts, which allows them to purchase crude from a number of suppliers. In 2011 the company bought 13 different types of crude oil from nine countries. The agency notes that lower purchases of Iranian oil may result in higher working capital needs as Iran has offered very favourable payment terms in the past and Fitch has included this in its rating case for Tupras.

Large Dividends Pay-outs to Continue
Tupras's ratings are constrained by its generous dividend policy, which is unlikely to change over the rating horizon, despite negative free cash flow. Tupras pays out around 90% of its net profit or 100% of distributable income, or the maximum allowed under the Turkish law. Fitch expects Tupras to continue its generous dividend policy at least until 2014 because its 51%-shareholder Enerji Yatirimlari A.S. needs to repay USD1.8bn acquisition debt until 2014.

Adequate Liquidity
Tupras's short-term debt at end-September 2012 amounted to TRY2.1bn against cash and cash equivalents balance of TRY2.6bn. In Q412 Tupras issued USD700m (TRY1.2bn) bonds due in May 2018 and entered into a short-term USD200m loan from a consortium of Middle Eastern banks.

RATING SENSITIVITY GUIDANCE
A positive rating action is currently unlikely given the company's business profile as a pure downstream and marketing company and the large capex plan.

Negative:
- Fitch expects credit ratios to return to levels commensurate with the current ratings in 2015 including FFO-adjusted net leverage of below 2.5x and FFO fixed charge cover comfortably above 5x. Delays in the recovery of the credit ratios, or significant underperformance in terms of FFO would put pressure on Tupras's ratings.
- Substantial delays in the RUP completion leading to delays in EBITDA improvement and ratio recovery would be negative for the ratings.

Source: bne