BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has upgraded the following ratings of Inversiones y Representaciones S.A. (IRSA):
--Local Currency Issuer Default Rating (IDR) to 'BB-' from 'B+';
--USD150 million senior unsecured notes due in 2017 to 'B+/RR3' from 'B/RR4';
--USD150 million senior unsecured notes due in 2020 to 'B+/RR3' from 'B/RR4';
--National scale ratings to 'AA+(arg)' from' AA-(arg)'.
Concurrently with these rating actions, Fitch has affirmed IRSA's Foreign Currency IDR at 'B' and its national scale Equity Rating at Category 1.
The Rating Outlook is Stable. The 'RR3' Recovery Rating reflects good recovery prospects in the event of default.
The upgrade of IRSA's local currency IDR to 'BB-' reflects the company's strong performance and positive operating trends. It also takes into consideration steps taken by the company during the past year to increase the focus of its business and diminish cash flow volatility. The most important step was the sale by IRSA's 95% owned subsidiary, Alto Palermo (APSA), of 80% of its stake in the consumer credit card company (Tarshop) to Banco Hipotecario. This subsidiary of APSA had high working capital requirements and had generated operating losses. IRSA also took the strategic step of increasing its stake in APSA to 95% from 65%, when it paid Parque Arauco US$126 million for its 29.55% stake in APSA.
IRSA's 'BB-' local currency IDR continues to be supported by the company's strong market positions in premium office buildings and APSA's leading position in shopping malls. The 'BB-' rating reflects a moderate level of debt, as well as manageable liquidity due to unencumbered assets and land that could be sold. The rating is constrained at 'BB-' by the above average risks associated with real estate development in Argentina. IRSA's foreign currency IDR continues to be constrained at the level of 'B' due to the 'B' Country Ceiling assigned to Argentina by Fitch.
IRSA is the leader in the development and management of office buildings in Buenos Aires. This division accounted for about 11% of the company's consolidated EBITDA during 2010. The company has a leading position in the shopping center segment of the real estate market within the city of Buenos Aires City and the Great Buenos Aires area through its subsidiary APSA. The shopping centers segment accounted for about 73% of IRSA's consolidated EBITDA during the latest 12 months (LTM) ended Dec. 31, 2010. The balance of IRSA's EBITDA is derived from three premium hotels, as well as its residential property development division.
IRSA maintains adequate leverage and interest coverage. On a consolidate basis, IRSA had US$348 million of sales and generated US$181 million of EBITDA during 2010. These figures compare with US$620 million of debt, resulting in a total debt-to-EBITDA ratio of 3.4 times (x) and an EBITDA-to-interest expense ratio of 4.2x. APSA accounted for US$135 million of IRSA's consolidated EBITDA and only US$185 million of its debt. IRSA's main debt obligations are US$150 million notes maturing in 2017 and 2020; APSA has also issued a US$120 million note maturing in 2017. These notes do not have cross guarantees.
IRSA had US$181 million of consolidated short-term debt obligations as of Dec. 31, 2010, of which US$52 million are associated with debt at APSA. These figures compare with US$94 million of cash and marketable securities. Approximately US$33 million of the company's cash is at APSA. The company 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 USD100 million.
For the real estate industry, the emphasis of Fitch's methodology is on portfolio quality and diversity, and size of the asset base. IRSA portfolio of assets is strong with USD1 billion of undepreciated book capital as of Dec. 31, 2010. These assets are mostly unencumbered, as secured debt represents less than 5% of total debt load. IRSA' large pool of unencumbered assets provides financial flexibility and above average recovery prospects in a stress case scenario. The company's leverage measured by total debt as a percentage of undepreciated book capital was 60% at the end of December 2010. This percentage would be even lower at market values.
Despite lower leverage at APSA, the local currency IDRs of APSA and IRSA are linked at 'BB-'. This linkage reflects factors that align the credit quality of the company such as the same management team, a centralized treasury, operational ties and the lack of restrictions upon the movement of money between the companies.
Potential Rating and Outlook Drivers:
The Stable Outlook reflects Fitch's expectations that IRSA will manage its balance sheet to a targeted ratio of total debt-to-EBITDA of less than 3.5x. The company's cash flow from operations is expected to become more stable and predictable as a result of recent actions taken by the company.
Any significant increase in IRSA's targeted leverage ratio would weaken credit quality and could result in a negative rating action. IRSA's foreign currency IDR could be affected by an upgrade or downgrade of the Argentine Country Ceiling of 'B'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 16, 2010;
--'Liquidity Considerations for Corporate Issues' dated June 12, 2007;
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities within a Corporate Group Structure)' dated July 14, 2010;
--'Fitch Upgrades Alto Palermo's Notes to 'B+/RR3'; Outlook Stable', dated Feb. 25, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.