Each week we screen thousands of corporate bond listings to find what we believe are currently the best corporate bonds for investors needing or seeking higher yields with the least amount of risk possible relative to its projected return. We take on this task because we are convinced that holding a small, but well chosen, basket of individual bonds with maturity certain dates may offer significant advantages to bond mutual funds that; (1) may carry the risk of being subjected to forced redemptions and devaluation should the sentiment of other investors turn in mass against them; (2) typically do not have fixed rate payouts; and (3) typically do not have maturity certain dates at which investors can anticipate achieving both a return of principal and its stated yield.
This week we look at the high yields offered in short 44 month, high yield Yankee (US dollar) bonds from Alto Palermo SA (APSA), an Argentina-based real estate company engaged in the ownership, leasing, development, management, acquisition and operation of high end shopping centers in Argentina. Our research leads us to believe that these B+ rated bonds will not only uphold our unblemished record of acquiring higher yielding bonds that steer clear of default while providing excellent cash flow, but the near 10% yields currently indicated with its below par price represents a savvy opportunity for its inclusion into our Fixed-Income1.com and Fixed-Income2.com portfolios.
A Look at Alto Palermo
Originally founded in 1889 under the name of "Sociedad Anónima Mercado de Abasto Proveedor" (Market Supply Corporation), Alto Palermo resumed operations in the real estate business when Inversiones Representaciones SA (IRS) purchased controlling interest in July 1994. In October 2010, IRSA acquired partner Parque Arauco's interest in the company and became its main shareholder. The remaining outstanding shares (less than 5%) trade on the NASDAQ and Buenos Aires exchanges.
Alto Palermo is primarily engaged in the ownership, acquisition, development, leasing, management and operation of shopping centers, and it is one of the largest owners and managers of shopping centers in Argentina, in terms of gross leasable area and number of shopping centers. Alto Palermo owns and operates a portfolio of twelve Shopping Centers, six of which are located in the City of Buenos Aires, two in the Great Buenos Aires and Soleil, and four in the cities of Salta, Córdoba, Rosario and Mendoza. Representing a total Gross Leasable Area of 300,000 sq.meters, the average occupancy level of its Shopping Centers has been historically above 95%. In Argentina, Alto Palermo is synonymous with "shopping center," and Alto Palermo Shopping has set a record of the highest sales per squared meter in Argentina. The average sales per square foot for Simon Property Group (SPG), the USA's largest mall developer, last year was $554.
We like companies that are profitable
The charts below helps to demonstrate the year over year consistency and growth of Alto Palermo's revenues and net income over the last three years. This has allowed it to be cash flow positive from before and through the global economic crash, having a positive operating cash flow each quarter since 2006.
In millions of Argentine Pesos (one ARS pesos = US$ 0.174 currently):
9 months ending
Dividends of about 141.4 million pesos (about $25 million US) were paid in the period ending March 31, 2013.
Interest Coverage Ratios
Interest expenses for the nine months ending Q1 2013 appear to be $11.4 million, while operating income (EBITDA) for the same period was about $95 million, indicating a very healthy interest coverage ratio that's greater than eight to one.
We like companies with lower debt to cash ratio
The total debt of Alto Palermo at the end of 1Q 2013 was about $195 in US dollars, primarily attributed to the US dollar denominated notes. On January 14, 2013, Alto Palermo repurchased all of its Series I Convertible Notes due July 2014, amounting to a total price of $35.4 million in US dollars. Considering its US dollar equivalent cash position at the end of 1Q 2013 of about $32 million, it appears to be a reasonably manageable debt to cash ratio of about 5.5 to 1. We see Alto Palermo's historical declaration and distribution of dividends as a ready target for conserving additional cash flow should it become necessary. Considering its very robust margins, solid EBITDA growth and its ability to maintain a sound cash position, we are of the opinion that it is a significantly lower fiscal risk than the modest B+ credit rating typically seems to imply.
We like companies that have good balance sheets
Alto Palermo's debt of about $195 million appears to be less that 20% of its current $728 million enterprise value, indicating a sound and flexible balance sheet should additional equity be needed or sought from the capital markets in spite of its closely held structure.
We like higher yields
Although the B+ credit ratings assigned to this debt is widely different than the AA+ ratings of our government's sovereign debt, when set in comparison to the paltry 1% yields of comparable length U.S. Treasuries, we believe that this nearly 8% difference in yield represents an excellent opportunity for higher rewards given the level of risks that we can identify.
The default risk is Alto Palermo's ability to perform. As most rating agency still rate Argentina's sovereign debt at B-, the country's low rating pretty much ensures that Alto Palermo's rating has a glass ceiling equivalent to the only nation it operates within. Considering its historical performance with excellent profit margins and earnings growth, as well as its cash position, sound balance sheet, and the cash flow that is projected to easily service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short term bond is minimal relative to its highly favorable return potential. Furthermore, it is our opinion that if or when the credit ratings for Argentine sovereign debt rise, the ratings for Alto Palermo will be lifted accordingly.
The hardest risk for us to identify is the geopolitical risk. Considering how difficult it has become to understand many of the political changes and potential changes for bondholders. With that said, the more recent civil political unrest in Argentina appears that it may be favoring a move away for the very socialistic direction that Cristina Fernández de Kirchner has taken it in recent years. It is our opinion that diversification into other forms often serves to reduce risk. Our strategy here, as with other Yankee bonds, is to focus on unique or required services that can be seen as adding key economic value to the society it's associated with. Alto Palermo has positioned itself for the posh demands of Argentina's fashion conscious society, and it is readily acknowledged as one of Argentina's premier shopping brands.
As regulatory burdens continue to change, it often appears that companies outside of the United States might have an internal cash flow advantage. Consequently, we see Alto Palermo bonds as having similarities to the yields, risks and maturities of other Yankees bonds such as the 9.1% RusHydro, the 10.5% Myria Agro, or the 8.9% Berau Coal bonds that we have previously reviewed.
Summary and Conclusion
After carefully considering Alto Palermo's recent performance, its financial position, and the prospects for its ongoing viability, we are convinced that the high 9.85 % yields that might be achieved with these relatively short 44 month Yankee bonds represent an exceptionally attractive value relative to the risks that we can identify. Furthermore, it is our opinion that the low "B+" ratings currently assigned to it by two reputable credit rating agencies are largely attributable to the sole country (Argentina) that the Company currently operate within. Therefore, we are adding the high yield and high cash flow of these lesser known Alto Palermo bonds to our portfolio Fixed-Income1.com and our Fixed-Income2.com portfolio's.
The latest updates and/or more news on Alto Palermo can be found on bond-yields.com.
Yield to Maturity: ~9.88 %
Disclosure: Durig Capital and certain clients may have positions in Alto Palermo 2017 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.