TEXT - S&P affirms RAGHSA S.A. 'B-' rating
(The following statement was released by the rating agency)
Dec 21 - Overview
-- We expect Argentinean real estate developer RAGHSA to continue to focus its operations in Argentina, and maintain high leverage and relatively weak credit metrics.
-- We are affirming our 'B-' corporate credit and senior unsecured ratings on RAGHSA.
-- The negative outlook reflects the company's exposure to the sovereign risk. Rating Action On Dec. 20, 2012, Standard & Poor's Ratings Services affirmed its 'B-' corporate credit and senior unsecured ratings on RAGHSA S.A. The outlook is negative. The rating action follows our regular annual review. Rationale The ratings on RAGHSA continue to reflect its exposure to the Argentine business environment, its relative small scale, and high leverage and weak credit metrics. The partly offsetting factors are RAGHSA's extensive experience managing real estate projects in Argentina and a comfortable debt maturity schedule for the next three years. Furthermore, the company's brand recognition and its focus on the office rental segment, which typically results in more stable cash flows than housing projects for sale, should allow it to increase results and cash flows gradually up to $12 million by 2016 when its debt starts amortizing. We assess RAGHSA's business risk profile as "vulnerable," and its financial risk profile as "highly leveraged." Argentina's business environment has been deteriorating in the past few years, exposing issuers to high inflation rates and volatile domestic policies and regulatory framework, which often cause consumer and business confidence to fall, jeopardize returns on long-term investments, and add volatility to credit availability. These trends could make it more challenging for Argentine issuers to tap international debt markets. RAGHSA has recently made some changes to its project portfolio mix to become more resilient by a strong focus on the office rental segment, given that the rental prices in Argentina are adjusted for currency depreciation, which provides some relief against the peso depreciation. Furthermore, the government's growing intervention in foreign currency markets has hurt housing demand lately, turning housing projects more risky from a commercial standpoint and more vulnerable to inflation, as unsold projects now remain on the market for longer periods. Projects in the company's office rental division comprise of "Belgrano 955," "Dique IV," and "Libertador offices," totaling a gross leased area of 112.600 square meters. Expected completion dates for these projects are 2014, 2015 and 2018, respectively. Assuming no material construction delays, inflation levels in line with current expectations, a moderate depreciation of the Argentine peso, and conservative adjustments over office rental and square meter prices, our base-case scenario expects the company to generate EBITDA of $20 million - $25 million in the next two years. This amount should cover RAGHSA's annual interest payments of about $9 million and capital expenditures of $15 million - $25 million. We also expect RAGHSA's main cash-flow protection metrics to gradually improve, as its outstanding projects should start generating funds. The company's adjusted funds from operations (FFO) to total debt should in the 15%-20% range in the next two years. Total debt to EBITDA should slightly decrease to less than 6x through 2014 from 6.9x for the 12 months ended in Aug. 31, 2012. Liquidity We assess RAGHSA's liquidity as "adequate." As of Aug. 31, 2012, the company had cash balances of $20 million with no significant debt maturities until February 2016 ($50 million due February 2016 and $50 million in February 2017). We also incorporated in our analysis the following facts:
-- Sources of liquidity should exceed uses by at least 20% over the next 12-18 months.
-- Liquidity sources to exceed uses, even if EBITDA were to decline by 20%, considering that RAGSA's capital expenditures are flexible and can be easily reduce by 40%. Additionally, there is enough room over existing covenants to maneuver under a stress situation.
-- RAGHSA should absorb low probability adversities in the short term, without incurring in additional debt.
-- No material dividend payments for the next three to four years. We believe that in line with progress of its projects, RAGHSA should post positive free operating cash flow by 2014. However, low debt maturities until 2016, and no dividends payments partially mitigate liquidity risks. Outlook The negative outlook reflects RAGHSA's exposure to sovereign-related risks. We believe a one-notch downgrade could result from increasingly adverse effects from Argentinean economy, additional debt increases, and/or significant project delays. On the other hand, improved business conditions, together with more favorable financial conditions, could result in an outlook revision to stable. A potential upgrade is not likely in the next two years due to RAGHSA's high leverage metric. Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed RAGHSA S.A. Corporate Credit Rating B-/Negative/-- Senior Unsecured B-/Negative (Caryn Trokie, New York Ratings Unit)