BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Inversiones y Representaciones S.A. (IRSA):
--Foreign Currency Issuer Default Rating (IDR) at 'B-' with a Negative Outlook;
--Local Currency IDR at 'B+' with a Negative Outlook;
--USD150 million Senior Unsecured Notes due in 2017 at 'B/RR3';
--USD150 million Senior Unsecured Notes due in 2020 at 'B/RR3';
--National Scale rating at AA+(arg) with a Stable Outlook;
--National Scale Senior Unsecured Notes at AA+(arg);
--National Scale Equity Rating at '1'
The 'RR3' recovery rating reflects good recovery prospects in the event of default. The notching above the soft cap of 'RR4' for bonds issued by Argentine corporates reflects the company's strong credit profile and its ability to continue to operate should a potential economic and political crisis occur in Argentina.
IRSA's foreign currency (FC) IDR continues to be constrained at 'B-' due to Argentina's 'B-' country ceiling. IRSA's Local Currency (LC) IDR is constrained at 'B+' by above-average risks associated with real estate development in Argentina. Devaluation risk is also present for IRSA as most of its cash flow is denominated in Argentine pesos and a substantial part of its debt is in U.S. dollars. This is partially mitigated by IRSA's dollar-denominated asset portfolio.
The Negative Rating Outlooks that have been assigned to the FC and LC IDRs are in line with ones assigned to Argentina's sovereign ratings and reflect the high degree of uncertainty about the business climate and economic conditions that should persist throughout 2013.
IRSA's 'B+' LC IDR is supported by its strong performance and positive operating trends. IRSA has a leading position in the shopping center segment within the city of Buenos Aires through its subsidiary, Alto Palermo S.A. (APSA, 95.6% owned). The shopping centers segment accounts for about 75% of IRSA's consolidated operating EBITDA. IRSA is also the leader in the development and management of office buildings in Buenos Aires (14% of consolidated operating EBITDA). The balance of IRSA's operating results is derived from three premium hotels, as well as its residential property development division.
IRSA maintains a moderate level of debt, as well as a manageable liquidity position, due to unencumbered assets and land that could be sold. For the real estate industry, the emphasis of Fitch's methodology is on portfolio quality, diversity, and size. IRSA's asset portfolio is strong with USD776 million of book capital as of Sept. 30, 2012. This value would be higher at market values. These assets are mostly unencumbered as secured debt represents less than 5% of total debt.
As of Sept. 30, 2012, IRSA had USD566 million of debt, resulting in a total debt-to-EBITDA ratio of 2.7x and an EBITDA-to-interest expense ratio of 3.0x. APSA accounted for only 28% of IRSA's consolidated debt. IRSA's main debt obligations are USD150 million notes maturing in 2017 and 2020. APSA also has a USD120 million note maturing in 2017. These notes do not have cross guarantees.
IRSA had USD135.6 million of consolidated short-term debt obligations as of Sept. 30, 2012, of which USD7 million are associated with debt at APSA. These figures compare with USD107 million of cash and marketable securities. Approximately USD50.4 million of the company's cash is at APSA. IRSA is expected to meet its upcoming debt obligations with a mix of cash from operations and the rollover of existing debt. Importantly, both IRSA and APSA own key parcels of land in strategic areas of Buenos Aires, which could be sold to improve the company's liquidity, or used for new developments. The book value of this undeveloped land exceeds USD90 million.
Despite lower leverage at its subsidiary APSA, the local currency IDRs of APSA and IRSA have been linked at 'B+'. This linkage reflects factors that align the credit quality of the company, such as strong strategic ties, and the fact that APSA's upstream dividends represent a relevant part of IRSA's cash flow generation.
Rating and Outlook Drivers
Fitch expects that IRSA will manage its balance sheet to reach a total debt-to-EBITDA ratio of less than 3.5x. Any significant increase in IRSA's targeted leverage ratio would weaken credit quality and could result in a negative rating action. IRSA's FC IDR could be affected by an upgrade or downgrade of the Argentine Country Ceiling of 'B-'.
Additional information is available '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. 8, 2012);
--'Liquidity Considerations for Corporate Issues' (June 12, 2007);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
Parent and Subsidiary Rating Linkage