A roundabout way to measure corporate distress in Turkey

TURKEY - In Brief 27 Jun 2016 by Atilla Yesilada

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On Friday, a reader asked me and Dr Ucer about corporate distress in Turkey. I consider this topic of great interest to economic stability and market performance after Brexit in particular, because of my fear that UK and EU origined banks might restrict credit to the periphery including Turkey, while an expected rise in current account deficits could once again drive up F/X loan spreads. Unfortunately, there is no quarterly aggregate balance sheet data on Turkish corporates; hence I used an indirect method to measure corporate distress, relying on the findings of the Turkey’s Largest 500 Companies Survey of the Istanbul Chamber of Industry. The results, covering FY2015 are extremely disconcerting: Sales have increased only 7% in nominal terms,Profitability as a share of operating income rose to 8.7%.Financial expenses rose by 75% to consume 63% of the operating income. Short-term debt to liabilities ratio is 39%. Long-term debt to liabilities ratio is 46%.Debt to equity ratio rose to 250%.45% of EBITDA went to financial expenses. To me, this picture signals rather significant and rising financial distress. Turkey’s giants can’t raise sales in real terms during a year of buoyant GDP growth, can’t produce profit and are heavily indebted, the servicing of which is sucking up cash flow. Of course, optimists will argue that the results pertain to 2015, when the lira underwent heavy depreciation, which also boosted F/X financial expenses. This is true, but since then corporates added another 6% (annualized 13%) to their indebtedness which means 2016 results are unlikely to be significantly different. It can also be argued that the results could be better in retail and servic...