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Fitch Affirms IRSA Foreign Currency IDR at 'B'; Outlook Stable
April 25, 2017 / 7:41 PM / 8 months ago

Fitch Affirms IRSA Foreign Currency IDR at 'B'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 25 (Fitch) Fitch Ratings has affirmed Inversiones y Representaciones S.A. (IRSA) Long-Term Foreign Currency Issuer Default Rating (LT IDR) at 'B'. Fitch has also upgraded IRSA's Local-currency IDR (LC IDR) to 'BB-' from 'B+' and its senior unsecured notes to 'B+/RR3' from 'B/RR4'. The Rating Outlook on the corporate ratings is Stable. The upgrade of the LC IDR is due to IRSA's resilient operating performance during the past five years, despite high inflation and challenging economic conditions. The upgrade of IRSA's notes to 'B+'/'RR3' reflects above-average recovery expectations for these obligations, as it is Fitch's belief that a default on debt denominated in a foreign currency by IRSA would be driven by exchange controls rather than a deterioration of its solid financial profile or strong business position. KEY RATING DRIVERS Constrained by Argentina Economic Environment IRSA's Long-Term Foreign Currency (FC) IDR continues to be constrained at 'B' by the country ceiling assigned to Argentina. Country ceilings are designed to reflect the risks associated with sovereigns, placing restrictions upon private sector corporates, which may prevent them from converting local currency (LC) to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Strong Business Position The company's ratings reflect IRSA's solid business position as one of the largest owners and managers of real estate assets in Argentina. IRSA through its subsidiary IRSA Propiedades Comerciales S.A. (IRSA PC, LT IDR 'B'/Outlook Stable) owns 16 shopping centers (15 managed by IRSA) in Argentina with a total GLA of 337,000 square meters (sq.m.) and six premium offices with 77,252 sqm as of Dec 31, 2016. IRSA PC's cumulative tenants' sales in the shopping centers segment totaled ARS 17.8 billion during the six-month period ended in Dec. 31, 2016, a 20% increase over the prior year's same period. Strong Parent-Subsidiary Linkage: Importantly, both IRSA and IRSA PC own key parcels of land in strategic areas of Buenos Aires, which could be sold to improve the company's liquidity or for new developments. Despite lower leverage at its subsidiary IRSA PC, the LC IDRs of IRSA and IRSA PC have been linked at 'BB-'. This linkage reflects factors that align the credit quality of the company and the fact that IRSA PC's upstream dividends represent a relevant part of IRSA's cash flow generation. Debt Related to Operations outside Argentina Non-recourse IRSA gained control of the Israeli conglomerate IDB Development Corporation Ltd. (IDBD) during October 2015. The debt of IDBD is non-recourse to IRSA and Fitch excludes its debt from the credit metrics calculation of IRSA. IDBD is one of the largest conglomerates in Israel. It participates through various subsidiaries in industry sectors such as: real estate (Property & Building Corporation), supermarkets (Shufersal), insurance (Clal Holdings Insurance Enterprises), and telecommunications (Cellcom), among others. Manageable Liquidity and Unencumbered Assets IRSA's liquidity is viewed as adequate considering the company's capacity to cover interest expenses. It has a manageable debt service schedule with no material debt principal payments due during 2017 and 2018, credit access. Fitch expects the company to continue accessing the credit market and to maintain an interest coverage ratio in the 2x to 2.5x range during 2017-2018. The company's asset value is estimated at around USD1.8 billion. Most of these assets have not been used to collateralize debt. Stable Margins, High Occupancy The company maintains a high-quality property portfolio resulting in consistently stable margins and high occupancy rates. As of Dec. 31, 2016, the company's occupancy level in the shopping center and premium offices segments were solid at 98.4% and 100%, respectively. The company owns and manages six premium office buildings in the City of Buenos Aires and owns certain properties for future development in Buenos Aires and several provincial cities. The company's Adjusted EBITDA (excluding operations in Israel) was ARS 2.2 billion for the last 12 month period ended Dec. 31, 2016. The company consistently kept an EBITDA margin (not adjusted by income from expenses and collective promotion) of around 60% in the past several years. Leverage Expected to Remain Stable Fitch expects IRSA's gross leverage (measured as total adjusted debt to adjusted EBITDA ratio) to remain around 4.5x during 2017-2018. As of Dec 31,2016, IRSA had total debt of ARS11.1 billion or USD698 million, which consists primarily of the IRSA PC's USD360 million unsecured notes due in March 2023; IRSA PC's USD 185 million local bonds due in September 2019; and, IRSA's USD71.4 million unsecured notes due in July 2020. The company's debt structure is primarily unsecured. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: --Adjusted EBITDA margin in the 55% to 60% range in fiscal year end (FYE) 2017 - 2018; --Adjusted net leverage (measured as total adjusted debt to adjusted EBITDA) ratio around 4.5x in FYE 2017 - 2018; --Interest coverage (EBITDA/gross interest expenses) consistently above 2x in FYE 2017-2018 RATING SENSITIVITIES A downgrade could be triggered by a downgrade of the Argentine sovereign rating or a significant deterioration of IRSA's credit metrics leading to an interest coverage ratio consistently below 2x. Conversely, an upgrade of the Argentina sovereign rating could trigger a positive rating action. Contact: Primary Analyst Jose Vertiz Director +1-212-908-0641 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Johnny Da Silva Director +1-212-612-0367 Committee Chairperson Joseph Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Rating Non-Financial Corporates Above the Country Ceiling Rating Criteria (pub. 15 Feb 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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