Fitch Ratings has upgraded IRSA Inversiones y Representaciones, S.A.'s (IRSA) Long-Term Foreign Currency Issuer Default Rating (IDR) to 'B-' from 'CCC-' and the Local Currency IDR to 'B' from 'CCC-'.

Fitch has also upgraded the company's senior unsecured rating to 'B'/'RR3' from 'CCC'/'RR3'. The Rating Outlook is Stable.

The upgrades reflect decreased default risk following IRSA's successful refinancing of its 2023 notes. The FC IDR of 'B-' is constrained by Argentina's country ceiling. The Recovery Rating of 'RR3' reflects above average recovery expectation for creditors in the event of default. It is supported by the historical precedent of numerous distressed debt exchanges by Argentine corporates that did not result in a reduction in principal.

Key Rating Drivers

Improved Credit Profile: The successful refinancing of IRSA's USD360 million note due in March 2023 has significantly improved its credit profile. The company was able to decrease this obligation during 2022 through an exchange offer that allowed it to pay in cash a portion of its debt and extend maturities within capital control requirements of the Banco Central de la Republica Argentina (BCRA).

Following this exchange, IRSA was left with USD121 million outstanding on the 2023 notes and a USD171 bond that amortizes through 2028. On Feb. 8, 2023, the company made payment on the outstanding balance of the 2023 notes using proceeds from a local market issuance plus the authorization from the BCRA to access US dollars for repayment.

Improving Operational Metrics: IRSA's EBITDA surpassed USD100 million in 2022, and Fitch expects it to remain near this level. The recovery of mall activity post-pandemic was the main driver for the improvement. Mall occupancy rates are now above 90%, and revenues from tenant sales have also recovered. Office occupancy rates remained slightly above 70% during fiscal 2022, and Fitch believes it is unlikely that these will return to pre-pandemic levels for the foreseeable future. Hotel revenues also nearly tripled from 2021 pandemic levels, reaching around USD30 million according to our estimates. This is more in line with 2020 levels. The improvement of revenues and the refinancing of debt should allow IRSA to generate positive FCF during the forecast period.

Operating Environment Risk Remains: Argentina's operating environment continues to be one of the major risks for IRSA. The company's assets and cashflow generation is almost entirely from domestic sources. High inflation levels, capital controls, an upcoming electoral process, and limited access to international financial markets generate downside risks to IRSA's operational performance.

Relevant Business Position: The company is an experienced and well positioned operator. It maintained 67% of BA Malls' market share and 10% of BA Office's market share as of June 2022, making it the leading commercial real estate company in Argentina. The company has maintained consistent occupancy levels of approximately 90% in shopping malls, and the majority are in prime traffic locations. IRSA's total rental portfolio encompasses approximately 500,000 sqm of GLA, distributed in 335,000 sqm in 15 shopping malls, 84,000 sqm in six office buildings, and 79,000 sqm in three hotels.

Derivation Summary

IRSA's ratings are primarily driven by Argentina's weak operating environment, which compares negatively to 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 average lease duration between two and three years.

Key Assumptions

Assumes 90% occupancy rates in the mall business and a minimum of 70% in office;

Capex at 2.5% of revenues;

Dividends at current levels in USD;

Tenant revenues grow with GDP growth;

Stable hotel business;

Refinancing of local bonds and debt.

RATING SENSITIVITIES

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

The Foreign Currency Long-Tern IDR is unlikely to be upgraded as it is capped by Argentina's country ceiling;

Debt to EBITDA of 2.5x or below;

Improved liquidity profile.

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

Debt to EBITDA increases above 3.5x;

Liquidity decreases below 1.0x cash to short-term debt ratio.

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

Adequate Liquidity Post-Refinancing: As of 1Q 2023 IRSA had approximately ARS23 billion pesos in cash and cash equivalents. Fitch views the company's liquidity as adequate post-refinancing. Fitch also expects cash flows from operations to reach over USD40 million annually, which, together with access to refinancing of local maturities, should be sufficient for repayment of short-term obligations.

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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