Fitch Ratings earlier this month downgraded Turkey's Vestel Elektronik (VESTL) by two notches to six notches below investment grade, according to a statement from the rating agency.

VESTL now has a B-/Negative rating from Fitch Ratings and a Caa1/Negative from Moody’s Investors Service.

Electronics manufacturer Vestel Elektronik, launched in 1984, is a unit of Zorlu Holding. It manufactures electronics and major household appliances (Vestel Beyaz Esya (VESBE)) while also operating an electric vehicle (EV) charging stations network ((ZES Dijital, Electrip).

$500mn eurobond sold last year

In May 2024, VESTL sold a $450mn eurobond (XS2817919587) due 2029 at a coupon rate of 9.75%.

In June 2024, the company sold an additional $50mn of the paper via a tap issue.

In 2024, eurobond sales from Turkish issuers broke records.

Between October 2024 and March 2025, Zorlu Enerji (ZOREN), another unit of Zorlu Holding, raised $1.1bn with a debut eurobond sale that was followed by two tap issues.

Next coupon in November, no default expected, offers 18% yield

So far, VESTL has delivered two coupon payments, one in November and one in May. The third is scheduled for November 17. A default does not seem imminent.

The paper currently offers an 18% yield.

Turkey’s CDS moved above the 300-level, while the yield on the Turkish government’s 10-year eurobonds remained above the 7%-level.

May 2024 looked good, then came a nosedive

In May 2024, Fitch assigned a new rating of BB-/Stable to VESTL, three notches below investment grade. Then, it downgraded its rating to B+/Negative in November.

Also in May 2024, Moody’s Investors Service assigned a new rating of B3/Stable, six notches below investment grade, to the company.

In April 2025, Moody’s downgraded the company by one notch to Caa1/Negative, seven notches below investment grade.

Bloomberg reported planned layoffs

In May 2025, Bloomberg reported that Omer Yungul, CEO of Vestel Elektronik and Zorlu Holding, told an investor call that VESTL was planning layoffs but it was expecting no default.

In response, VESTL said that layoffs announced by its CEO during an investor call were only about improving efficiency and it was not planning asset sales.

Sales head south

In its rating rationale released on June 4 with the decision to downgrade VESTL to B-/Negative, Fitch said that the downgrade reflected its expectation of a weaker financial structure and liquidity position due to softer demand and lower-than-expected sales volumes, including from export.

Consequently, VESTL's revenue and margins have come under pressure with an increasing reliance on expensive short-term debt that places a burden on cashflows and interest coverage.

The negative outlook reflects risks to VESTL's revenue and Ebitda margin recovery, deleveraging trajectory and refinancing.

Inflation burden at home

VESTL's Ebitda margin sharply underperformed Fitch’s expectations in 2024. The margin came in at 5.5% versus Fitch’s forecast of 9%.

The margin further deteriorated to 4% in 1Q25, driven by persistent high inflation in Turkey. This increased labour and raw material costs relative to revenues, according to Fitch.

VESTL’s revenues fell 14% y/y in 1Q25 on lower volumes in household appliances and TV units sold and a general softening of the average selling price in Turkey for both white goods and TV sets.

Chinese competition in Europe

Fitch anticipates a gradual improvement in VESTL’s total sales volumes, driven by the company's initiatives, despite the challenging operating environment.

The company is seeking to diversify its revenue towards the US market and other non-European countries as exports currently account for 60% of revenue. This strategy is in response to intensifying competition in Europe, particularly from Chinese exporters.

VESTL's revenues are heavily reliant on low-margin private-label manufacturing, which limits its pricing power and ability to transfer cost increases, especially in Europe.

Leverage surpasses eurobond covenant

VESTL's management-calculated net leverage reached 6.8x at end-2024, exceeding the permitted debt incurrence covenant of 3.5x associated with its $500mn eurobond.

However, Fitch expects the company still has room for additional permitted debt under the terms of its bond documentation.

Uncommitted facilities from Turkish banks

VESTL's capital structure continues to rely heavily on recurring short-term debt refinancing with increasing risks due to the company's under-performance.

However, Fitch believes that uncommitted facilities from Turkish banks will continue to be available to Vestel.

Relying on short-term lira debt

VESTL has been dependent on short-term bank debt facilities and factoring to meet its financing needs. The practice of continuously rolling over these uncommitted bank lines is typical in the Turkish corporate market and limits the liquidity assessment of Vestel.

Long-term notes represented around 31% of VESTL's debt at end-1Q25, with short-term bank loans and domestic bonds making up the balance.

Fitch anticipates an increased reliance on short-term and expensive local funding due to the forecast slower recovery in Ebitda margins.

Local hyperinflation

VESTL's through-the-cycle average Ebitda margin of 8% a year on average is similar to those of higher-rated peers like Whirlpool Corp. (BB+/Negative) and LG Electronics Inc. (BBB/Stable).

However, this strength is offset by the company's weaker free cash flow margin due to Turkish lira volatility, local hyperinflation, a higher leverage structure and lower interest coverage.

Arcelik hedges FX risk

Unlike VESTL, Turkish peer Arcelik (ARCLK/BB-/Negative) focuses solely on more profitable white goods and benefits from the geographical diversification of its production base.

VESTL's leverage metrics are weaker, while its financial flexibility is constrained by lower interest coverage, a wider free cash flow margin deficit, FX risk due to only partly effective hedging, short-term debt exposure and weak liquidity.

Moody’s concurs

In April, Moody’s said in its rationale for its rate cut that its action reflected its concerns about VESTL's weakening liquidity position and weak operating performance in 2024.

Despite the company's $500mn (TRY 17.7bn) eurobond sale that was used to replace a significant portion of the company's short term debt with long-term debt, VESTL's short-term debt balance increased to TRY 43.5bn at end-2024 from TRY 40.6bn at end-2023, Moody’s noted.

The large balance of short term debt compared to a cash balance of only TRY 2.7bn and no committed credit facilities.

Local banks supportive

Moody’s also expects that VESTL’s free cash flow will remain negative over the next 2-3 years. This makes the company dependent on the continued rollover of maturing debt.

While banks have so far remained supportive of rolling over maturing facilities and Moody’s expects that they will continue to remain supportive to domestic Turkish exporters such as VESTLl, the company's high dependence on loan renewals heightens refinancing risk.

Further liquidity risk emanates from restrictions the company has under its bond documentation on incurring additional indebtedness.

Intensified Chinese competition in Europe, inflation and tightening impacts at home

VESTL’s weak performance was driven by lower sales in both Europe and Turkey as well as compressed gross margins in the white goods segment, Moody’s also noted.

Exports to Europe account for around 49% of VESTL's sales and the company lost competitiveness there due to a significant appreciation of the Turkish lira against the euro in real terms, meaning a nominal depreciation of the lira remained significantly below still very high domestic inflation.

At the same time, VESTL also faced intensifying competition from Chinese competitors in Europe, which could increase further if US-China trade tensions result in Chinese manufacturers diverting more products to VESTL's core European markets.

In Turkey, sales declined since the company had benefitted from an increase in sales in 2023 as consumers brought large purchases forward in a highly inflationary environment.

Inflation in Turkey eased in 2024, but still remained high at around 40% on average.

At the same time, the government's continued efforts to reduce inflation led to reduced spending power and lower purchases by consumers.