BUENOS AIRES, Argentina--(BUSINESS WIRE)--Fitch Ratings has upgraded Alto Palermo S.A.'s (APSA) ratings as follows:
--Local currency Issuer Default Rating (IDR) to 'BB-' from 'B+';
--USD120 million senior unsecured notes due in 2017 to 'B+/RR3' from 'B/RR4';
--USD50 million argentine peso-linked notes due in 2012 to 'B+/RR3' from 'B/RR4';
--National scale ratings to 'AA+(arg)' from 'AA-(arg)'.
In addition, Fitch has affirmed APSA's foreign currency IDR at 'B' and APSA's 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 APSA's local currency IDR to 'BB-' reflects the company's strong performance and the sale of 80% of its consumer finance business, Tarshop. This business had high working capital requirements and had been a drain on the company's cash flow. In Fitch's opinion, the sale of Tarshop should lower cash flow volatility and will reduce the company's financial risk during an economic downturn.
APSA's 'BB-' LC IDR is supported by the company's strong business position in the Argentine shopping center industry. While debt at APSA is low in relation to cash flow, Fitch has linked the credit quality of APSA with its more highly leveraged parent company, Inversiones y Representaciones S.A. (IRSA). APSA's credit quality is also constrained at 'BB-' due to its aggressive growth strategy and the high degree of risk associated with operating in the real estate industry, as well as in Argentina. APSA's foreign currency IDR continues to be constrained at 'B' by the 'B' Country Ceiling assigned to Argentina by Fitch.
APSA has a strong business position in the Argentine shopping center industry, operating 11 shopping centers with a gross leasable space of 286,286 square meters. The high quality and strategic location of APSA's shopping centers result in sales per square meter that exceed the market average. The quality of APSA's malls has resulted in operating margins in excess of 70% of rent income, occupancy rates of more than 97%, and improving leasing conditions. APSA's revenues are partially hedged against consumer inflation, as the company receives a percentage of the sales made by tenants of its malls.
APSA's high operating margins are due to leases that result in the tenants paying direct expenses and a percentage of the common expenses. The company's results are closely correlated with the performance of the economy, which has proven to be quite volatile. APSA has a high degree of concentration in the near term for its lease agreements, with approximately 35% of lease contracts expiring before the end of 2011. While this ratio is high for the industry, APSA's strong market position somewhat mitigates this risk.
APSA's leverage is low and its interest coverage is adequate. For the latest 12 months (LTM) ended Dec. 31, 2010, the company's total debt-to-EBITDA ratio was 1.4 times (x), while its EBITDA-to-interest ratio was 6.3x. As of Dec. 31, 2010, APSA had USD185 million of total debt, excluding USD47 million of convertible notes that are expected to fully convert at maturity given the current stock price. Only 24% of the company's debt is short-term. The company had only USD32.6 million of cash and marketable securities as of Dec. 31, 2010.
For this industry, the emphasis of Fitch's methodology is on portfolio quality and diversity, and size of the asset base. APSA's portfolio of assets is strong, with an undepreciated book capital as of Dec. 31, 2010 of USD635 million. These assets are mostly unencumbered, as secured debt represents less than 5% of total debt load. The company's leverage measured by total debt as a percentage of undepreciated book capital was 29% at the end of December 2010. This percentage would be even lower at market values. The large pool of unencumbered assets at APSA provides financial flexibility and results in above average recovery prospects in the event of default.
For the LTM ended Dec. 31, 2010, APSA had USD229 million of sales and USD135 million of EBITDA, an improvement from USD204 million and USD114 million during the fiscal year ended June 30, 2010. The improvement was due to the positive performance of the company's shopping centers, which posted a 31% growth in revenues during the first six months of the fiscal year 2011.
APSA is 95% owned by IRSA. On a consolidate basis, IRSA had USD348 million of sales and generated USD181 million of EBITDA during 2010. IRSA had USD620 million of consolidated debt and USD94 million of consolidated cash. Excluding the debt at APSA, the main debt obligations of IRSA are a USD150 million note maturing in 2017 and a USD150 million note maturing in 2020. The IRSA notes and APSA's USD120 million note maturing in 2017 do not have cross guarantees.
Potential Rating and Outlook Drivers:
The Stable Outlook reflects Fitch's expectations that APSA will manage its balance sheet to a targeted ratio of debt-to-EBITDA of about 1.5x. Under a conservative scenario, Fitch estimates the company's interest coverage to be above 5x. APSA's management is intent on maintaining a conservative financial structure.
Any significant increase in APSA's targeted leverage ratio would threaten credit quality and could result in a negative rating action. APSA'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'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 16, 2010;
--'Liquidity Considerations for Corporate Issuers' 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 IRSA'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
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