Fitch Ratings has assigned Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'CCC' to IRSA Inversiones y Representaciones S.A. (IRSA).

The Rating Outlook is Stable.

Fitch also assigns a rating of 'CCC'/'RR4' to IRSA's new senior unsecured notes due 2028 to be issued as part of the company's proposed exchange transaction.

The 'CCC'/'RR4' rating of the existing USD360 million bonds due in 2023 issued under IRSA Propiedades Comerciales S.A. (IRSA PC) is affirmed and transferred to IRSA as the latter assumed full responsibility for the bonds as of May 17, 2022.

Fitch also withdraws IRSA PC's Long-Term Local and Foreign Currency IDRs.

Fitch has withdrawn IRSA PC's ratings due to its dissolution and the absorption of all its assets and liabilities by IRSA.

Key Rating Drivers

Exchange Offering: On May 16, 2022, the company announced a voluntary exchange offer of its USD360 million notes due in 2023 originally issued by IRSA PC for cash and new notes to be issued by IRSA. The Central Bank of Argentina authorized up to 30% of the notional amount times the participation rate to be paid in USD. The new notes would be up to an amount of USD262.8 million, pay an 8.75% coupon per annum, pay interest semiannually, amortize starting in 2024, and be due in June 2028. Bondholders will have two exchange options (A and B) with a premium paid to early participants. Option A includes a pro-rata cash and bonds exchange, while Option B bonds only. Option B bondholders may receive a pro-rata of any remaining cash available after all Option A bondholders receive theirs. The exchange is subject to a minimum bondholder participation rate of 75%.

Fitch believes a successful exchange will significantly reduce IRSA's refinancing risk. Conversely, failure to execute the proposed transaction will further limit the company's ability to address its 2023 debt maturities due, in great measure, to the existing capital controls in Argentina and challenging macro conditions.

Weak Operating Environment Caps Ratings: Argentina's economic environment is depressed and impaired by high debt and inflation. Argentina's annual inflation is expected to average 50% between 2021 through 2022. Argentina's continued capital controls expose IRSA to FX risk overtime, as their interest expense and debt are predominately in U.S. dollars. As for most Argentinean corporates, Fitch believes accessibility and cost of capital to IRSA is limited and at a high cost.

Refinancing Risk: As of March 31, 2022, IRSA's net debt to EBITDA ratio is estimated at 4x including sales and development and 5.5x excluding them. The company's LTV is low at under 20%. IRSA has managed to deleverage through asset sales and improved operational performance. However, devaluation risks, capital controls, and high inflation continue to put pressure on leverage and refinancing risk as the majority of the company's debt is in USD. Fitch expects IRSA to continue its deleveraging efforts throughout the year, but these efforts may be curtailed by limited access to US dollars, which increases the risks of repayment for all Argentinean borrowers. The proposed exchange, if successful, will reduce the risk of repayment on the USD360 million bonds maturing in 2023 and improve the company's overall debt repayment profile.

Relevant Business Position: The company is an experienced and well positioned operator maintaining 67% share of Buenos Aires' malls and 10% of the city's office market as of March 2022, making it the leading commercial real estate company in Argentina. IRSA has maintained consistent occupancy levels, approximately 90% in shopping malls and 80% in its office buildings, even during the pandemic. IRSA operates 335,690 sqm of gross leasable area (GLA) in 15 shopping malls, 83,892 sqm of GLA in six office buildings and 79,000 sqm of GLA in three premium hotels.

Recovery in Malls Operations as Economy Reopens: Recovery was significant in 2021 as operations improved following the sharp decline in performance seen in 2020 as a result of pandemic-related restrictions on malls activities. Fitch expects to see a continued gradual improvement in IRSA's sales and traffic in 2022. As of 3Q22, nine-month revenues are up 37% nominally when compared to the same period for 2021. That said, a devaluation of the ARS may underscore some of these performance gains in the future.

Derivation Summary

IRSA's ratings are primarily driven by Argentina's weak operating environment, high net leverage, and limited financial flexibility, which compares negatively to its regional peers. The ratings also reflect IRSA's status as an experienced and well-positioned real estate operator. The company has adequate portfolio granularity, limited tenant concentration, consistent consolidated occupancy levels of 90%, and lease duration between two and three years.

Key Assumptions

Occupancy levels maintained at 90% and 80% for the mall and office segments, respectively, during fiscal 2022;

Recovery in revenues of 37% maintained for fiscal 2022;

Net debt to EBITDA of around 5.5x is maintained or lowered over the next 18 months;

Total unencumbered assets base of around USD1.8 billion;

A successful exchange transaction with at least a 75% participation rate.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade is unlikely but could be considered if the Argentine sovereign rating is upgraded and if the macroeconomic environment improves, clarity increases surrounding the company's ability to refinance its hard currency debt, and IRSA's liquidity position becomes stronger or the company accesses U.S. dollars.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A significant deterioration of credit metrics to total net debt/EBITDA of 7.5x on a sustained basis;

Weakened EBITDA to Interest expense of below 1.0x;

A downgrade may occur if, in Fitch's judgment, a default of some kind appears probable or a default or default-like process has begun, which would be represented by a 'CC' or 'C' rating.

KEY RECOVERY RATING ASSUMPTIONS

The recovery performed under the following assumptions resulted in a high recovery level. However, the bonds are capped at 'RR4' for Argentina, senior unsecured ranking, and 'CCC' rating.

The recovery estimate reflects a sustainable, post-reorganization Going Concern (GC) EBITDA level upon which Fitch bases the enterprise valuation. An Enterprise Value (EV) multiple of 6x EBITDA is applied to the GC EBITDA to calculate a post-reorganization EV. Fitch also assumes a 10% administrative claim.

The choice of multiple considers that similar public companies trade at EBITDA multiples in the 12x-15x range. Fitch used a multiple of 6x to estimate a value for IRSA because this company benefits from dominant market share, unique brands, higher barriers to entry, or undervalued assets. It also factors in Argentina's challenging operating environment

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Refinancing Risk Remains: Fitch views refinancing risks for IRSA remaining high during the next 18 months. The company's refinancing capacity is highly dependent on Argentina's macro-economic environment. This includes the ability to sustain post-pandemic recovery as well as debt repayment risks associated with capital controls that restrict access to hard currency.

The issuer faces debt repayments of USD430 million in 2023. IRSA is planning to manage its refinancing risks during fiscals 2022 and 2023 through a combination of assets sales, cash and debt refinancing. A successful exchange can mitigate these risks significantly.

The issuer maintains a readily available cash of USD51 million and an unencumbered assets base of approximately USD1.8 billion as of March 31, 2022. Through recent asset sales IRSA has raised approximately and additional USD105 million in cash. IRSA consolidated net loan to value ratio is below 20% as of the same period.

Issuer Profile

IRSA is a premier real estate operator in Argentina. The company is primarily focused in the acquisition, development, and management of shopping centers and it is the country's market leader in the segment. The company also owns several office buildings and three premium hotels.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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