Fitch Ratings has affirmed IRSA Propiedades Comerciales S.A.'s (IRSA PC) Long-Term Foreign and Local Currency IDRs at 'CCC', and IRSA PC's unsecured notes at 'CCC'/'RR4'.

IRSA PC's ratings are capped by its exposure to Argentina's weak operating environment, resulting in continued pressure on the operational performance of the company's real estate portfolio. The ratings also factor in the strong credit linkages between IRSA PC and its parent company IRSA Inversiones y Representaciones S.A.(IRSA), and incorporate Fitch's expectations for a continued gradual recovery in the operational performance of IRSA PC 's shopping mall portfolio during the next quarters as Argentina's economy reopens and lockdown measures are removed or reduced.

Key Rating Drivers

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 PC 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 PC is limited and at a high cost.

Strong Parent-Subsidiary Linkage: Fitch views the rating linkage between IRSA PC and its parent company, IRSA, as strong due to IRSA's high level of access to and control over IRSA PC's resources and weaker legal ringfencing provisions. IRSA PC's ratings are driven by the consolidated credit profile of IRSA/IRSA PC. IRSA is viewed as having dominating control, with limited or no influence from external stakeholders. IRSA owns 79.9% of IRSA PC as of Sep. 30, 2021. IRSA PC is considered to have a stronger credit profile than its parent. Further, IRSA PC is viewed as operationally integral to its parent company. IRSA PC's upstream dividends historically has represented a relevant part of IRSA's cash flow generation, which reinforces the strong credit linkage.

High Financial Leverage: IRSA PC's net debt to EBITDA ratio was 4.7x as of Sept. 30, 2021, reflecting LTM EBITDA, total gross debt, and cash levels of USD64 million, USD426 million and USD126 million, respectively. Fitch's net leverage calculation considers only recurring EBITDA; assets sales are not included in the EBITDA calculation. IRSA PC and its parent company IRSA are currently in the process of a merger process. IRSA PC's ratings incorporate the expectation this merger will be fully executed during the first quarter of 2022. Proforma leverage is high for consolidated IRSA PC/IRSA debt at 9.2x as of Sep. 30, 2021, with proforma EBITDA, total gross debt and cash levels of USD64 million, USD723 million and USD133 million, respectively.

Relevant Business Position: The company is an experienced and well positioned operator maintaining 67% of BA Malls market share and 10% BA Office market share as of November 2021, making it the leading commercial real estate company in Argentina. The company has maintained consistent occupancy levels around 90%, including during the pandemic, through working with its tenants through offered flexibility, and maintains a lease duration of around two to three years in both the Shopping and Office segments. IRSA PC operates 450,000 sqm of GLA and has 1,550 shopping malls tenants and 45 office tenants without high tenant concentration.

Recovery in Malls Operations as Economy Reopens: Recovery has been significant in 2021 as operations recuperate following the sharp decline in operational performance seen in 2020 as a result of pandemic-related restrictions on malls activities. Fitch expects to see a continued gradual improvement in IRSA PC's sales and traffic in 2022. Income has shown a 297% increase yoy in 1Q22, and although not back to pre-pandemic levels, recovery has been seen to about 75% of pre-pandemic levels.

The company mitigated occupancy level declines during the pandemic with provided flexibility to tenants by means of rent deferrals and discounts. As of Sept. 30, 2021, the company's shopping mall portfolio was approximately 89.6% occupied versus 92.8% the prior year. The operational performance of the company's offices segment remained more stable during the pandemic with September 2021 (1Q22) showing only 10.7% lower revenues than pre-pandemic 1Q20.

Derivation Summary

IRSA PC's ratings are primarily driven by Argentina's weak operating environment and IRSA/IRSA PC consolidate high financial leverage and tight financial flexibility. The ratings also reflect an experienced and well-positioned real estate operator with adequate portfolio granularity, limited tenant concentration, consistent consolidated occupancy levels around 90%, and lease duration between two and three years. In terms of financial leverage, the consolidated IRSA/IRSA PC's leverage metric, measured as net debt/EBITDA, is expected to be around 9x range during fiscal 2022, which is viewed as relatively weaker when compared with regional peers.

Key Assumptions

Recovery trend in occupancy continues, with occupancy levels around 92% and 75% for the mall and office segments, respectively, during fiscal 2022-2023;

EBITDA margin recovery and trending to levels around 65% during fiscal 2022-2023.

KEY RECOVERY RATING ASSUMPTIONS

The recovery analysis assumes that IRSA PC would be reorganized as a going-concern in bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim. The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which Fitch bases the enterprise valuation. An EV multiple of 6x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value.

The choice of this multiple considered the following factors: similar public companies trade at EBITDA multiples in the 12x-15x range, Fitch used a multiple of 6x to estimate a value for IRSA PC because this company benefits from dominant market share, unique brands, higher barriers to entry, or undervalued assets. It also factors in Argentina's operating environment. The recovery performed under this scenario resulted in a recovery level of 'RR2'. The bonds are capped at 'RR4'.

RATING SENSITIVITIES

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

An upgrade is unlikely to occur but can be considered if there is an upgrade of the Argentine sovereign rating in conjunction with an improved macroeconomic environment and increased clarity surrounding the company's ability to refinance its hard currency debt and strengthen its liquidity in U.S. dollars given the current central bank restrictions.

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

A significant deterioration of credit metrics to total net debt/EBITDA of 10x on a sustained basis;

Weakened EBITDA to Interest expense of below 1.0x coupled with a liquidity position of less than USD80 million;

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.

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 and IRSA PC remaining high during the next 18 months. The company's refinancing capacity is highly dependent on Argentina's macro and economic environment, which includes the development of the pandemic situation as well as potential continued Argentina's capital controls restricting access to the foreign exchange market to obtain U.S. dollars for the payment of debt maturities.

Fitch expects the issuer to execute liability management in the next 12 months as they are facing refinancing risks associated with upcoming debt. Post-merger, the issuer faces debt principal payments of USD440.7 million and USD31.8 million in March 2023 and November 2023, respectively. The issuer is planning to manage its refinancing risks during fiscals 2022 and 2023 through a combination of assets sales, use of own cash and debt refinancing.

The issuer maintains a readily available cash of USD133 million and an unencumbered assets base of approximately USD2 billion as of Sep. 30, 2021, a rating positive. IRSA/IRSA PC's consolidated net loan to value ratio is 30% as of Sept. 30, 2021.

Issuer Profile

IRSA PC operates its real estate activities primarily in the shopping centers and office segments. With six of its 15 shopping centers in Buenos Aires, IRSA PC is a leading shopping mall developer/operator in Argentina.

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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