Turkish Airlines' decision to replace its chief financial officer, remove a swathe of its senior financial team and terminate the contracts of more than 200 staff – whom it accuses of having links to the recent failed military coup – appear to have taken a heavy toll on its previously strong reputation among bankers and investors.
In the days following the failed coup, financiers told FlightGlobal that if the situation in the country stabilised, normal lending practices – albeit at higher costs – would likely resume within six months to a year, once risk boards became comfortable again with the airline's credit.
But, the unexpected – and so far unexplained – departures of senior financial figures at the airline will likely lead commercial banks and investors view to steer clear of the airline for some time.
Fundamentally, their risk committees are not minded to consider green-lighting any financing proposals for the carrier, FlightGlobal understands.
"No bank is taking on Turkish country risk at the moment," says one investment banker.
NEXT YEAR'S NEEDS
Fortunately for the carrier, Turkish has already secured much of its financing for 2016. Its chief executive Temel Kotil said at the IATA annual general meeting in Dublin last month that the carrier had found the majority of the roughly $3 billion financing it needs for 2016.
The airline has a further 10 aircraft scheduled for delivery later this year, Flight Fleets Analyzer shows.
But Turkish will need to source financing for 2017 soon. The carrier had been expected to issue a request for proposals for its 2017 deliveries in September.
Next year, Turkish will take delivery of four Airbus A321neos, one A321, one A330 and three Boeing 777s, Flight Fleets Analyzer indicates.
FlightGlobal understands that the timing of this RFP is under discussion, but the likelihood is that not many banks, if any, will actually submit proposals.
One source tells FlightGlobal that his bank, which has not worked with Turkish before, would not consider it at all, and that he did not expect any others to give it a serious look.
Albeit that its 2017 financing needs of roughly $1.2 billion at current list prices are relatively light for Turkish, the airline may struggle to tap its traditional debt providers.
It has been suggested by some sources that the airline may look to use its cash reserves or be supported by the government. However, the airline is already facing weakening passenger volumes and a poor first quarter in which it made a loss of $214 million.
FLY Leasing executives said during a quarterly earnings call on 28 July that they thought the government would help state-owned Turkish but the country's private airlines such as Pegasus could suffer more.
LIMITED OPTIONS
Turkish has historically mostly raised its financing through Japanese operating leases with call options, export credit agency-backed debt, and enhanced equipment trust certificates (EETCs).
All of these options now look unavailable for Turkish.
ECA debt was already not available before the coup, given the fact that the US Export-Import Bank and its European counterparts are essentially shut down.
The cautious equity investor base for JOLCOs are also now unlikely to want to be involved with the carrier. Even before the failed coup, FlightGlobal understands, one Turkish JOLCO fell through amid investor concerns shortly after the Istanbul airport terror attack.
The US debt capital markets will also prove harder for the carrier to access.
In the wake of the coup, Moody's cut Turkish's corporate rating to Ba2 from Ba1, and its default rating to Ba2-PD from Ba1-PD.
The rating agency also downgraded two EETCs issued by the airline in 2015 amid pressure on 777-300ER values as well as US dollar depreciation versus the Japanese yen.
Another factor is that Turkish has often restricted its relationships with financiers to a select few.
If its traditional partners are unwilling or unable to finance Turkish for some time, the airline has few other relationships to tap, particularly as the ECAs remain shut. The departure of many of its finance team also likely affects its working relationships with banks and investors. However, one source offers a more upbeat take, commenting that the finance team has already been "replaced" and that Turkish is still a client of the bank.
Turkish may find that it faces a world where its only financing option is the lessors, which are more concerned with asset risk than credit risk, meaning that they are in a better position than the banks to continue working with the airline.
INTREPID CARRIES ON
Leasing firm Intrepid Aviation has persevered with a deal to lease seven Airbus A330s to Turkish, These aircraft, originally operated by Skymark Airlines in Japan, are currently being reconfigured. Deliveries are scheduled to start later this year.
"This aircraft type is a very important part of the THY fleet," says Intrepid chief executive Olaf Sachau.
"The reconfiguration of our seven aircraft is on budget and on time. We continue to have full engagement with the airline in the planning and preparation effort."
Turkish may therefore be spending much of the next few months agreeing deals for sale-and-leasebacks in 2017.
Of course, the carrier may defer deliveries or be able to rely on state or local bank funding.
But however it proceeds, the airline will face a tough 12 months going forward.
"I have no doubt that THY's management and staff, using all of its experience and capabilities, will overcome the challenges that recent events might pose on them," adds Sachau, who worked with the airline's chief investment officer to agree the leases, rather than the finance team.
Eventually, Turkish will have to tap financing options like JOLCOs or EETCs again if it is to keep up its planned fleet growth. The airline has 181 aircraft on order in total, Flight Fleets Analyzer shows.
To do that, the airline must become a stable credit in the eyes of banks and investors again. Turkish already likely faces at least year in the financing wilderness. Any more instability at the airline – or in the country itself – would only lengthen that stay.
Turkish Airlines was not immediately available for comment.
Additional reporting by Sophie Segal
Source: Cirium Dashboard
