BUENOS AIRES, Argentina & NEW YORK–(Business Wire)–Fitch Ratings has assigned the following rating to IRSA Inversiones yRepresentaciones’ notes:
–USD150 million series 2 senior unsecured notes ‘B/RR4’.
The Rating Outlook is Stable.
IRSA’s foreign and local currency Issuer Default Ratings (IDR) are:
–Foreign currency IDR ‘B’;
–Local currency IDR ‘B+’.
The proceeds will be used to fund capital expenditures and investments,replacement of short-term debt and capital contributions to subsidiaries.
IRSA’s ‘B+’ local currency IDR reflects the company’s strong market position anddiversified portfolio of real estate assets in Argentina. The ‘B+’ rating alsofactors the company’s positive operating trends, the positive improvement in thecompany’s corporate structure, and relatively low leverage levels. The ‘B+’local currency IDR rating is constrained by the company’s exposure to marketcyclicality due to the heavy concentration of its assets in Argentina. Therating also reflects the company’s exposure to a devaluation of the Argentinapesos due to its peso revenues and U.S. dollar denominated debt (partiallyoffset by their assets denominated in dollars). IRSA’s foreign currency IDRcontinues to be constrained at the level of ‘B’ due to the ‘B’ Country Ceilingassigned to Argentina by Fitch.
The Stable Outlook reflects Fitch’s expectations that IRSA will manage itsbalance sheet to a targeted ratio of debt-to-EBITDA around 3.0 times (x). Thecompany’s cash flow from operations is expected to become more stable andpredictable as a result of recent actions taken by the company. These actionsinclude the sale of 80% of Alto Palermo’s (APSA) consumer financing subsidiary,Tarshop, and the increase in its stake in APSA to 93% from 63%.
Strong Market Position and Diversified Portfolio:
Through its subsidiary APSA, IRSA has a leading market share in the shoppingcenter segment of the market within the city of Buenos Aires City and the GreatBuenos Aires area. The shopping centers segment accounted for about 42% ofIRSA’s consolidated EBITDA for the fiscal year ended June 30, 2009 (49% at Dec.31, 2009).
IRSA’s second most important business division is its office-building segment,which accounts for about 23% of the company’s EBITDA. IRSA is the clear leaderin the development and management of office buildings in Buenos Aires, with amarket share of approximately 20% in the premium segment. The balance of IRSA’sEBITDA is derived from three premium hotels, as well as its residential propertydevelopment division. Importantly, both IRSA and APSA own key parcels of land instrategic areas of Buenos Aires, which could be sold to improve the company’sliquidity, or used in new developments. The book value of this undeveloped landexceeds USD100 million.
Improving Trend in Operating Results:
For the last 12 months (LTM) ended Dec. 31, 2009, IRSA recorded sales and EBITDAof USD358 million and USD197 million, respectively. These figures compare toUSD358 million and USD127 million for the fiscal year ended in June 2009. IRSA’scash flow generation during the LTM allowed it to finance capital expendituresof USD69 million and distribute USD14 million of dividends. Free cash flow (FCF)totaled USD66 million.
The improvement in IRSA’s cash flow generation was due to the positiveperformance of IRSA’s office rental and residential real estate developmentbusiness units. The company also benefited from the strong performance of APSA’sshopping malls and the stabilization of its consumer financing subsidiary,Tarshop S.A.
Reorganization of Corporate Structure a Positive:
IRSA has taken several steps to rationalize its businesses during the past year.Fitch views these actions as positive as they should make the company’s cashflow more stable and predictable. During January 2010, the company reached anagreement with Parque Arauco to acquire a 29.55% stake the later has in APSA.This transaction will increase IRSA’s control on APSA to 93%. It also includesParque Arauco’s USD15.4 million hold of APSA’s convertible notes. IRSA hasalready paid USD6 million to Parque Arauco, and is expected to pay an additionalUSD120 million to Parque Arauco by November 2010.
In December 2009 APSA agreed to sell 80% of its consumer credit card subsidiary,Tarshop, to Banco Hipotecario for USD26.8 million. The transaction is subject toCentral Bank’s approval. From a credit perspective, Fitch views APSA’s decisionto sell Tarshop as a positive since it will allow the company to focus on itscore business, real estate.
Adequate Leverage But Below Average Liquidity:
IRSA had USD369 million of debt as of Dec. 31, 2009. It is comprised primarilyof IRSA’s USD150 million notes maturing during 2017 and the APSA’s USD 120million notes and USD50 million peso linked notes, maturating 2017 and 2012,respectively. IRSA’s leverage, as measured by net debt/EBITDA, was 1.6 times (x)for 2009, a reduction from the average net debt ratio of 2.2x maintained by thecompany between 2007 and 2009. IRSA’s ratings incorporate the expectation thatthe company’s leverage would increase to between 3.3x and 3.5x by the end offiscal year ended 2010. Nevertheless, the leverage ratio remains comfortablewithin the rating category.
For this industry, the emphasis of Fitch’s methodology is on portfolio qualityand diversity, and size of the asset base. IRSA’s portfolio of assets is strongwith USD1.1 billion of undepreciated book capital at Dec. 31, 2009. These assetsare mostly unencumbered, as secured debt accounted for only USD4.5 million ofthe company’s USD369 million total debt load. Leverage measured by total debt asa percentage of undepreciated book capital was 35% at the end of December 2009.On a market value basis, these ratios would be even lower.
IRSA’s cash position has been trending negative during the last two years, ascash has decreased to USD51 million as of Dec. 31, 2009 from USD135 million asof June 30, 2008. The company’s liquidity position, measured by the ratio ofcash to short-term debt, was below average at 0.5x as of Dec. 31, 2009. Thedeclining trend in the company’s liquidity over the past year is attributable tothe resources oriented to support APSA’s financial consumer business (Tarshop).The company maintains a large pool of unencumbered assets that could providealternative sources of financing if required. During 2009, the company soldnon-strategic properties for USD52 million.
Any significant increase in IRSA’s leverage beyond expectations could pressureratings. A downturn in the Argentine economy would hurt the company’s resultsand could also lead to a negative rating action. IRSA’s foreign currency IDR isconstrained by the ‘B’ Country Ceiling of Argentina. An upgrade or downgrade ofthe Argentine Country Ceiling would impact IRSA’s foreign currency IDR.
IRSA is a leading real estate company in the Argentine market founded 1943.IRSA’s diversified business portfolio splits among office rental, real estate &hotel developments and shopping centers. The company’s stock is listed in theBuenos Aires Stock Exchange and in the NYSE. The company’s main shareholder isCresud S.A., with a 57% stake. The company’s strategy focuses on the enhancementof its real estate asset portfolio, within its different business units. To thisend, IRSA maintains a substantial amount of land reserves for future projects.
Applicable criteria available on Fitch’s website at ‘www.fitchratings.com’: Theprimary methodology used in this rating action is ‘Corporate RatingMethodology’, dated Nov. 24 2009. Fitch has also used the Corporate Manualpresented at the Comision Nacional de Valores (CNV).
Additional information is available at ‘www.fitchratings.com’.
Fitch RatingsGabriela Catri, +54-11-5235 8100, Buenos AiresJose Vertiz, 212-908-0641, New YorkorMedia Relations:Brian Bertsch, 212-908-0549, New YorkEmail: email@example.com
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