NEW YORK--()--Fitch Ratings has affirmed the ratings of Interproperties Holding (Interproperties) as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BB-';
--Local currency IDR at 'BB-';
Interproperties Finance Trust (IFT):
--Foreign currency IDR at 'BB-';
--Local currency IDR at 'BB-';
--USD185 million senior secured notes at 'BB-'.
IFT, the issuer of the notes, is a trust constituted under the laws of the Cayman Islands solely to issue the secured notes. The notes are structured as if they were senior secured obligations of Interproperties.
The Rating Outlook is Stable
Interproperties' ratings reflect its solid business position in Peru's shopping center industry with participation in eight shopping centers, stable and predictable cash flow generation, and the low working capital requirements nature of the industry. Incorporated in the ratings is the company's stable revenue stream derived from its lease portfolio and the credit profile of its main tenants. The lease revenues are predominately fixed in nature and also provide for the pass-through of ongoing maintenance and operating expenses for the company's properties, which lowers business risk. Factors that constrain the rating are limited asset and tenant diversification, high leverage, execution risk related to its capex plan.
Integration to Major Peruvian Retail Operator Incorporated:
The company's operations complement a diversified retail platform as Interproperties is integrated as a central component of the business strategy of the retail holding company Intercorp Retail Peru, which is oriented to expand its operations in the supermarket, pharmacy, department stores, and home improvement retail formats. The expected business growth in Intercorp Retail Peru's operations ensures high occupancy levels for the Interproperties' assets and is the main driver behind Interproperties' important capex plan. As of June 30, 2012, approximately 70% of the company's total GLA was occupied by tenants that belong to the same economic group.
Positive Business Environment:
Interproperties is expected to continue to benefit from the strong industry fundamentals as a result of a positive macroeconomic environment coupled with a limited supply of leasable shopping areas. Peru's favorable economic environment has led to increases in disposable income, which in turn has boosted retail sales growth at a higher rate than Peru's inflation rate and GDP growth. Furthermore, there is a limited supply of gross leasable area in the shopping centers, and, therefore, an inadequate supply of space to meet the demands of the main retailers. The ratings reflect the view that the company will continue to benefit from the country's positive business environment. The Peruvian economy is forecasted to post growth rates of 5.8% and 6.2% during 2012 and 2013, respectively, after growing by 6.9% and 8.8% in 2011 and 2010, respectively.
Operating Metrics Trending Positive, Limited Diversification:
The company's operational performance reflects its portfolio quality, evidenced by the high level of occupancy, positive trending in tenant sales, and rent per square meter. Interproperties achieved a 98% occupancy rate during the second quarter of 2012. This compares with 97% during 2Q2011. The company's tenant consolidated sales totaled USD196 million during the first half of 2012 (1H2012), representing increases of 42% over 1H2011, while same sales store (SSS) during 1H2012 increased by 16% versus 1H2011. In addition, the company had a 26% increase in the level of rent per square meter (m2) to during 1H2012. The company's revenues for the last 12 month (LTM) ended in June 2012 was approximately USD25.1 million, adjusted by the effect of the change in fair value of assets (USD6.9 million).
The ratings factor Interproperties' geographic, income, and tenant diversification. The company has operations in eight malls. The company's three largest malls are Real Plaza Huancayo, Real Plaza Primavera, and Real Plaza Arequipa that represent approximately 19%, 18%, and 16%, respectively, (or 53% combined) of the company's total revenue. In addition, the company's tenant composition is concentrated as its 10 most important tenants represent approximately 45% and 72% of the company's total annual rent revenue and total GLA, respectively. This concentration is counterbalanced by the credit quality of these tenants.
Capex Plan to Increase GLA 80% by 2014:
Interproperties is currently implementing an aggressive capex plan with several greenfield and expansion projects, which are expected to be funded with the company's liquidity, cash flow generation (EBITDA), and equity increases During the LTM ended June 2012, the company added approximately 25,641 square meters to its gross leasable area (GLA) for a total GLA of 191,140 square meters. The company's capex plan for 2012 and 2013 is expected to reach levels of approximately USD100 million and USD115 million, respectively, increasing the company's total GLA to 249,615 square meters and 346,585 square meters by the end of 2013 and 2014, respectively.
The company has adjusted its original plan (September 2011) by giving priority to complete expansion projects in several of its shopping centers during 2011-12 period, while the Salaverry project, which was initially scheduled to be completed by the end 2013 with an original GLA target of 66,000 square meters, has been rescheduled and is now expected to be opened in 2014 and will add 73,642 square meters. The company's implementation of its capex plan should increase cash flow generation. During LTM June 2012, the company's EBITDA was USD19 million, Fitch's base case considers Interproperties' EBITDA (annual basis) will be around USD30 million by the end of 2013.
Leverage Expected to Remain High during 2012-13 Period:
Interproperties had USD199 million of debt at the end of June, resulting in a total debt-to-EBITDA ratio of 10.4x. Business deleverage is expected to start taking place as projects are completed, resulting in a decline in the company's forecasted gross financial leverage to around 9x and 7x by the end of 2012 and 2013, respectively. FCF is expected to be negative during 2012-13 period - driven by the capex plan. Equity infusions should support the financial needs of the company during 2012-13 period. Interproperties is in compliance with the covenants related to the secured notes as well as bank loans.
Adequate Liquidity and Good Collateral Support:
The secured notes (USD185 million) are the main component of the company's total debt of USD199 million by the end of June 2012, considers only interest payments during the first three years. The notes' structure provides financial flexibility to the company to complete the capex plan and increase its cash flow generation. Interest payments related to the secured notes are estimated around USD16 million per year during 2012-14 period. In 2015, the company will start to face a total amount related to the secured notes in debt service of principal and interests of USD25.4 million, which should be covered by the expected EBITDA levels at that point in time.
Positively incorporated, the notes are secured by encumbered assets that are composed by real properties with a commercial value of approximately USD267 million (net of secured loans) by the end of June 2012, which results in a current LTV ratio of 69% for the secured notes.
Key rating drivers include the development of the Peruvian macroeconomic environment in which the company operates. The Stable Outlook reflects Fitch's expectation that Interproperties will complete its capex plan as scheduled and reach EBITDA levels by the end of 2013 that would be sufficient to cover principal and interest payments. The Stable Outlook also incorporates the view that the company's adjusted gross leverage will be around 7x by the end of 2013.
Positive Rating Actions: Interproperties' ratings could be positively affected by significant improvement in its cash flow generation, credit metrics, and collateral support due to capex plan completion ahead of original schedule. An upgrade is not likely to occur until the company completes its capex plan, reverses its free cash flow trends and lowers leverage; which is not expected to occur during the next 12-month period ended in June 2013.
Negative Rating Actions: Delays in the company's capex plans for 2012 and 2013 would likely result in a negative rating action. A rating downgrade could be triggered by a decline in the Peruvian macroeconomic environment in which the company operates, and/or delays in the execution of the capex plan, resulting in a deterioration of the company's credit profile and collateral support.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria