Fitch Ratings has affirmed the ratings of IRSA Inversiones y Representaciones (IRSA) as follows:
--Foreign currency Issuer Default Rating (IDR) at 'B';
--Local currency IDR (LC IDR) at 'B+';
--USD150 million notes due in 2017 at 'B/RR4';
--National Scale Ratings at 'AA-(arg)'.
The Rating Outlook for all ratings is Stable.
IRSA's 'B+' local currency IDR reflects the company's strong market position and diversified portfolio of real estate assets in Argentina. The 'B+' rating also factors in the company's positive operating trends, the positive improvement in the company's corporate structure, and relatively low leverage levels. The 'B+' LC IDR rating is constrained by the company's exposure to market cyclicality due to the heavy concentration of its assets in the Greater Buenos Aires region. The rating also reflects the company's exposure to a devaluation of the Argentina pesos due to its peso revenues and U.S. dollar denominated debt. 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.
The Stable Outlook reflects Fitch's expectations that IRSA will manage its balance sheet to a targeted ratio of debt-to-EBITDA around 3.0 times (x). 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. These actions include the sale of 80% of its consumer financing subsidiary, Tarshop, and the increase in its stake in Alto Palermo S.A. (APSA) to 93% from 63%.
Strong Market Position and Diversified Portfolio:
Through its subsidiary APSA, IRSA has a leading market share in the shopping center segment of the market within the city of Buenos Aires City and the Great Buenos Aires area. The shopping centers segment accounted for about 42% of IRSA'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 leader in the development and management of office buildings in Buenos Aires, with a market share of approximately 20% in the premium segment. The balance of IRSA's EBITDA is derived from three premium hotels, as well as its residential property development division. 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 in new developments. The book value of this undeveloped land exceeds USD100 million.
Improving Trend in Operating Results:
For the lastest 12 months (LTM) ended Dec. 31, 2009, IRSA recorded sales and EBITDA of USD358 million and USD197 million, respectively. These figures compare to USD358 million and USD127 million for the fiscal year ended in June 2009. IRSA's cash flow generation during the LTM allowed it to finance capital expenditures of 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 positive performance of IRSA's office rental and residential real estate development business units. The company also benefited from the strong performance of APSA's shopping 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 cash flow more stable and predictable. During January 2010, the company reached an agreement 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%. IRSA has already paid USD6 million to Parque Arauco, and is expected to pay an additional USD120 million to Parque Arauco by November 2010. IRSA is studying several financing alternatives for this transaction that include additional leverage, use of cash flow generation and cash on hand.
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 to Central Bank's approval. From a credit perspective, Fitch views APSA's decision to sell Tarshop as a positive since it will allow the company to focus on its core business, real estate.
Adequate Leverage But Below Average Liquidity:
IRSA had USD369 million of debt as of Dec. 31, 2009. It is comprised primarily of IRSA's USD150 million notes maturing during 2017 and the APSA's USD120 million notes and USD50 million peso linked notes, maturating 2017 and 2012, respectively. IRSA's leverage, as measured by net debt/EBITDA, was 1.6x for 2009, a reduction from the average net debt ratio of 2.2x maintained by the company between 2007 and 2009. IRSA's ratings incorporate the expectation that the company's leverage would increase to between 3.3x and 3.5x by the end of 2010 due to its payment to Parque Arauco. Nevertheless, the leverage ratio remains comfortable within the rating category.
For this 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 USD1.1 billion of undepreciated book capital at Dec. 31, 2009. These assets are mostly unencumbered, as secured debt accounted for only USD4.5 million of the company's USD369 million total debt load. Leverage measured by total debt as a 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, as cash has decreased to USD51 million as of Dec. 31, 2009 from USD135 million as of June 30, 2008. The company's liquidity position, measured by the ratio of cash to short-term debt, was below average at 0.5x as of Dec. 31, 2009. The declining trend in the company's liquidity over the past year is attributable to the resources oriented to support APSA's financial consumer business (Tarshop). The company maintains a large pool of unencumbered assets that could provide alternative sources of financing if required. During 2009, the company sold non-strategic properties for USD52 million.
Rating Drivers:
Any significant increase in IRSA's leverage beyond expectations could pressure ratings. A downturn in the Argentine economy would hurt the company's results and could also lead to a negative rating action. IRSA's FC IDR is constrained by the 'B' Country Ceiling of Argentina. An upgrade or downgrade of the Argentine Country Ceiling would impact IRSA's FC 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 the Buenos Aires Stock Exchange and in the NYSE. The company's main shareholder is Cresud S.A., with a 57% stake. The company's strategy focuses on the enhancement of its real estate asset portfolio, within its different business units. To this end, IRSA maintains a substantial amount of land reserves for future projects.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include: The primary methodology used in this rating action is 'Corporate Rating Methodology', dated Nov. 24 2009. Fitch has also used the Corporate Manual presented at the Comision Nacional de Valores (CNV).
Additional information is available at 'www.fitchratings.com'.
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