London, 18 October 2012 -- Moody's Investors Service has today assigned a Ba1 Corporate Family (CFR) and Probability of Default Rating (PDR) to Turkiye Petrol Rafinerileri A.S. ("Tupras") and a provisional (P)Ba1 rating to the proposed USD notes. The outlook assigned to all ratings is stable. This is the first time that Moody's has assigned a rating to Tupras.

RATINGS RATIONALE

"The Ba1 ratings primarily reflect Tupras's dominant position in the Turkish market as well as the execution risks associated with the company's ongoing capex investment programme," says Martin Kohlhase, a Vice President - Senior Analyst in Moody's Corporate Finance Group and lead analyst for Tupras.

Moody's decision to position Tupras's ratings at the upper end of speculative grade is driven by a combination of factors.

On the positive side, the ratings reflect (i) a dominant position in the domestic market as the sole refiner in Turkey with an established infrastructure, including storage, pipeline and terminal facilities; (ii) positive and supportive economic fundamentals in the domestic market with a strong demand for transportation fuel; (iii) the ability to achieve higher gross margins per barrel as compared to its Mediterranean benchmark due to, amongst other reasons, its refinery capability of processing heavy and sour crude oil, in combination with opportunistic procurement of discounted crudes; and (iv) higher expected operating profit margins from 2015 onwards once the Residuum Upgrading Project (RUP) is completed.

Tupras's ratings also incorporate challenges including (i) exposure to cyclical market conditions inherent to the industry combined with emerging market risk factors (such as public policy, regulatory, foreign exchange volatility risks); (ii) negative free cash flow (FCF) until 2014 at the earliest, due to the combination of a sizable capital expenditure programme and high dividend payouts; (iii) potential for competitive cost disadvantage and supply/demand imbalance risk over the medium term stemming from international and local competition; and (iv) future profitability compression from reduced sourcing of discounted Iranian crude oil and weaker heavy crude differentials and from lower inventory gains (which had previously benefited from rising crude prices in 2011).

In addition, the rating assessment includes Moody's view that the company's asset base profile is comparable to that of peers in the Ba rating category, with three medium-complexity refineries, which are geographically located in a single market, and dependency on imported crude oil. The majority of Tupras's operating profit is derived from the refining business, with the distribution business complementing the former, although it does not provide a large scale of earnings diversification.

Tupras has adequate liquidity. As of June 2012, the company had unrestricted cash of TL1.86 billion against TL3.8 billion of adjusted debt, of which approximately half is short term. Cash flow from operations before working capital has historically been healthy, averaging at TL1.2 billion between 2007-11, but continues to be susceptible to the cyclical and volatile nature of the industry. Moody's expects Tupras to record negative FCF until 2014 at the earliest, with substantial cash outflows for capital expenditure requirements - largely related to its USD2.4 billion RUP - and returns to shareholders in order to repay the remaining balance of USD591 million of the USD1.8 billion acquisition loan placed in the EYAS special purpose vehicle, which was set up specifically during the privatisation of Tupras. Management expects the RUP project to contribute USD550 million in recurring EBITDA from 2015 onwards, which will strengthen underlying operating cash flows. Leverage remains moderate, with adjusted debt/EBITDA of 2.3x as of June 2012, and Moody's expects adjusted debt/EBITDA to be in excess of 3.5x by 2014 as the RUP-specific bank facilities will be drawn down before the company begins to de-leverage from 2015 onwards.

Given that only around 20% of its products are currently destined for export, although this may vary, Tupras is reliant on the stability of Turkey's domestic demand and economic growth. Any sustained deterioration of the macroeconomic environment, such as a material drop in foreign capital inflows and a higher current account deficit, could lead to a more challenging business and operating environment for Tupras. However, this risk is mitigated since Tupras produces dollar-priced commodities which can be easily exported. Political and regulatory policy changes remain a risk, such as future environmental regulations which could impact liquidity and profitability. Moody's has modestly factored shareholder support from Koc Holding, its main equity investor into the rating.

Tupras is exposed to international supply/demand market dynamics for crude oil and has in the past financially benefited from sourcing discounted heavy crude. International sanctions on Iranian crude oil imports (which at times were priced at a significant discount to Ural) will negatively affect Tupras's profitability going forward to the extent that supply is restricted, since Iran had been a major supply source. This is mitigated by the company's ability to opportunistically buy crude from various other countries including Russia, Saudi Arabia and Iraq. Tupras may also face a more challenging competitive environment from 2014 onwards when significant new capacity from the Middle East is expected to enter the market.

The rating outlook is stable and assumes that capex plans remain on schedule, with no material delays and cost overruns of the RUP project that may jeopardise the company's financial flexibility.

Turkiye Petrol Rafinerileri A.S. is the sole refiner in Turkey with a dominant position in the domestic petroleum product market. Its two core business segments are refining and distribution, with the former contributing on average 90% of the operating profit over the past five years. The refining business consists of three medium-complexity refineries located in Izmit, Izmir and Kirikkale and one simple refinery in Batman with a combined annual crude processing capacity of 28.1 million tonnes. Other core companies include (i) a 40% effective ownership stake in Opet, Turkey's second-largest oil products distribution company as of June 2012, with 1,300 stations operating under the Opet and Sunpet brands, and (ii) an 80% stake in Ditas, a shipping company which primarily serves Tupras's logistic needs.

The principal methodology used in rating Tupras was the Global Refining and Marketing Rating Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Körfez/Turkey, Tupras reported sales of TL45.9 billion (USD25.6 billion) and an operating profit of TL1.5 billion (USD850 million) for the last twelve months ending June 2012.

REGULATORY DISCLOSURES

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Martin Kohlhase Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Services Limited, Dubai Branch Gate Precinct 3, Level 3 P.O. Box 506845 DIFC - DubaiUAE Telephone: 00971 4237 9536 David G. Staples MD - Corporate Finance Corporate Finance Group Telephone: 00971 4237 9536 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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