What are some of the big strategies initiatives in place at Koc Holding this year? Where is the company spotting emerging opportunities?
As an investment holding company, we have two main functions. One of them is to contribute to the performance of existing portfolio companies. We strive to achieve this by active involvement in the strategic decision making of our companies, by employing our group-wide shared systems, services and performance management tools. The other function is portfolio management. While we are a long-term investor, we systematically evaluate our portfolio to identify exit opportunities if we think we are no longer the best owner of a portfolio company. We also monitor investment prospects in new and existing sectors we already operate in.
One of the top priorities in recent years has been increasing our geographical footprint. We want to increase the share of international revenues in our combined revenues, which is currently around 30%. Our target is to achieve this not only by increasing our exports, but also through direct investments abroad. This is a group-wide strategic objective for organic and inorganic investments in our portfolio companies, as well as for new business development efforts at the holding level.
Another group-wide initiative we launched this year is digital transformation (DT). Each industry, hence each of our portfolio companies, experiences the effects of DT differently and develops their own response to improve their performance or steer clear of any associated risks. But we decided to initiate a group-wide effort to support and contribute to each portfolio company’s own digital transformation journey, facilitate experience sharing, create centers of excellence and synergies. We also aspire to use digital transformation as an effective business development tool facilitating investments in new business models.The company elected a new chairman earlier this year, Omer Koc, after the sudden and unfortunate passing of his brother Mustafa. Has the shift prompted any change in direction or strategic focus for the firm? How did the change impact investor sentiment around the firm?
On a combined basis, Koc Group is a fairly large business organization. However, Koc Holding itself is rather small and tight knit community and we interact on an almost daily basis with board members and shareholders. Therefore, emotionally, we had a very difficult time dealing with the tragic loss of Mustafa V. Koc. But business wise, I can say that the transition has been quite smooth. Mr. Ömer M. Koç has been a board member since 2004 and vice chairman since 2008, in addition to being a significant shareholder. He has certainly been involved in major decisions throughout his elder brother’s tenure. Therefore we didn’t experience a sudden change in direction. Mr. Ömer M. Koç will no doubt reflect his vision and personal style to the business, but this will be over time. I would also like to note that our transparent approach during the transition period has been appreciated by the investor community and did not result in any negative impact on investor sentiment.
Can you share some insight into some of the funding challenges associated with managing such a diverse range of companies?
Our portfolio companies have their own financial management practices and banking relations. Funding is obtained at an individual company level on a standalone basis, without a Koc Holding guarantee. That being said, Koc Holding sets certain financial policies (such as leverage and liquidity ratios, debt maturity profiles, FX and interest rate risks, etc.) which are followed by all portfolio companies. These policies are there to make sure that our portfolio companies maintain strong balance sheets and high creditworthiness. Moreover, we have another set of financial metrics that applies to both Koc Holding on a standalone basis, as well as Koc Group on a combined level. We have been rigorously implementing these policies/ metrics for a long time and they have been critical in our success in navigating through difficult periods as experienced many times in the past. Obviously, our sound and stringent financial policy framework helps us tremendously in building and maintaining healthy relationships with our counterparts in international and domestic financial markets, ranging from banks and multilateral agencies to capital market investors, enabling us to diversify our funding base.
Many banks are keen to work with such an industrial powerhouse like KOC. Can you shed some light on how the company chooses its relationship banks?
We value long term and mutually beneficial relationships with our banks. Trust is the most important element; it is established in many years but can be ruined in a matter of hours. We expect our banks to support us not only in good times but during more challenging periods as well. I believe that is when a relationship is best tested. We strongly believe Turkey and Koc offer many opportunities and we prefer working with banks that share this view. On our part, we endeavor to allocate fee-generating transactions among banks that provide a meaningful balance sheet commitment and superior services.
KOC successfully printed US$750mn Eurobond this year. Can you take me through the strategy on that deal, what your expectations were, and how those may have changed throughout the issuance process?
The main motivating factors behind our second Eurobond were enhancing Koc Holding liquidity and extending our debt maturity profile, as well as expanding our investor base. As you know our first Eurobond, which was another US$750mn printed back in April 2013, will mature in early 2020. We started to think about raising additional term-funding late 2015/early 2016. At that time (and still), medium term bank financing was more competitively priced compared to Eurobonds, but tenor available in international bank market was shorter than we liked, as we wanted to avoid debt repayments concentrating at around 2020. In order to achieve longer tenors we decided to proceed with a Eurobond transaction. Although we were aware that spread would be higher than a bank deal, we also believed yields were at reasonable levels given low interest rate environment, hence a Eurobond deal made sense to us.
As you may remember financial markets were rather volatile in the beginning of 2016; we used that period to finalize the necessary preparations. As soon as the first signs of calmer markets appeared, we announced the transaction in early March and conducted a comprehensive roadshow, covering London, Los Angeles, New York and Boston. The original plan was a four day roadshow; but, we decided to compress it to three days (with two teams visiting Boston and New York in parallel) in order to avoid the potential volatility risk around the scheduled ECB rate announcement on March 10th. We launched the deal on March 9th and priced a US$750mn 2023 Eurobond on the same day. Pricing was tightened twice, by 22.5 bps in total and finalizing at 5.40%, at the back of a strong and high quality orderbook. In the end, it was a very successful transaction for Koc Holding which was also very well received by our investors.
The coup attempt in July rippled through the global investment community. Shortly after, Moody’s placed KOC Holding on review for downgrade. How do you anticipate this, and the fallout from the coup attempt, has impacted the firm?
The coup attempt was an enormous shock to everyone in international and local markets alike. Fortunately, the mutineers represented only a small group within the armed forces and were unsuccessful. Government officials and politicians displayed strong and timely leadership and solidarity, supported by the overwhelming majority of the general public. Hence the attempt was defeated swiftly. The unity of the Turkish people in standing against the ominous coup attempt injected a much needed boost to confidence to the society that helped the markets and the economy to remain resilient against this atrocity.
Meanwhile, Moody’s decided to place many Turkish banks and corporations, including KocHolding, on review for a downgrade. This action was triggered by their similar decision for Turkish sovereign rating, following the failed coup attempt. I believe Koc Holding would be able to retain its investment grade rating due to its widely acknowledged strengths and qualities. We are a diversified investment holding company, both sectorial and geographical, through exports and international businesses of our portfolio companies, enjoying excellent liquidity ratios and financial flexibility, and have a strong financial profile with limited risk of deterioration thanks to the composition and diversification of our portfolio companies, as well as to our conservative/disciplined management and prudent risk policies.