Fitch Affirms Alto Palermo's Notes at 'B/RR3'
BUENOS AIRES, Argentina -- January 9, 2013
Fitch Ratings has affirmed the following ratings of Alto Palermo S.A. (APSA):
-- Foreign currency Issuer Default Rating (IDR) at 'B-', Rating Outlook
-- Local currency IDR at 'B+', Rating Outlook Negative;
-- USD120 million senior unsecured notes due in 2017 at 'B/RR3';
-- National scale rating at 'AA+(arg)', Rating Outlook Stable;
-- National scale senior unsecured notes at 'AA+(arg)';
-- National scale equity rating at '1'.
The 'RR3' recovery rating reflects good recovery prospects in the event of
default. The notching above the soft cap of 'RR4' for bonds issued by
Argentine corporates reflects the company's very strong credit profile and its
ability to continue to operate should a potential economic and political
crisis occur in Argentina.
APSA's foreign currency (FC) IDR continues to be constrained at 'B-' by the
'B-' country ceiling assigned to Argentina by Fitch. The company's local
currency (LC) IDR is constrained at 'B+' due to the high degree of risk
associated with operating in Argentina's real estate industry. The Negative
Rating Outlooks that have been assigned to the FC and LC IDRs are in line with
ones assigned to Argentina's sovereign ratings and reflect the high degree of
uncertainty about the business climate and economic conditions that should
persist throughout 2013.
APSA's 'B+' LC IDR is supported by the company's strong market 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, IRSA Inversiones y Representaciones S.A. (IRSA).
APSA has a strong business position in the Argentine shopping center industry.
The company operates 13 shopping centers with a gross leasable space of
approximately 309,000 square meters. The high quality of these malls and their
strategic locations result in sales per square meter that exceed the market
average and occupancy rates of more than 98%. APSA's revenues are partially
hedged against consumer inflation, as the company receives a percentage of the
sales made by tenants of its malls. The company's high operating margins are
due to leases that result in the tenants paying direct expenses and a
percentage of the common expenses.
APSA's results are closely correlated with the performance of the economy,
which has proven to be quite volatile. APSA shows some concentration in the
near term for its lease agreements (36% of lease contracts expiring in fiscal
year 2013), as the contracts are generally for 36 months. While this ratio is
high for the industry, APSA's strong market position allows it to renew
contracts updating leasing terms.
Devaluation risk is also present for APSA as most of its cash flow is
denominated in Argentine pesos and a substantial part of its debt is in U.S.
dollars. This risk is partially mitigated by APSA's dollar-denominated asset
portfolio and its long-term debt profile.
APSA's leverage is low and its interest coverage is adequate. At Sept. 30,
2012, the company's total debt-to-EBITDA ratio was 0.7x, while its
EBITDA-to-interest ratio was 12.7x. APSA had USD125.3 million of total debt,
excluding USD32.4 million of convertible notes, which repurchase was approved
in the company's last shareholders assembly on Oct. 31, 2012. Only 5% of the
company's debt is short term. The company had USD50.4 million of cash and
marketable securities at the end of September, covering short-term debt by 7x.
APSA is 95.6% owned by IRSA. On a consolidated basis, IRSA had USD364 million
of sales and generated USD212 million of EBITDA during the fiscal year ended
June 30, 2012. At Sept. 30, 2012, IRSA had USD565.5 million of consolidated
debt, resulting in a total debt-to-EBITDA ratio of 2.6x. APSA accounted for
only 28% of IRSA's consolidated debt. IRSA's main debt obligations are USD150
million first notes maturing in 2017, USD150 million second notes maturing in
2020, and around USD70 million of third and fourth notes maturing in 2013 and
2014. APSA also has a USD120 million note maturing in 2017. These notes do not
have cross guarantees.
For this industry, the emphasis of Fitch's methodology is on portfolio quality
and diversity, as well as the size of the asset base. APSA's portfolio of
assets is strong, with book capital of USD343 million as of Sept. 30, 2012.
This value would be higher at market values. These assets are mostly
unencumbered, as secured debt represents less than 5% of its total debt load.
The large pool of unencumbered assets at APSA provides financial flexibility
and results in above-average recovery prospects in the event of default.
During the first quarter of fiscal year ended June 30, 2013 (1Q FYE13), APSA
had USD42.4 million of EBITDA, a 10.7% improvement from 1Q FYE12. The
improvement continues to show the positive performance of the company's
Key Rating and Outlook Drivers
Fitch expects APSA will manage its balance sheet to a targeted of
debt-to-EBITDA ratio under 1.5x. Under a conservative scenario, Fitch
estimates the company's interest coverage to be above 5.0x. APSA's management
is intent on maintaining a conservative financial structure. Fitch estimates
that the company's EBITDA margin will remain above 70%.
A 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'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology', dated Aug. 8, 2012;
-- 'Liquidity Considerations for Corporate Issues', dated June 12, 2007;
-- 'Parent and Subsidiary Rating Linkage', dated Aug. 8, 2012;
-- 'Fitch Affirms IRSA's Notes at 'B/RR3', dated Jan. 9, 2013.
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
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