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IRSA And Cresud Could Have 70% Downside Due To $6.7 Billion Of Unconsolidated Debt, And Covenant Breach

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By Ben Axler :

Spruce Point is pleased to release an investment research opinion on IRSA (NYSE: IRS ) and Cresud (NADSAQ: CRESY ) with a " Strong Sell " opinion.

Please visit our website for the full report at www.sprucepointcap.com and follow us on Twitter . Please also review our investment disclaimers at the bottom of the report.

Spruce Point is short IRSA and CRESY, Latin American holding companies of real estate and agricultural assets, and sees 70% downside for the following reasons:

Egregious Accounting For IRSA's Controlling Investment In IDB Development: IRSA is a Latin American real estate company that recently invested in IDB Development Corp. (TLV: IDBD), an Israeli holding company with interests in real estate, communications, agricultural products, and technology. It appears that IRSA has structured its investment through an entity it designated as a Venture Capital Organization ("VCO"). IFRS rules provide a narrow exception for investment entities such as VCOs to allow issuers to record investments on the balance sheet as an "investment in associate" and record changes in value through the income statement. Our close examination of the facts and circumstances suggest that IRSA has majority control of IDBD through related-party entities, notably IFISA, under common control that have accumulated 81% of IDBD's shares. These entities bear no resemblance to a venture fund by any stretch of the imagination. In short, we believe the designation as a VCO is grossly inappropriate

We Believe IDBD Should Be Consolidated Into IRSA's Financials: IRSA's accounting choice appears designed for one thing; to avoid consolidation of IDBD into its financials. We can understand why; IDBD is massively levered with $6.7 billion of net debt outstanding as of 6/30/15. IRSA has already injected ~$300m into IDBD since 2014 and it still has received a " going concern " warning from its auditor as of 6/30/15. IRSA has commitments to inject a further $185m into IDBD through 2016. We estimate IRSA's pro forma Net Debt/EBITDA assuming consolidation to be 8.6x; however, we view IRSA's EBITDA as inappropriate because it includes gains from sales of investment properties, which goes against best practices for IFRS reporting. By normalizing IRSA's EBITDA, and converting it to US$ (a majority of its debt is US$), we find its EBITDA has been declining and barely covering its interest expense. IRSA appears dependent on liquidating its real estate assets to fund its investment in IDBD and cover its interest costs

IRSA's New 20-F Annual Report Filing Highlights Big Material Risk of Funding Issues, ADR Delisting : On Nov 3, 2015, IRSA filed an NT 20-F indicating it had petitioned the SEC for relief from presenting audited statements for IDBD. IRSA offered an excuse that " it was unable to force its associate " to provide audited financials following U.S. GAAP standards. Given that IRSA controls ~81% of IDBD's shares and that IRSA and IDBD share the same Chairman of the Board (Eduardo Elsztain), the response is questionable. The SEC denied IRSA's request for relief. The new 20-F filed on Nov 17th adds a risk factor that, absent a waiver from the SEC, IRSA may lose its registration, access to capital, and have its ADRs delisted

Under IRSA's Global Bond Indenture, It Appears To Be In Violation of its Covenants : IRSA currently carries US$300m of debt issued under its Global Notes program, which mature in 2017 and 2020. Its indenture contains an Incurrence of Additional Indebtedness covenant that expressly prohibits its EBITDA to Interest ratio to be less than 1.75x on a pro forma basis. Given IDBD's substantial debt load (consisting primarily of unsecured debentures amounting to $5.4 billion), we estimate IRSA's pro forma coverage ratio to be 1.25x (1.0x excluding one-time property gains). It is our view that IRSA is in imminent risk of a covenant breach

Rampant Evidence of Deficient Disclosures To The SEC And Its Global investors : IRSA operates in a multi-jurisdictional securities law and regulatory environment. It is an Argentinean company that has an ADR listed on the NYSE. Furthermore, its investment in IDBD trades in Israel. We have observed a few instances where IDBD has made disclosures related to IRSA, yet IRSA has failed to make corresponding disclosures to the SEC, or in a timely manner. From a materiality perspective, IRSA should be reporting to the SEC the activities of IDBD, a material subsidiary. To illustrate, IDBD's assets totaled $10.5 billion at 6/30/15 or 11x larger than IRSA's assets!

Dozens of Related Party Deals To Consider : IRSA makes numerous disclosures about related-party transactions. IRSA has the largest list of related-party transactions that Spruce Point, to date, has ever seen. To illustrate, IRSA's 2015 20-F Note 37 to the financial statements include 17 pages (F180 to F197) of related party disclosures! We have found instances of related party transactions not adequately described to IRSA investors. For example, complete details of an off-market warrant transfer from IRSA to IFISA (an entity controlled by the Chairman) were not adequately disclosed

IRSA and CRESY's Auditor Cited For Significant Audit Deficiencies : Both IRSA and CRESY (along with IRSA Commercial Properties (NASDAQ: IRCP )) are all audited by Price Waterhouse & Co S.R.L. a member firm of PWC. According to its last PCAOB inspection report from 2013, the firm had just 11 issuer audit clients, which raises the likelihood that these inter-related companies may have been the subject of the audit citations. Specifically, the reported highlighted for " the failure to perform sufficient procedures to test the initial recording of, and subsequent accounting for, assets purchased ," and " the failure to perform sufficient procedures to test the fair values of fixed assets acquired in business combinations ." This would be significant for an acquisitive minded real estate company such as IRSA

IRSA's Share Price Is Dramatically Overvalued : IRSA trades at approximately 3.8x and 8.5x, Sales and Adjusted EBITDA (assuming no IDBD consolidation). On a pro forma basis for the consolidation of IDBD, we estimate IRSA trades at 1.5x and 10.0x Sales and Adjusted EBITDA. Given our belief that it is effectively currently in violation of its debt covenants, levered 8.6x on a pro forma net debt basis, on the hook for funding $185m in commitments to IDBD, and resorting to asset sales to raise cash, we believe IRSA is in a precarious position. If IRSA were to even just trade at its book value in reflection of its pending problems, the stock would be worth approximately $4.75 per ADR, or approximately 70% downside

By Virtue of Cresud Owning 64.3% of IRSA, We Believe Its Shares Also Risk Impairment: Cresud, a Latin American agriculture company, is also controlled by Mr. Elsztain. Its current market cap of $650m approximates its IRSA ownership. If IRSA's price becomes impaired from a covenant breach, CRESY's stock price could also become impaired as it consolidates IRSA's debt load. We see a similar 70% downside to its share price

How the Dominos May Fall :

  1. SEC denies IRSA's waiver request to file anything but US GAAS statements for IDBD; compels IRSA to consolidate IDBD
  2. IRSA severely breaches its EBITDA/Interest covenant under its Global Notes
  3. IDBD's future becomes more uncertain as its controlling shareholder may become restricted from making good on additional capital contributions
  4. CRESY's impaired investment in IRSA causes harm to its own shares

Overview of Public Corporate Entities

IDB Development Corp.

Public: Israel

Tel Aviv Ticker: IDBD

CEO/Chairman: Haim Gavrieli/ Eduardo Elsztain

Share Price: NIS 2.30 ($0.60)

Market Cap: $395m

Net Debt: $6,700m

Prime Business: hold co. for real estate, insurance, cellular, agriculture and other businesses

Website: http://www.idb.co.il/

Majority Ownership and Control: entities controlled by IRSA/ Eduardo Elsztain owns 81% through Dolphin Companies + IFISA

IRSA Invesriones y Representaciones SA

Public: Argentina and US

NYSE: IRSA/Argentina: IRSA

CEO/CFO/Vice Chairman: Eduardo Elsztain/Matias Gaivironsky/Saul Zang

Share Price: $16.75 (1 ADR=10 common)

Market Cap: $970m

Net Debt: $503m

Prime Business: Real estate acquisition, development, operation and financing in Argentina

Website: http:// www.irsa.com.ar

Majority Ownership and Control: 64.3% by Cresud/64.3% ultimately by Eduardo Elsztain

Cresud S.I.F.A.

Public: Argentina and US

Nasdaq: CRESY/Argentina: CRES

CEO/CFO: Eduardo Elsztain/Matias Gaivironsky

Share Price: $13.00 (1 ADR=10 common)

Market Cap: $652m

Net Debt: $811m (1)

Prime Business: Agricultural Production

Website: http://cresud.com.ar

Majority Ownership and Control: 37.4% by Eduardo Elsztain

(1) Includes $389.5m of IRSA Debt

Public financial filings

Background on IRSA's Investment in IDB Development Corp.

  1. IDB Development Corp. Ltd (IDBD) is an Israeli holding company with interests in businesses across various industries such as agriculture, financial services, real estate, communications and technology.
  2. In May 2014, IRSA, through Dolphin Netherlands BV ("Dolphin"), its indirect subsidiary, acquired 23% of IDBD's common shares as part of a court approved debt restructuring with the creditors of IDBD's parent company, IDB Holdings Corporation Ltd. By December 31, 2014, IRSA's ownership interest in IDBD had increased to 31.26% of IDBD's outstanding shares. Under the terms of an agreement between Dolphin Fund Ltd ("DFL"), a majority owned subsidiary of IRSA, and E.T.H. M.B.M. Extra Holdings Limited ("Extra"), dated November 17, 2013 (the "Shareholders' Agreement"), IRSA's ownership interest in IDBD gave it the right to appoint three of the nine members of IDBD's board of directors, while Extra's ownership interest gave it the right to appoint another three members of the board.
  3. In February 2015, Dolphin acquired additional IDBD shares as part of a rights offering approved by a majority of IDBD's board. Extra did not purchase shares in the rights offering and, as a result, subsequent to the completion of the offering, Dolphin owned approximately 61% of IDBD's outstanding shares.
  4. Subsequent to the completion of the rights offering, Dolphin sold shares totaling approximately 12% of IDBD's outstanding shares to Inversiones Financieras del Sur S.A. ("IFISA") for cash and a note receivable secured by the IDBD shares. IFISA is a wholly-owned subsidiary of IFIS Limited ("IFIS"), over which Mr. Elsztain has control of more than 50% of the voting shares, either through direct and indirect holdings or through irrevocable powers of attorney that give him the right to vote shares owned by other IFIS shareholders.
  5. Extra gave notice to Dolphin that Extra was exercising its rights under the " buy me buy you " provision in the Shareholders' Agreement requiring Dolphin to either sell all of its IDBD shares to Extra at a specified price or purchase all of Extra's shares at that price. Dolphin elected to purchase all of Extra's IDBD shares. In September 2015, Dolphin, through IFISA, purchased all of Extra's IDBD shares bringing IFISA's holdings in IDBD to over 32%. Dolphin and IFISA, entities under common control, now own 81% of IDBD and has the right to appoint an additional three Board members (for a total of six of nine)

II. Evidence IRSA Controls IDBD

IRSA and IDBD Say Vastly Different Things About Control and Ownership Levels

As of Nov 17, 2015 when IRSA filed its previously delinquent FY 2015 20-F , IRSA still claims that it owns 49% of IDBD and does not control the company. IDBD viewed IRSA's ownership at 66.73% as of its midyear 2015 filing.

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IDBD Mid Year 2015 Report

Elsztain and IRSA Increase Stake Further With a Questionable Transaction

We estimate that Dolphin, IFISA, and entities related to Eduardo Elsztain now own approximately 81% of IDBD (vs. 49% reported in its SEC financial filings), and clearly has control of IDBD

  1. Subsequent to the completion of the Feb 2015 rights offering, Dolphin sold shares totaling approximately 12% of IDBD's outstanding shares to Inversiones Financieras del Sur S.A. ("IFISA") for cash and a note receivable secured by the IDBD shares.
  2. IFISA is a wholly-owned subsidiary of IFIS Limited ("IFIS"), over which Mr. Elsztain has control of more than 50% of the voting shares, either through direct and indirect holdings or through irrevocable powers of attorney that give him the right to vote shares owned by other IFIS shareholders.
  3. Specifically, IRSA's 20-F (p. 114) says " Eduardo S. Elsztain is the Chairman of the board of directors of IFIS Limited, a corporation organized under the laws of Bermuda and Inversiones Financieras del Sur S.A., a corporation organized under the laws of Uruguay. Mr. Elsztain, is the beneficial owner of 37.94% of IFIS capital stock, which owns 100% of Inversiones Financieras del Sur S.A ."
  4. Extra gave notice to Dolphin that Extra was exercising its rights under the "buy me buy you" provision in the Shareholders' Agreement requiring Dolphin to either sell all of its IDBD shares to Extra at a specified price or purchase all of Extra's shares at that price. Dolphin elected to purchase all of Extra's IDBD shares.
  5. Dolphin, through IFISA, purchased all of Extra's IDBD shares bringing IFISA's holdings in IDBD to over 32%. This acquired 32% stake, when added to IRSA's 49% stake, brings IRSA's total ownership to approximately 81%.
  6. In relation to the above transaction, IRSA's 6-K disclosure to U.S. investors was limited to saying that it would acquire the stake at a price of NIS1.64 per share for a total amount of NIS 151,972,119 (approx US$ 38.7 million) and that Dolphin will additionally assume all the obligations that Extra Holdings has, including the obligation to make certain share repurchases during 2015 and 2016.
  7. A 6-K filed on October 13, 2015 indicated that IRSA granted a 1-year loan to IFISA for $40m 1M Libor +3%, with no audit committee objection.
  8. A final 6-K filed on October 26, 2015 still represented that as of the filing date, IRSA held indirectly through Dolphin 49% of the outstanding shares of IDBD.

Evidence of IRSA Controls IDBD

We believe that IDBD became a subsidiary of IRSA as a result of the February 2015 rights offering, which resulted in an increase in Dolphin's ownership interest to 61% of IDBD's outstanding shares.IFRS 10Consolidated Financial Statementsstates in part:

"an investor controls an investee if and only if the investor has all the following:

  1. power over the investee (see paragraphs 10-14);
  2. exposure, or rights, to variable returns from its involvement with the investee (see paragraphs 15 and 16), and
  3. the ability to use its power over the investee to affect the amount of the investor's returns (see paragraphs 17 and 18)"
  4. We believe that Dolphin controlled IDBD subsequent to the rights offering because it had the right to call a General Meeting and appoint a majority of IDBD's directors as a result of its 61% interest. Eduardo is currently Chairman of the Board , and Dolphin also appointed Alejandro Gustavo Elsztain and Saúl Zang as regular members (although IDBD's website does not show Alejandro). Currently, three of nine members are representatives of IRSA/Dolphin. Therefore, IRSA should have included IDBD in its consolidated financial statements as a subsidiary as of March 31, 2015. The fact that Dolphin did not exercise its right to appoint a majority of IDBD's board does not, in any way, diminish its control over IDBD. Paragraph BC97 of IFRS 10 addresses that topic, stating, in part:

We do not believe the transfer of a 12% interest to a related party (Dolphin's sale of 12% of IDBD to IFISA) changes the conclusion that Dolphin could exercise control over IDBD. In discussing relationships between an investor and other parties,IFRS 10paragraphs B74 and B75 state, in part:

B74 :

Because IFISA is a related party of Dolphin and because Dolphin financed IFISA's purchase of the IDBD shares, we believe that, in accordance with paragraphs B74 and B75 of IFRS 10, IFISA is Dolphin's de facto agent and the shares held by IFISA should be attributed to Dolphin, and ultimately IRSA's total ownership of IDBD

Israeli Legal Document Also Contains Evidence of Control

In a signed affidavit to the Israeli Court, Saul Zang - First Vice Chairman of IRSA - stated fairly clearly that the transactions with Dolphin and IFISA were a policy matter related to control over IDBD. Mr. Zang is the same individual that signs IRSA's financial statements and filings to the SEC.

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Israeli Court System

III. Creative Acquisition Accounting?

IRSA has taken advantage of a narrow loophole to avoid the consolidation of IDBD into its financial statements, and instead labels it as an "Interest in Associate."

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IRSA FY 2015 20-F Annual Report

What Is An Investment Entity?

  • The IASB issued an amendment to IFRS 10 Consolidated Financial Statements in October 2012, to introduce an exception from consolidation of investments in subsidiaries by entities that qualify as investment entities. Such entities must not consolidate their subsidiaries; instead, those subsidiaries must be accounted for at fair value through profit or loss
  • The standard defines an investment entity as one that:

  1. Obtains funds from one or more investors for the purposes of providing those investors with investment management services
  2. Commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both
  3. Measures and evaluates the performance of substantially all of its investments on a fair value basis
  • Most investment entities will be in the fund management industry, including private equity and venture capital funds
  • The standard also sets out the following four typical characteristics of an investment entity to be considered alongside the definition, although the absence of any one of these does not necessarily disqualify an entity from being classified as an investment entity:

  1. It has more than one investment
  2. It has more than one investor
  3. It has investors that are not related parties of the entity
  4. It has ownership interest in the form of equity or similar interests

Loophole Accounting: IRSA's Investment Made Through a Venture Capital Fund... For Real!

IRSA's investment in IDBD made through Dolphin Fund Limited ("DFL")

IRSA Describes DFL Specifically as a Venture Capital Organization ("VCO")

And later on pages 52 and F-59:

IRSA 2014 20-F SEC Filing

What is a Venture Capital Organization?

Our interpretation of Dolphin and its entities suggest that it is not a Venture Capital Organization

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Dolphin Funds Ltd is Really Just an Entity Controlled For IRSA's Benefit

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Bermuda corporate registry , and fund administrator

Dolphin Netherlands B.V. Main Investor Is a Gibraltar Entity Directed By Elsztain and Zang

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Companies House Gibraltar

IRSA and CRESY's Auditor Cited By The PCAOB For Significant Deficiencies

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2013 PCAOB Report

IV. Evidence Suggesting Lapses of Investment Disclosures

Evidence Suggesting Material Deficiencies

  1. IRSA should be reporting to the SEC the activities of IDBD, a material subsidiary, which we believe should be consolidated. To illustrate, IRSA's total assets as of 6/30/15 were approximately $960m (adjusted to exclude reporting IDBD as an associate). IDBD's assets totaled $10.5 billion at 6/30/15 or 11x larger than IRSA's assets!
  2. Under Israeli law, Dolphin has been required to inform IDBD of material events related to its investment in IDBD. IDBD, in turn, discloses such events in an "Immediate Report" on Magna , Israel's public disclosure portal. As a foreign private issuer, IRSA, Dolphin's parent company, is required to submit a current report on Form 6-K promptly when material information is made public to non-US investors based on foreign laws or stock exchange regulations.
  3. We've identified numerous matters that have been disclosed by IDBD on Magna for which IRSA has either not filed a Form 6-K or has not disclosed certain information in the 6-K that was disclosed on Magna, including the following significant events:
  • On February 10, 2015, Dolphin sold 71.39 million (or approximately 12%) IDBD shares to IFISA for a total price of approximately ARS 221.9 million ($25.65 million). IRSA filed a 6-K dated February 11, 2015 disclosing the sale of the shares to IFISA. However, IRSA did not disclose in that Form 6-K that, as consideration for the sale, it had accepted a note from IFISA for approximately 86% of the sale price secured by a pledge of the IDBD shares. That information was provided in a filing on Magna by IDBD. Further, IRSA does not discuss the terms of the related party transaction as required by IAS 24 Related Party Disclosures in its March 31, 2015 quarterlyfinancials . In Note 34 to the quarterly financial statements, IRSA discloses that, as of March 31, 2015, it had trade and other receivables from IFISA totaling ARS 191.8 million, up from ARS 0.4 million at June 30, 2014. IRSA classified the receivable from IFISA as a current asset at March 31, 2015
  • On February 22, 2015, IDBD disclosed through Magna that Extra and Dolphin had requested arbitration over the rights offering that closed in early February 2015. On February 26, 2015, IDBD disclosed through Magna that the parties agreed to arbitrate the dispute. The issues to be arbitrated include damages relating to Dolphin's failure to offer Extra the option to purchase one-half of the shares that Dolphin acquired in the rights offering. The arbitration was disclosed in IRSA's 6-K quarterly financial results as of March 31, 2015, which was not furnished to the SEC until June 17, 2015, almost four months after this information was disclosed in Magna.
  • On May 8, 2015, IDBD disclosed through Magna that Dolphin had committed to make an additional investment totaling NIS 150 million (approximately $38.9 million at the exchange rate on that day) by exercising warrants to acquire IDBD shares. Dolphin's commitment was disclosed in its 6-K Note 41 Subsequent Events of the March 31, 2015 financial statements furnished to the SEC on June 17, 2015
  • Dolphin sold the warrants to IFISA on May 31, 2015 at a price below the market price for the warrants and IFISA exercised the warrants on June 2, 2015. IDBD disclosed Dolphin's commitment and the transfer of the warrants to IFISA through Magna, but IRSA has still not furnished that information on Form 6-K, nor did it disclose the transfer or exercise of the warrant in its March 31, 2015 financial statements.
    • IRSA sold warrants to purchase 46,000,020 shares of IDBD to IFISA for a price of NIS 0.01 per share, at a time when the market price of the IDBD warrants was NIS 0.46. IFISA exercised these warrants on June 7, 2015.
    • This transaction has the appearance of siphoning IRSA shareholder value to entities controlled by the Chairman at a below market price

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Tel-Aviv Stock Exchange

(1) Magna current event filing

(2) According to 2014 20-F (p. 114)

Evidence Suggesting Material Deficiencies (cont'd)

  1. On May 28, 2015, IDBD disclosed through Magna that Extra had triggered the buyout mechanism in the Shareholders' Agreement, requiring Dolphin to either sell its shares to Extra at the indicated price or purchase Extra's shares at that price. On June 10, 2015, IDBD disclosed through Magna that Dolphin had elected under the buyout mechanism to acquire Extra's shares in IDBD for an aggregate purchase price of NIS 151.97 million ($39.7 million at the June 10, 2015 exchange rate). IRSA did not disclose that Extra had triggered the buyout mechanism or that it had committed to acquire Extra's shares in its March 31, 2015 financial statements filed June 17th, 2015, nor had it timely furnished that information on Form 6-K, until it reported on the result of an arbitration proceeding relating to the buyout four months later in a 6-K on September 25, 2015.
  2. On September 9, 2015, IRSA filed its consolidated financial statements for the year ended June 30, 2015 with the National Securities Commission in Argentina. IRSA has continued to account for IDBD at fair value through profit or loss, even though IRSA obtained control over IDBD in February 2015. IRSA has not yet submitted a 20-F Annual Report for Fiscal Year 2015 ended June 30th. It took IRSA until November 17, 2015 to file its 20-F with the SEC.
  3. IRSA also recently released its Q1 2016 results through the September 30, 2015 period with full financial results on its website, yet filed a brief summary to the SEC in a 6-K.

V. Covenant Breach Appears Imminent, IRSA's Financial Condition Appears Tenuous

IRSA Should Consolidate IDBD's Mountain of Debt

Source:

IDBD Mid Year 2015 Report

IDBD's Total Debt of NIS 28.8bn ($6.7bn) as of June 30, 2015

  1. Significant short-term debt of $6.2bn or approximately 82% of total debt.
  2. $4.6bn of the debt are Series G, I, J unsecured debentures.
  3. On February 26, 2015, Maalot, Israel's S&P credit agency, announced a reduction of the rating given for the Company and its debentures, to a rating of B, negative rating outlook.
  4. Recent "Going Concern" warning by IDBD's auditor.

IDBD's Auditor Issued a "Going Concern" Warning Recently

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IDBD Mid Year 2015 Report

IRSA Has Substantial Commitments to IDBD

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Q1 2016 earnings conference call

IRSA's EBITDA Appears Low Quality

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FY 2015 Earnings Release

More Apparent EBITDA Absurdity

The financial presentation of IRSA's "Sales and Developments" segment is perplexing. Its EBITDA dwarfs its sales, and its disclosures below adds little clarity as to what is a sale. Also, IRSA includes no depreciation in this segment. What happens after it completes a property development and it sits waiting to be sold? Where is the depreciation accounted for?

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FY 2015 Earnings Release

IRSA Selling Crown Jewels To Fund IDBD Black Hole

FY 2015 Earnings Release

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Q2'2015 6K filing

IRSA's Free Cash Flow For Debt Repayment Appears Cause For Concern

Almost 80% of IRSA's debt is US$ denominated, so it's important to evaluate its ability to repay upcoming maturities in 2017. We adjust IRSA's operating cash flow to remove interest paid. Under IFRS, companies have the option to show this figure as a financing cash flow, but under traditional US GAAP and financial analysis, it is an operating cash flow. After factoring in the depreciation of the Argentina Peso, we find that IRSA's free cash flow contracted substantially in 2015 to approximately $83m and its effective interest costs have risen to almost 13%

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Warning: IRSA Changes Language About Cash Flows in Recent 20-F Filing

Risk Factor - Filed October 31, 2014

FY 2014 Annual Report 20-F (p. 12)

Risk Factor - Filed November 17, 2015

We had, and expect to have, substantial liquidity and capital resource requirements to finance our business. As of June 30, 2015, our consolidated financial debt amounted to Ps. 4,983.8 million (including accrued and unpaid interest and deferred financing costs).( SENTENCE OMITTED : Although we are generating sufficient funds from operating cash flows to satisfy our debt service requirements and our capacity to obtain new financing is adequate given the current availability of credit lines with the banks) We cannot assure you that we will have sufficient cash flows and adequate financial capacity in the future.

FY 2015 Annual Report 20-F (p. 15)

An Alternative View of IRSA's Recent EBITDA Performance is Less Rosy

By removing one-off gains from asset sales and translating IRSA's financials into US$, we find that its core EBITDA has been declining for the past three years

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IRSA's US$ Debt Matures Soon, Peso Depreciation Burdening Interest Costs

Almost 80% of IRSA's debt is US$ denominated with $270m of Notes maturing in 2017. The Company has said that a depreciation of the Argentina Peso would increase its indebtedness measured in Pesos and materially affect its results of operations

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IRSA Violates its Bond Covenants Upon Consolidation of IDBD

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(1) Adjusted to remove property gains (2) Adjusted for debt paydown of Class V notes on 8/25/15 per 6-K (3) APSA Series I and II Note Indenture (p. 169)

Company Financials.

Note: Converted at average exchange rates

Warning: SECAppears To Be Turning Up Pressure on IRSA to Consolidate IDBD

It appears the SEC may be investigating the consolidation issue and has denied IRSA and CRESY's request for not providing it audited IDBD financials. Ironically, IRSA claims it cannot "force" its "associate" to present US GAAP financials even though it controls 81% of IDBD.

IRS NT 20-F

Warning: New Risk Factor Increases Likelihood of Funding Issues, Share Delisting

As of IRSA's recent filing on Nov 17, 2015, it is still claiming it owns just 49% of IDBD and that it doesn't have power to deliver audited financials for IDBD. The reluctance to provide these financial statements could result in financing issues and the delisting of its ADRs.

Risk Factor

Our inability to provide audited financial statements for IDBD in accordance with Rule 3-09 of Regulation S-X may cause us to be unable to complete a registered offering, which would materially adversely affect our ability to access the capital markets, may cause certain of our shareholders to be unable to rely on Rule 144 for sales of our securities and may ultimately result in the delisting of our GDSs from the NYSE....

IRSA FY 2015 20-F Annual Report (p. 17)

Appendix

Weak Argentinean Peso Makes IRSA's Financing of IDBD Shekel Commitments More Challenging

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Bloomberg

IDBD's Stock Price Has Traded Down Post-Reorg, a Reflection of the Uncertain Future and "Going Concern" Warning

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Bloomberg

IRSAand CRESY's Stock Prices Linked

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Bloomberg

Disclaimer: This research presentation report expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation report. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC's control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC's research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.

You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers has a short position in all stocks (and/or are long puts/short call options of the stocks) covered herein, including without limitation IRSA Inversiones y Representaciones Sociedad Anónima ("IRSA") and Cresud Sociedad Anónima, Comercial, Inmobiliaria, Financiera y Agropecuaria ("CRESY"), and therefore stand to realize significant gains in the event that either of its stock prices decline. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation.

This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor, broker/dealer, or accounting firm.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stocks covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of IRSA or CRESY or other insiders of CRESY or IRSA that has not been publicly disclosed by IRSA or CRESY. Therefore, such information contained herein is presented "as is," without warranty of any kind - whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All rights reserved. This document may not be reproduced or disseminated in whole or in part without the prior written consent of Spruce Point Capital Management LLC.

See also Vale Continues To Go Down, Down, Down on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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