OREANDA-NEWS. Fitch Ratings has upgraded the ratings of InRetail Real Estate Corp. (InRetail Real Estate) as follows:

--Foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BB';
--Local currency IDR to 'BB+' from 'BB'.

Fitch has also upgraded the bonds issued by InRetail Shopping Malls that were guaranteed by InRetail Real Estate as follows:

--Senior unsecured foreign currency notes due 2021 to 'BB+' from 'BB';
--Senior unsecured local currency notes due 2034 to 'BB+' from 'BB';

The Rating Outlook is Stable.

The upgrades reflect the company's consistent execution of its capex plan and the successful implementation of a debt refinancing program. Also factored into the upgrades was the strength of the company's operating results that led to margins above those previously projected.

The Stable Outlook incorporates Fitch's expectation that the company will continue with a moderately aggressive capex plan, which includes the addition of more than 110,000 square meters of gross leasable area (GLA) during 2015-2017 primarily the result of the development of the Puruchucho Mall. The ratings incorporate an expectation that net leverage will remain below 4.5x and that liquidity will remain adequate. Additional expectations include consistent EBITDA margins of around 80% and the maintenance of significant levels of unencumbered assets.

KEY RATING DRIVERS

Stable Cash Flow Generation:

InRetail Real Estate's ratings reflect its solid business position in Peru's shopping malls industry, stable and predictable cash flow generation, and favorable industry fundamentals. The company's margins are stable and supported by its lease structure with fixed-rent payments representing approximately 84% of its total rental income. EBITDA margins are expected to be 80% during 2015-2017.

Moderate Net Leverage:

The company's net leverage is viewed to be moderate and in line with industry standards. As of March 31, 2015, InRetail Real Estate had PEN1.139 million of total debt, which was composed of USD350 million of notes due in 2021 and PEN141 million of unsecured local currency bonds due in 2034. The balance of the company's debt was mostly in banking loans and financial leases. InRetail Real Estate's ratings incorporate the expectation that the company's net leverage will be around 4.5x during 2015-2016. At the end of March 2015, the company's net leverage, measured by total net debt-to-EBITDA, was 4.3x, which was an improvement from 4.9x in March 2014.

Negative FCF driven by Capex Plan:

The company will record negative free cash flow (FCF) during the 2015-2016 period due to the continued execution of its capex plan. The company is expected to continue generating negative FCF during the next few years but at a decreasing level as cash flow from operations will tend to increase with the new GLA being incorporated, and capex levels are projected to decline as new project developments are completed. InRetail Real Estate's FCF during the LTM ended March 31, 2015 was negative PEN 248 million. This was an improvement from negative FCF of PEN554 million during the prior 12 months. Fitch's FCF calculation for the LTM ended March 31, 2015 is for CFFO and capex of PEN208 million and PEN456 million, respectively.

Limited Diversification:

The ratings incorporate InRetail Real Estate's asset and tenant concentration risk. The company's net revenue structure presents some asset concentration with five malls representing approximately 50% of its expected net revenues during 2015-2016. In addition, the company's tenant composition is concentrated, as its 10 most important tenants represent approximately 50% of the company's total annual rent revenue. This concentration is partially counterbalanced by the credit quality of these tenants. The company's assets and tenant concentration risks are not expected to materially change in the short- to medium-term.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--2015-2016 EBITDA margin around 80%.
--Net leverage around 4.5x during 2015-2016.
--Negative FCF during 2015-2016 with annual FCF margin (FCF/net revenues) in the negative 13% to negative 50% range.
--No dividend payments during 2015-2016.
--Interest coverage (EBITDA/gross interest expenses) consistently above 2.5x during 2015-2016.
-- Unencumbered assets-to-net unsecured debt consistently above 1.75x during 2015-2016.
--Short-term debt levels consistently below PEN20 million during 2015-2016.

RATING SENSITIVITIES

Considerations that could lead to a negative rating action (Rating or Outlook):
Fitch would consider a negative rating action if the company's financial profile deteriorates due to some combination of the following factors: adverse macroeconomic trends leading to weaker credit metrics; significant dividend distributions; and higher than expected vacancy rates or deteriorating lease conditions.

Potential developments that could trigger a negative rating action:

--Net Leverage consistently above 5x;
--EBITDA margin deterioration reaching levels consistently below 72%;
--Interest coverage ratio (EBITDA / interest expense ratio) consistently below 2x;
--Consistent increase in short-term financing.

Considerations that could lead to a positive rating action (Rating or Outlook):
Fitch would consider a positive rating action as a result of the combination of the following factors: Improvement in InRetail Real Estate's net leverage, liquidity and unencumbered assets at levels above those incorporated in the ratings. Potential developments that could trigger a positive rating action:

--Net Leverage consistently below 3.75x ratio;
--Interest Coverage ratio consistently above 3x;
--Unencumbered asset to net unsecured debt consistently above 3x ;
--Material improvement (i.e. better than expected) in EBITDA margins and asset diversification.

LIQUIDITY

InRetail Real Estate's liquidity is adequate as a result of its current cash position and manageable debt payment schedule, as well as a high level of unencumbered assets. The company's cash and marketable level was PEN120 million and its short-term debt was PEN10 million as of March 31, 2015. InRetail Real Estate faces low levels of annual debt payments in the PEN10 million to PEN12 million range during 2015-2017, which is viewed as credit positive for financial flexibility. The company's interest coverage is estimated at around 2.8x during 2015-2016

In addition, the company's assets related to shopping malls have an estimated market value of approximately PEN 2.7 billion (USD876 million) as of March 2015. InRetail Real Estate's loan-to-value is estimated at around 41%. The company is expected to maintain a good level of unencumbered assets with an estimated market value of approximately PEN 2.014 million (USD585 million), as of March 31 2015, covering 1.9x its unsecured debt level. This level of unencumbered assets provides financial flexibility that could be used to access financing in a stress scenario.