Argentine Real Estate Co. IRSA And Subsidiary IRCP 'B' Ratings Affirmed; Outlook Remains Stable

  • Argentina-based real estate company IRSA Inversiones y Representaciones S.A. (IRSA) has posted weaker credit metrics and tighter liquidity.
  • As a result, on April 15, 2019, S&P Global Ratings downwardly revised IRSA's stand-alone credit profile (SACP) to 'b+' from 'bb-'. At the same time, it kept IRSA's subsidiary, IRSA Propiedades Comerciales S.A.'s (IRCP) SACP at 'bb'.
  • We're also affirming our 'B' issuer credit and issue-level ratings on IRSA and IRCP.
  • The stable outlook reflects our expectation that IRSA and IRCP will maintain a stable operating performance, with their strong positions in Argentina's shopping mall and premium office segments, while maintaining their credit metrics near current levels over the next year. It also reflects our expectation that IRSA will successfully refinance its 2019 bond and extend its debt maturity.
BUENOS AIRES (S&P Global Ratings) April 15, 2019—S&P Global Ratings took rating actions described above. IRSA's weaker financial risk profile is indicated by worsening credit metrics, mainly due to the Argentine peso's depreciation, Argentina's inflation rate, and poor GDP growth. Although the deprecation of the peso helps the office and hotel business segment because fees are denominated in dollars, it hurts leverage and credit metrics because almost 100% of IRSA's financial obligations are dollar-denominated. Peso depreciation increases the company's debt burden, so its cash generation has fallen amid higher interest costs. Additionally, higher inflation and lower consumption reduce shopping mall traffic, while negatively affecting tenant sales. In this context, we expect our adjusted EBITDA interest coverage (without netting interest income) at IRSA's level to underperform our previous expectations, with coverage around 1.6x versus previous expectation of 2.0x in 2019 and 2020.
We now view IRSA's liquidity as more pressured, while IRCP's position remains more comfortable. Although we expect IRSA to successfully refinance its September 2019 bond maturity for around $184 million, its cash flow generation has become weaker against its overall short-term financial obligations. However, we acknowledge that high-quality real estate assets and investments in the U.S. could provide financial flexibility if the company sells them, as it's done in the past.
We expect IRSA to maintain stable debt levels in 2019 and 2020 amid its considerable investment plan, which includes expanding Alto Palermo, the company's flagship mall; and constructing the Catalinas office buildings. In the next 12 to 18 months, the new projects should mitigate debt levels by providing stronger cash flow generation once they're completed and fully running.
We view IRSA's business as resilient: it's the leading shopping mall operator in Argentina, with high-quality and strategic locations of assets, which should allow it to maintain occupancy rates of above 90%. Additionally, its long-term contracts with commercial and office property tenants include revenues linked to tenants sales and step-ups in rental fees that allow hedging against inflation (shopping malls) and foreign-exchange variation (offices). These factors increase the company's cash flow predictability and mitigate its limited geographic diversification.
We assess IRCP's SACP as 'bb', while IRSA's is 'b+', given the latter's larger debt amount. However, we cap our ratings on both companies at the sovereign rating on Argentina (B/Stable/B), because in our view, the companies are not sufficiently insulated from the country to merit a higher rating.
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