(The following statement was released by the rating agency)
Dec 21 -
-- 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
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.
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.
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
-- 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.
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
Corporate Credit Rating B-/Negative/--
Senior Unsecured B-/Negative
(Caryn Trokie, New York Ratings Unit)