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Turkish banks at a ‘turning point’ over asset quality, warn analysts

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Credit Analytics Case Study: Carillion Plc

Live Linear OTT Streaming Bumps Up The Multiscreen Transcoder Market

FOX Could Reap Substantial Rewards For 2026 World Cup

Turkish banks at a ‘turning point’ over asset quality, warn analysts

As Turkish corporates grapple with foreign currency debt, a rapidly depreciating lira and moderating economic growth, the country's banks face a deterioration in asset quality, analysts warned.

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Isbank and Akbank, major lenders to the corporate sector, have reported sharp increases in Stage 2 or "underperforming" loans, a marker of declining asset quality. Isbank's stage 2 loans rose from 5.9% to 8.5% of gross loans in the first quarter of 2018, while Akbank's stage 2 loans rose from 5.4% to 10.2%.

Garanti Bank , another bank with large corporate exposures, had stage 2 loans worth 41 billion lira, or 16.1% of gross loans, at the end of the first quarter, though nearly half of this reflected the transition to IFRS 9.

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Nicholas Smallwood, a senior emerging markets credit analyst at ING, described the increase in Akbank's stage 2 loans as "startling."

For both Akbank and Isbank, the increase in stage 2 loans — classified as loans under close monitoring — was mainly attributable to corporate borrowers, according to earning calls.

Akbank disclosed that its stage 2 tally includes loans to Otas, the owner of Türk Telekom, and Yildiz Holding AS, a conglomerate that owns food manufacturing companies including Godiva Chocolatier.

Otas owes $4.8 billion, and Yildiz $6.5 billion, and along with six other corporates they are seeking to restructure loans totaling nearly $20 billion with multiple banks, Bloomberg News reported May 31.

"This could be the start of an unravelling picture regarding corporate debt restructuring," said Magar Kouyoumdjian, an associate director at S&P Global Ratings. "From a very rosy picture, [the sector] has suddenly started to show signs of pressure. It seems to be a turning point for Turkish banks especially in terms of asset quality."

S&P Ratings downgraded six Turkish banks on May 4 following a downgrade of the sovereign rating from BB to BB–. The largest risk for the banking system is its reliance on external debt, said Kouyoumdjian, but rising distress in the leveraged private sector was also a factor in the downgrades.

Currency weakness

The lira's dramatic weakening is expected to make it harder for some companies to meet their foreign currency denominated debt repayments. Nonfinancial corporates hold a net foreign exchange short position of $221.97 billion in March, according to the central bank.

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Nevertheless, high levels of dollarization in the economy clouds the view of the possible impact. Many large companies have some form of hedging in place, some are exporting companies earning in foreign currency, while part of the exposure is government-guaranteed finance, said Kouyoumdjian.

Loan maturation is the key factor: Most forex loans are long term. "Until a company needs to pay the loan back all of this will be an accounting loss. With all that volatility in-between, it is hard to pinpoint how much damage we might have for the large corporates," said Zekeriya Ozturk, the founder of iRes Independent Financial Research & Advisory in Istanbul.

Signs of deterioration

Turkish banks are well-positioned to absorb some damage. Since recovering from a 2001 economic crisis, asset quality indicators have been "squeaky clean," said Kouyoumdjian, and Turkish banks felt the impact of the 2008 financial crisis much less than those in other emerging markets.

NPL rates are low, and despite deteriorating asset quality, Moody's expects problem loans to grow from just 3% in 2017 to 4% in 2018 across the 17 banks it rates — still better than the average for Turkey's emerging market peers.

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This is partly because of denominator growth. Lending grew 21% in 2017, driven by a 250 billion lira government initiative to boost lending to SMEs, Ozturk said.

Most large Turkish banks also regularly sell problematic assets, while regulatory forbearance allows them to restructure problematic loans before they become nonperforming, preventing the deterioration of asset quality indicators on banks' books, Kouyoumdjian noted.

Despite the growing volume of loans to be restructured and potential for higher NPL ratios, Ozturk said that high levels of capitalization across the banking sector means a rise in problem loans would be a profitability issue rather than constitute a crisis.

The core tier one capital ratio averaged 12.46% across all Turkish banks in 2017, up slightly on the 11.88% reported in 2016, according to S&P Global Market Intelligence data.

Economic outlook

A dip in growth could add further strain to corporate earnings and the ability to services loans.

Economic worries are expected to shape the outcome of Turkey's June 24 elections, with some reports suggesting Recep Erdogan may face a run-off vote on July 8 to regain the presidency.

Turkey's GDP will grow around 4.0% in 2018 and 4.6% in 2019, the Economist Intelligence Unit forecasts. Moody's expects growth of only 3.5% in 2019. In 2017, the State Institute of Statistics of Turkey reported growth of 7.3%.

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Bank loan books will remain healthy at growth of 3% or more, said Kouyoumdjian. "The problems would start if we saw very low or negative growth. That would be quite problematic for asset quality."

Ozturk pointed to falling consumer confidence, weak housing sales, high inflation and rates pressure, as signs that Turkey's economy is hitting the limitations of "leverage-driven private sector growth."

"The pressure is clear," said Ozturk. "What matters for those corporates with dollar debts who invested in Turkish domestic consumption, tourism, and so on, [is that] Turkey needs to grow in dollar terms so that those dollar debts can be easily repaid."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.

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Credit Analysis
Credit Analytics Case Study: Carillion Plc


Co-written by Elijah Harden, Risk Services.

Jul. 05 2018 —

Bankruptcy Summary
Carillion Plc (Carillion), a construction services firm, had “declining profit margins” and “high adjusted debt [due to] reverse factoring and its unfunded pension deficit” according to S&P Global Ratings1 . When Carillion filed for liquidation on January 15, 2018, the company had debt and liabilities in excess of £1.5 billion. Trading in the shares was suspended that same day. S&P Global Market Intelligence’s Fundamental Probability of Default (Fundamental PD) rose to 18.27% in the first quarter of 2017 from 1.32% the previous quarter – the equivalent of the implied credit score falling to ‘ccc’ from ‘bb’2 . An additional 30% increase from Q1 to Q2 2017 brought the Fundamental PD to 24%, six months ahead of Carillion’s liquidation. In the quarter leading up to its compulsory liquidation filing, the median Market Signal Probability of Default (Market Signal PD) was 18%, and reached as high as 29%. The Market Signal PD increased nearly sixfold, from 2.17% to 12.69% (equivalent to a credit score decrease from ‘bb-‘ to ‘ccc+’) during July 2017 in response to a share price decline of nearly 70% during the month. Carillion’s share price fell by 39% on July 10 alone, triggered by a profit warning (the first of three) and the announcement of a strategic review.

Exhibit 1: Market Signal and Fundamental PD Escalation

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Business Description
Carillion provides maintenance, facilities management, and energy services to buildings and large property estates, in public and private sectors; infrastructure services for roads, railways, and utility networks. It serves aviation, corporate, financial services, oil and gas, central and local government, defense, healthcare, transport, education, commercial and retail, and residential and leisure sectors. Carillion was incorporated in 1999 and is headquartered in Wolverhampton, in the United Kingdom.

Fundamental Probability of Default Analysis
Upon closer inspection of the Fundamental PD in the third quarter of 2017, business and financial risks were significant problems for the company, with vulnerable and highly leveraged scores, respectively. In the first quarter of 2017, Carillion’s Fundamental PD of 1.32% was better than the UK Construction & Engineering industry median of 4.43%. The Fundamental PD later increased to place Carillion in the worst 25% of the industry by the second quarter of 2017. The most significant factor contributing to the increase in Fundamental PD is Carillion’s EBIT interest coverage, a measurement of the company’s ability to pay interest on debt, which fell to -0.32 in the first quarter of 2017 from 2.75 in the fourth quarter of 2016 (semiannual data was multiplied by 0.5). The elevated Fundamental PD was also due to total equity and cash interest coverage which stood at -£405MM and 0.09, respectively, in the first quarter of 2017 down from £730MM and 2.7 in Q4 2016. Between Q4 2016 and Q1 2017 EBIT decreased by £132MM to a net loss of £100MM and equity decreased by an astonishing £1,135MM. The Fundamental PD illustrates Carillion’s sizable net losses left the company debt ridden and unable to operate.

Exhibit 2: Fundamental Probability of Default Contribution Analysis

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Exhibit 3: Key Developments

Source: S&P Global Market Intelligence as of June 11, 2018. For illustrative purposes only.

Copyright © 2018 by S&P Global Market Intelligence, a division of S&P Global Inc.
These materials have been prepared solely for information purposes based upon information generally available to the public and from sources believed to be reliable. S&P Global Market Intelligence, its affiliates, and third party providers (together, “S&P Global”) do not guarantee the accuracy, completeness or timeliness of any content provided, including model, software or application, and are not responsible for errors or omissions, or for results obtained in connection with use of content. S&P Global disclaims all express or implied warranties, including (but not limited to) any warranties of merchantability or fitness for a particular purpose or use.

S&P Global Market Intelligence’s opinions, quotes and credit-related and other analyses are statements of opinion as of the date they are expressed and not statements of fact or recommendation to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security.

S&P Global keeps certain activities of its divisions separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain divisions of S&P Global may have information that is not available to other S&P Global divisions.

S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

S&P Global provides a wide range of services to, or relating to, many organizations. It may receive fees or other economic benefits from organizations whose securities or services it may recommend, analyze, rate, include in model portfolios, evaluate, price or otherwise address.

[1] Source: S&P Global Ratings, Carillion’s Demise: What’s At Stake? as published on March 23, 2018.
[2] Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD scores from the credit ratings used by S&P Global Ratings. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence.

Credit Analytics Case Study: Carillion Plc

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Technology, Media & Telecommunications
Live Linear OTT Streaming Bumps Up The Multiscreen Transcoder Market


Multiscreen transcoding is widely used today to prepare and distribute video content in over-the-top and TV Everywhere services.

Jul. 05 2018 — Multiscreen transcoding is widely used today to prepare and distribute video content in over-the-top and TV Everywhere services. Multiscreen transcoding revenue is forecast to grow to $628.2 million in 2022, up from $415.1 million in 2017. However, revenue is not rising as quickly as the amount of video being delivered. There are a large number of competitors, so price pressure and the move from hardware appliances to software licenses and cloud services is affecting worldwide multiscreen transcoder revenue.

The amount of video streamed via the internet continues to grow. However, not all of the video is transcoded using a broadcast-quality multiscreen transcoding solution from the vendors discussed in detail in Kagan's latest transcoder report. Some of the largest video streamers in the world, including Netflix Inc. and Alphabet Inc.'s YouTube, use an internal solution. Additionally, those who do not need the same level of density or quality may use solutions such as the free FFmpeg or x264 software, particularly for file transcoding. In some cases, a content producer will use the transcoder that is part of its media asset management system rather than a separate transcoding solution.

Growth in live transcoding revenue is being helped by the expansion of TV Everywhere, or TVE, services. Many multichannel video programming distributors continue to expand the number of linear channels and the amount of VOD content available on their TVE systems in order to offer the same ability to view content on other devices as is available via the set-top box, or STB, in the home. For example, Sky Deutschland GmbH is expanding to offer more than 100 linear channels on Sky Go rather than just the Sky Sport channels. OTT provider of Russia added streamed channels to its service in 2018. Nc+ GO of Poland added 22 channels in April 2018.

FFmpeg and open source solutions have more of an impact on the file transcoding market since multiple passes can be done to produce the quality desired. Therefore, file transcoding vendor revenue is not growing as quickly as the live transcoding vendor revenue. However, some content producers and OTT VOD providers do choose to buy products and services for file-based multiscreen transcoding rather than using an internal or open source solution. The amount of content and the number of versions required to monetize that content continues to grow, causing our expectations of revenue in the file transcoding segment to increase by single-digit percentages each year.

Many transcoder vendors offer cloud transcoding services, oftentimes with multiple cloud providers. The cloud providers tend to be agnostic to the transcoder vendors. A primary example of this is Amazon Web Services, or AWS. Even though AWS owns AWS Elemental, many others also run on AWS, including Beamr Ltd., Bitmovin Inc, Inc., Harmonic Inc., Telestream Inc. and Zencoder Inc.

Revenue from cloud transcoding is expected to increase each year as both the overall multiscreen transcoder revenue grows, as well as the percentage of transcoder revenue that comes from transcoder services that run in the public cloud. The advantages of using cloud transcoding simply outweigh any disadvantages for most use cases.

This article provides some of the highlights contained in Kagan's latest in-depth report titled "Worldwide Transcoding: Live linear OTT streaming bumps up the multiscreen transcoder market," which updates vendor activity and provides global forecasts for live and file transcoding revenue by region, as well as cloud transcoding revenues as a percent of total revenues through 2022.

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FOX Could Reap Substantial Rewards For 2026 World Cup

Jul. 05 2018 — The 2018 FIFA Men's World Cup has struggled with U.S. viewership due in part to the timing of matches aired from Russia. But the June 14 announcement that the quadrennial cup competition will head back to North America in 2026 was likely music to the ears of TV rights owners Telemundo and 21st Century Fox Inc.'s FOX Sports. The choice of a three-country combination — the U.S., Canada, and Mexico — does not come cheap for the U.S. networks, however. The two will pay a combined $887 million for the 2026 games, including an additional approximately $300 million bonus paid to FIFA because North America was chosen as the location.

The upside is that the World Cup will take place in more ideal airing times, offering stronger ad pricing and bigger audiences. In addition, the number of teams in 2026 will increase to 48, compared to 32 today.

The current tournament is the first in which Telemundo and FOX Sports took away rights from Univision Communications Inc. and Walt Disney Co.'s ESPN/ABC. The announcement may make up for some of the troubles surrounding this year's competition after the U.S. Men's National Team failed to make the cut. In addition, the tournament is in Russia, meaning many of the games have aired during lower viewing times in the U.S.

Despite the challenges, Telemundo and FOX Sports could deliver higher ad revenues compared to 2014, according to some estimates. Telemundo recently announced that it had reached its goal of $225 million in ad sales for this year's tournament. The networks may be benefiting from unused funds tied to the NBA Finals, which ended after just four games

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