July 25, 2018 / 3:02 PM / 4 months ago

Turk Telekom squeezed by falling lira, foreign currency debt

ISTANBUL, July 25 (Reuters) - Turk Telekom has become the latest Turkish company to highlight the ill effects of the falling lira on its finances, saying that unfavourable currency movements were behind the company’s second-quarter loss of nearly a billion lira.

The falling lira has also pushed up the cost of repaying dollar- and euro-denominated loans for Turkish companies, including Turk Telekom. Retailers, energy firms and others have borrowed heavily in foreign currencies to take advantage of lower interest rates overseas.

Turk Telekom, the country’s largest fixed-line and operator, published second-quarter earnings late on Tuesday and said its net loss of 889 million Turkish lira ($184.03 million) was due to unfavourable forex movements in the quarter.

Stripping out the impact of foreign exchange and foreign exchange hedging, net income totalled 676 lira, the company said in a statement.

Turk Telekom was also hit by 2 billion lira of net financing costs, more than double the previous quarter. It has foreign-currency debt of $2.97 billion and 1.1 billion euros. It is one of the first Turkish companies to report second-quarter earnings this year.

The lira has lost a fifth of its value against both the dollar and the euro this year, partly because President Tayyip Erdogan wants cheaper credit to keep the economy growing.

But his rhetoric on interest rates has spooked investors, sending the lira lower and piling pressure on the debt-laden companies he aims to help.

On Tuesday, the central bank shocked financial markets by keeping rates on hold - even after inflation spiked to its highest in 14 years last month, at 15.39 percent. The lira fell after the decision, with investors citing concern about Erdogan’s influence over monetary policy.

‘DEBT MISMATCH’

Like many Turkish companies, Turk Telekom’s revenue is almost exclusively domestic, Fitch Ratings said in a note on Wednesday, adding that this debt mismatch could put a squeeze on companies under a “stress scenario” where investment flows move away from Turkey.

“Currency depreciation would put further pressure on corporate balance sheets, particularly those with inadequately hedged FX positions,” Fitch said.

As of May, Turkish companies had $222.8 billion in long-term loans from abroad, almost all of that in dollars or euros, central bank data shows.

Investors have raised concerns about a coming wave of debt restructuring. Yildiz Holding, the owner of global food brands including Godiva chocolate and McVitie’s biscuits, signed a deal with its banks to refinance $5.5 billion in debt in May.

Conglomerate Gama Holding is in talks to sell some of its assets as part of a $1 billion debt restructuring, sources have told Reuters. ($1 = 4.8308 liras) (Editing by David Dolan and Jane Merriman)

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