OREANDA-NEWS. Fitch Ratings has affirmed Derindere Turizm Otomotiv Sanayi ve Ticaret A.S.'s (DRD) National Long-term rating at 'BBB(tur)' with a Stable Outlook.

KEY RATING DRIVERS
DRD's rating reflects its established and leading local franchise, sound asset quality and improving capitalisation. It also reflects sizable exposure to foreign exchange (FX) and debt rollover risks.

Operational leasing services are a growth market in Turkey and DRD's fleet size has increased 47% since 2011, to 22,000 vehicles and a national market share of 9.3%. DRD's wide network across Turkey provides advantages in offering leasing and fleet management solutions to a growing customer base.

DRD's profile is marked by volatile earnings, largely due to considerable FX risk. Assets are mainly denominated in Turkish lira, while funding is in foreign currency. The company uses hedge accounting to reflect cash flow hedges from FX denominated lease receivables (recorded off-balance sheet). This partially mitigates foreign exchange risk. However, DRD's open currency position (net of the hedge) was a very high 1.4x equity at end-2014. Hence its earnings remain sensitive to significant movements of the lira against the euro.

DRD has reduced its leverage due to strong profits in 2014. Debt/equity improved to 5.2x at end-2014 and interest coverage to 2.2x. These are moderate by international standards but have to be viewed in light of the company's risk appetite, FX exposure and volatile operating environment.

The company is exclusively wholesale funded, drawing credit lines primarily from local banks. Short-term borrowings represented a high 47% of total debt at end-2014. Rollover risk stems from the time mismatch of assets and liabilities and concentrated funding profile (DRD's top-10 banks make up 75% of total borrowings at end-2014). However, this risk is mitigated by DRD's strong cash generation capacity in runoff mode (if needed).

DRD's asset quality is sound, reflecting the availability of relatively resilient collateral. DRD retains title over the cars and may quickly repossess them in case of non-payment. Turkey's secondary car market is well established, resulting in sound liquidity of underlying assets. Doubtful lease receivables are very low and fully reserved.

The Stable Outlook reflects our view that DRD's strong operating performance and cash generation capacity counterbalance high FX and rollover risks.

RATING SENSITIVITIES
An upgrade would require an extended track record of solid operating performance, consistently well-controlled leverage and proven ability to withstand FX shocks.

A significant deterioration of DRD's capital position or operational profitability would trigger a downgrade.