United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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| Date of event requiring this shell company report _____________ |
Commission file number
IRSA Inversiones y Representaciones Sociedad Anónima |
(Exact name of Registrant as specified in its charter) |
(Translation of Registrant’s name into English) |
Republic of
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Tel.: +(
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12 (b) of the Act.
Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
Global Depositary Shares, each representing ten shares of Common Stock |
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| New York Stock Exchange* |
* | Not for trading, but only in connection with the registration of Global Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12 (g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: ☐ Yes ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. ☒
Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer | ☐ | ☒ | |
Non-accelerated filer | ☐ | Emerging growth company | |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by checkmark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ |
| International Accounting Standards Board included in this filing: ☒ |
| Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes ☐ No ☐
Please send copies of notices and communications from the Securities and Exchange Commission to:
Carolina Zang | Juan M. Naveira |
Zang Bergel & Viñes Abogados | Simpson Thacher & Bartlett LLP |
Florida 537, 18th Floor C1005AAK City of Buenos Aires Argentina | 425 Lexington Avenue New York, NY 10017 United States of America |
TABLE OF CONTENTS
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ITEM 1. Identity of Directors, Senior Management, Advisers and Auditors |
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ITEM 11. Quantitative and Qualitative Disclosures About Market Risk |
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ITEM 12. Description of Securities Other than Equity Securities |
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ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds |
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B. Management’s Annual Report on Internal Control Over Financial Reporting |
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C. Attestation Report of the Registered Public Accounting Firm |
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D. Exemption from the Listing Standards for Audit Committees |
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E. Purchase of Equity Securities by the Issuer and its Affiliates |
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I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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GLOSSARY
Glossary of certain terms used in this Annual Report
Unless the context indicates otherwise, the following terms have the meanings shown below:
| · | “ADS” or “ADSs”: American Depositary Shares; |
| · | “AFIP”: Federal Administration of Public Revenue (Administración Federal de Ingresos Públicos); |
| · | “ANSES”: National Social Security Agency (Administración Nacional de la Seguridad Social); |
| · | “ARS, Pesos or Peso”: Argentine Pesos; |
| · | “Anti-Money Laundering Law”: Law No. 25,246, subsequently amended by, among others, Laws No. 26,087, 26,119, 26,268, 26,683, 26,733, 26,734 and Decree No. 27/2018; |
| · | “Argentine Government”: Federal government of Argentina; |
| · | “Audited Consolidated Financial Statements”: audited Consolidated Financial Statements as of June 30, 2023 and 2022 and for the years ended June 30, 2023, 2022 and 2021, and the notes thereto; |
| · | “BACS”: Banco de Crédito y Securitización S.A.; |
| · | “Banco Hipotecario”: Banco Hipotecario S.A.; |
| · | “BASE”: Buenos Aires Stock Exchange; |
| · | “Board of Directors”: the board of directors of IRSA Inversiones y Representaciones S.A.; |
| · | “ByMA”: Argentine stock exchange and markets (Bolsas y Mercados Argentinos S.A.); |
| · | “Caja de Valores”: Caja de Valores S.A.; |
| · | “CCI”: Consumer Confidence Index; |
| · | “Central Bank”: The Argentine Central Bank (Banco Central de la República Argentina); |
| · | “CML”: Capital Markets Law No. 26,831, as amended by, among others, Law 27,440; |
| · | “CNDC”: National Competition Authority (Comisión Nacional de Defensa de la Competencia); |
| · | “CNV”: The Argentine National Securities Commission (Comisión Nacional de Valores); |
| · | “CNV Rules”: the rules issued by the CNV; |
| · | “Code”: Internal Revenue Code of 1986, as amended; |
| · | “CODM”: Chief Operating Decision Maker; |
| · | “Consumer Protection Law”: Argentine Law No. 24,240; |
| · | “Corporate Criminal Liability Law”: Corporate Criminal Liability Law No. 27,401; |
| · | “Covid-19”: the novel coronavirus, pneumonia originating in Wuhan, China; |
| · | “COPREC”: Preliminary Conciliation Service for Consumer Relationships (Servicio de Conciliación Previa en las Relaciones de Consumo); |
| · | “CPI”: Cumulative Variation of the Consumers Prices Index; |
| · | “CPF”: Collective Promotion Fund; |
| · | “Credit Card Law”: Law No. 25,065, as amended by Law No. 26,010 and Law No. 26,361; |
| · | “CRESUD”: Cresud S.A.C.I. F. y A.; |
| · | “CSJN”: Supreme Court (Corte Suprema de Justicia de la Nación); |
| · | “Deposit Agreement”: the deposit agreement, dated as of as of May 24, 1994, as amended and restated as of December 12, 1994, as amended and restated as of November 15, 2000, between us and the GDS Depositary |
| · | “Dolphin B.V”: Dolphin Netherlands B.V.; |
| · | “Edenor”: Empresa Distribuidora y Comercializadora Norte S.A.; |
| · | “EMAE”: Monthly estimate of economic activity; |
| · | “EOH”: Hotel Vacancy Survey (Encuesta de Ocupación Hotelera); |
| · | “EU”: European Union; |
| · | “Exchange Act”: United States Securities Exchange Act of 1934, as amended; |
| · | “Fair Price Provision”: fair price provision included to the Company’s bylaws; |
| · | “FCPA”: U.S. Foreign Corrupt Practices Act of 1977; |
| · | “FPC”: Building administration expenses and collective promotion funds (Fondo de Promoción Colectiva); |
| · | “GCBA”: Government of the Autonomous City of Buenos Aires (Gobierno de la Ciudad Autónoma de Buenos Aires); |
| · | “GCDI”: GCDI S.A.; |
| · | “GDP”: Gross Domestic Product; |
| · | “GDRs”: Global Depositary Receipts, which represent the GDSs; |
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| · | “GDSs”: Global Depositary Shares each representing 10 shares of our common stock, issued pursuant to the Deposit Agreement; |
| · | “GDS Depositary”: The Bank of New York; |
| · | “GLA”: Gross Leasable Area; |
| · | “HASAU”: Hoteles Argentinos S.A.U.; |
| · | “IAS 29”: Financial Reporting in Hyperinflationary Economies; |
| · | “IASB”: International Accounting Standards Board; |
| · | “ICSID”: International Centre for Settlement of Investment; |
| · | “IFRS”: International Financial Reporting Standards; |
| · | “IGJ”: Public Registry of Commerce of the City of Buenos Aires (Inspección General de Justicia); |
| · | “IMF”: International Money Fund; |
| · | “Income Tax Law”: Law No. 20,628, as amended; |
| · | “INDEC”: National Institute of Statistics and Censuses (Instituto Nacional de Estadística y Censos); |
| · | “IPC”: Consumer Price Index (Índice de Precios al Consumidor); |
| · | “IRS”: Internal Revenue Service; |
| · | “IRSA” or “the Company”: IRSA Inversiones y Representaciones S.A.; |
| · | “IRSA CP”: IRSA Propiedades Comerciales S.A.; |
| · | “LGS”: Argentine General Corporation Law No. 19,550 (Ley General de Sociedades); |
| · | “MAE”: Mercado Abierto Electrónico S.A.; |
| · | “MERCOSUR”: Common Market of the South; |
| · | “Metropolitan”: Metropolitan 885 3rd Ave; |
| · | “MULC”: Foreign Exchange Market (Mercado Único y Libre de Cambios); |
| · | “m2, or “sqm”: Standard measure of area in the real estate market in Argentina is the square meters; |
| · | “NIS”: Israel Currency; |
| · | “NYSE”: New York Stock Exchange; |
| · | “Official Gazette”: Official Gazette of Argentina (Boletín Oficial de la República Argentina); |
| · | “Pamsa”: Panamerican Mall S.A.; |
| · | ·“Paris Club 2014 Settlement Agreement”: settlement agreement reached by Argentina with the Paris Club members on May 29, 2014; |
| · | “PASO”: Mandatory and simultaneous open primary elections (Elecciones primarias abiertas simultáneas y obligatorias); |
| · | “PEN”: National Executive Branch (Poder Ejecutivo Nacional); |
| · | “PFIC”: Passive Foreign Investment Company; |
| · | “PROCREAR”: Argentine Bicentennial Credit Program for Single Family Housing (“Programa de Crédito Argentino del Bicentenario para la Vivienda Única Familiar”); |
| · | “Program”: Global Note Program for the issuance of simple, non-convertible, unconditional notes, secured or unsecured, to be paid in cash and/or in kind for a maximum outstanding amount of up to USD 750,000,000 or its equivalent in other currencies or value units, as approved by the shareholders’ meeting dated March 20, 2019; |
| · | “Real Estate Registry”: Argentine Real Estate Property Registry (Registro de la Propiedad Inmueble); |
| · | “Restructuring Unit Law”: Law No. 26,177; |
| · | “SAF Agreement”: agreement executed between Argentina and the IMF on January 28, 2022 to refinance indebtedness; |
| · | “SEC”: United States Securities and Exchange Commission; |
| · | “Securities Act”: U.S. Securities Act of 1933, as amended; |
| · | “TAP”: Tax on Personal Assets; |
| · | “UIF”: Financial Information Unit (Unidad de Información Financiera); |
| · | “U.S.”: United States of America; |
| · | “USD and/or U.S. dollars”: U.S. currency; |
| · | “VAT”: Value Added Tax; |
| · | “WEO”: World Economic Outlook, prepared by IMF; |
| · | “YPF”: Yacimientos Petrolíferos Fiscales S.A.; |
| · | “2013 COSO Report”: Integrated Framework-Internal Control issued by the Committee of Sponsoring Organizations of the Treadway Commission; |
| · | “2022 Plan”: the terms and conditions for the acquisition of the common shares issued by the Company approved on March 11, 2022 by the Board of Directors; |
| · | “2023 Plan”: the terms and conditions for the acquisition of the common shares issued by the Company approved on June 15, 2023 by the Board of Directors. |
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DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains and incorporates by reference statements that constitute estimates and forward-looking statements. The words “believe,” “will,” “may,” “may have,” “would,” “estimate,” “continues,” “anticipates,” “intends,” “should,” “plans,” “expects,” “predicts,” “potential,” “seek” and similar words or phrases, or the negative of these terms or other similar expressions, are intended to identify estimates and forward-looking statements. Some of these statements include statements regarding our current intent, belief or expectations. While we consider these expectations and assumptions to be reasonable, forward-looking statements are subject to various risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. Forward-looking statements are not guarantees of future performance. Actual results may be substantially different from the expectations described in the forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
We have based these forward-looking statements on our current beliefs, expectations and assumptions about future events. While we consider these expectations and assumptions to be reasonable, they are inherently subject to significant risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. The risks and uncertainties that may affect our forward-looking statements include, among others, the following:
| · | changes in general economic, financial, business, political, legal, social or other conditions in Argentina (including as a result of the presidential, provincial and congressional elections which will take place in Argentina on October 22, 2023), Latin America, other developed and/or emerging markets; |
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| · | changes in capital markets in general that may affect policies or attitudes toward lending to or investing in Argentina, including volatility in domestic and international financial markets; |
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| · | inflation and interest rates; |
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| · | impact of the variants of Covid-19 and the spread of other infectious diseases on our business; |
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| · | fluctuations in the exchanges rates of the Peso and in the prevailing interest rates in Argentina; |
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| · | increases in financing costs or our inability to obtain additional financing on attractive terms, which may limit our ability to fund existing operations and to finance new activities; |
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| · | current and future regulation and changes in law or in the interpretation by courts; |
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| · | price fluctuations in the real estate market; |
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| · | political, civil and armed conflicts; |
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| · | risks related to climate change; |
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| · | adverse legal or regulatory disputes or proceedings; |
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| · | fluctuations in the aggregate principal amount of Argentine public debt outstanding and default on Argentina’s of sovereign debt; |
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| · | the impact of the agreement with the IMF and the restructuring of Argentina’s sovereign debt with the IMF and the Paris Club; |
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| · | governmental intervention in the private sector and in the economy, including through nationalization, expropriation, labor regulation or other actions; |
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| · | restrictions on transfer of foreign currencies and other exchange controls; |
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| · | increased competition in the shopping mall sector, office or other commercial properties and related industries; |
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| · | potential loss of significant tenants at our shopping malls, offices or other commercial properties; |
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| · | our ability to take advantage of opportunities in the real estate market on a timely basis; |
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| · | restrictions on energy supply or fluctuations in prices of utilities in the Argentine market; |
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| · | our ability to meet our debt obligations; |
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| · | shifts in consumer purchasing habits and trends; |
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| · | technological changes and our potential inability to implement new technologies; |
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| · | deterioration of regional, national or global businesses and economic conditions; |
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| · | the integration of any acquisitions and the failure to realize expected synergies; |
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| · | the implementation of a possible tax reform and/or an increase and/or creation of taxes; |
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| · | changes in current regulations related to urban and commercial leases; |
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| · | incidents of government corruption that adversely impact the development of our real estate projects; |
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| · | fluctuations and declines in the exchange rate of the Peso and the U.S. dollar against other currencies; and |
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| · | the risk factors discussed under “Risk Factors”. |
Forward-looking statements refer only to the date of this Annual Report, and neither we undertake any obligation to update or revise any estimate or forward-looking statement due to new information, future events or otherwise. Additional factors or events affecting our business may emerge from time to time, and we cannot predict all of these factors or events, nor can we assess the future.
AVAILABLE INFORMATION
We file annual and current reports and other information with the United States Securities and Exchange Commission (“SEC”). You may obtain any report, information or other document we file electronically with the SEC at the SEC’s website (http://www.sec.gov) or at our website (http://www.irsa.com.ar). The information contained in our website does not form part of this Annual Report.
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION
In this annual report (the “Annual Report”), references to “IRSA,” the “Company,” “we,” “us” and “our” means IRSA Inversiones y Representaciones Sociedad Anónima and its consolidated subsidiaries, unless the context otherwise requires, or where we make clear that such term refers only to IRSA and not to its subsidiaries.
References to “GDSs” are to the Global Depositary Shares, each representing 10 shares of our common stock, issued pursuant to the Deposit Agreement, between us, The Bank of New York, as depositary (the “GDS Depositary”), and the owners and holders of the GDSs issued from time to time thereunder, and references to “GDRs” are to the Global Depositary Receipts, which represent the GDSs.
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Financial Statements
We prepare and maintain our financial books and records in Pesos (as defined below in section “—Currency”) and in accordance with IFRS, as issued by the IASB and the CNV Rules. Our fiscal year begins on July 1 of each year and ends on June 30 of each year thereafter.
Our audited Consolidated Financial Statements as of June 30, 2023 and 2022 and for the years ended June 30, 2023, 2022 and 2021, and the notes thereto (our “Audited Consolidated Financial Statements”) are set forth on pages F-1 through F-90 of this Annual Report.
Our Audited Consolidated Financial Statements have been approved by resolution of the Board of Directors’ meeting held on October 19, 2023 and have been audited by Price Waterhouse & Co S.R.L.,Argentina, member of PricewaterhouseCoopers International Limited, an independent registered public accounting firm whose report is included herein.
Functional and Presentation Currency; Adjustment for Inflation
Our functional and presentation currency is the Argentine Peso, and our Audited Consolidated Financial Statements included in this Annual Report are presented in Argentine Pesos.
IAS 29 requires that the financial statements of an entity whose functional currency is one of a hyperinflationary economy be measured in terms of the current unit of measurement at the closing date of the financial statements, regardless of whether they are based on the historical cost method or the current cost method. This requirement also includes the comparative information of the financial statements.
In order to conclude that an economy is “hyperinflationary,” IAS 29 outlines a series of factors, including the existence of an accumulated inflation rate in three years that is approximately or exceeds 100%. As of July 1, 2018, Argentina reported a cumulative three-year inflation rate greater than 100% and therefore financial information published as from that date should be adjusted for inflation in accordance with IAS 29. Therefore, our Audited Consolidated Financial Statements and the financial information included in this Annual Report have been stated in terms of the measuring unit current at the end of the reporting year. For more information, see section “Financial Statements” above and Note 2.1 to our Audited Consolidated Financial Statements.
See Note 2.2 to our Audited Consolidated Financial Statements for more information about the adoption of new standards.
Currency
Unless otherwise specified or the context otherwise requires, references in this Annual Report to “Peso,” “Pesos” or “ARS” are to Argentine pesos, and references to “U.S. dollars,” “dollars” or “USD” are to United States dollars.
We have translated some of the Peso amounts contained in this Annual Report into U.S. dollars for convenience purposes only. Unless otherwise specified or the context otherwise required, the rate used to convert Peso amounts to U.S. dollars is the seller exchange rate quoted by Banco de la Nación Argentina of ARS 256.70 per USD 1.00 as of June 30, 2023. The average seller exchange rate for fiscal year 2023, quoted by Banco de la Nación Argentina was ARS 179.84. The seller exchange rate quoted by Banco de la Nación Argentina was ARS 350.10 per USD 1.00 as of October 18, 2023. The U.S. dollar-equivalent information presented in this Annual Report is provided solely for the convenience of the reader and should not be construed as implying that the Peso amounts represent, or could have been or could be converted into, U.S. dollars at such rates or at any other rate. See “Item 3. Key Information—A1. Local Exchange Market and Exchange Rates” and “Risk Factors—Risks relating to Argentina—Continuing high rates of inflation may have an adverse effect on the economy and our business, financial condition and results of our operations.”
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Certain Measurements
In Argentina, the standard measure of area in the real estate market is the square meters (“m2”, or “sqm”), while in the United States and certain other jurisdictions the standard measure of area is the square foot (sq. ft.). All units of area shown in this Annual Report (e.g., gross leasable area of buildings (GLA)), and size of undeveloped land) are expressed in terms of sqm. One sqm is equal to approximately 10.8 square feet. One hectare is equal to approximately 10,000 sqm and to approximately 2.47 acres.
As used in this Annual Report, GLA in the case of shopping malls refers to the total leasable area of the properties, regardless of our ownership interest in such properties (excluding common areas and parking areas and space occupied by supermarkets, hypermarkets, gas stations and co-owners, except where specifically stated otherwise).
Rounding Adjustments
Certain figures which appear in this Annual Report (including percentage amounts) and in our financial statements have been subject to rounding adjustments for ease of presentation. Accordingly, figures shown for the same category presented in different tables or different parts of this Annual Report and in our financial statements may vary slightly, and figures shown as totals in certain tables may not be arithmetic aggregation of the figures that precede them.
Economic, Industry and Market Data
Economic, industry and market data and other statistical information included or incorporated by reference into this Annual Report is based on data compiled by us from internal sources and based on publications such as Bloomberg, the International Council of Shopping Centers, the Argentine Chamber of Shopping Centers (Cámara Argentina de Shopping Centers), and the INDEC. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness.
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PART I
ITEM 1. Identity of Directors, Senior Management and Advisers
This item is not applicable.
ITEM 2. Offer Statistics and Expected Timetable
This item is not applicable.
ITEM 3. Key Information
A. Reserved
A.1. Local Exchange Market and Exchange Rates
The Argentine government has established a series of exchange control measures that restrict the free flow of currency and the transfer of funds abroad. These measures significantly curtail access to the MULC by both individuals and private sector entities. This makes it necessary, among other things, to obtain prior approval from the Central Bank to enter into certain foreign exchange transactions such as payments relating to royalties, services or fees payable outside Argentina. For more information about exchange controls see, “Item 10. Additional Information—D. Exchange Controls”.
The following table shows the maximum, minimum, average and closing exchange rates for each applicable period to purchases of U.S. dollars.
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| At closing (1) |
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Fiscal year ended: |
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June 30, 2021 |
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| 95.62 |
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| 70.42 |
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| 83.81 |
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| 95.62 |
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June 30, 2022 |
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| 125.13 |
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| 95.66 |
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| 105.27 |
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| 125.13 |
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June 30, 2023 |
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| 256.50 |
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| 125.35 |
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| 179.71 |
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| 256.50 |
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Month ended: |
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|
|
|
|
|
|
|
July 31, 2023 |
|
| 275.05 |
|
|
| 257.70 |
|
|
| 266.23 |
|
|
| 275.05 |
|
August 31, 2023 |
|
| 349.60 |
|
|
| 275.95 |
|
|
| 321.75 |
|
|
| 349.50 |
|
September 30, 2023 |
|
| 349.60 |
|
|
| 349.45 |
|
|
| 349.50 |
|
|
| 349.45 |
|
October, 2023 (through October 18, 2023) |
|
| 349.60 |
|
|
| 349.45 |
|
|
| 349.56 |
|
|
| 349.60 |
|
Source: Banco de la Nación Argentina
(1) | Average between the offer exchange rate and the bid exchange rate according to Banco de la Nación Argentina’s foreign currency exchange rate. |
(2) | The maximum exchange rate appearing in the table was the highest end-of-month exchange rate in the year or shorter period, as indicated. |
(3) | The minimum exchange rate appearing in the table was the lowest end-of-month exchange rate in the year or shorter period, as indicated. |
(4) | Average exchange rates at the end of the month. |
B. Capitalization and Indebtedness
This section is not applicable.
C. Reasons for the Offer and Use of Proceeds
This section is not applicable.
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D. Risk Factors
Summary of Risk Factors
The following summarizes some, but not all, of the risks provided below. Please carefully consider all of the information discussed in this Item 3.D. “Risk Factors” in this Annual Report for a more thorough description of these and other risks:
Risks Relating to Argentina
| · | We depend on macroeconomic and political conditions in Argentina. |
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| · | The impact of the next presidential, congressional and provincial elections on the future economic and political environment of Argentina remains uncertain. |
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| · | Economic and political developments in Argentina, and future policies of the Argentine Government may adversely affect the Argentine economy and the sectors in which we perform our activities. |
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| · | Continuing high rates of inflation may have an adverse effect on the economy and our business, financial condition and results of operations. |
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| · | High levels of public spending in Argentina could generate long-lasting adverse consequences for the Argentine economy. |
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| · | Argentina’s ability to obtain financing in the international capital markets is limited, which may impair our ability to access international credit markets to finance our operations in Argentina. |
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| · | Fluctuations in the value of the Peso could adversely affect the Argentine economy as well as our financial condition and results of operations. |
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| · | The Argentine economy and finances may be adversely affected as a consequence of a decrease in the international prices of commodities. |
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| · | The operating costs of the Company could increase as a result of the promotion or adoption of certain measures by the Argentine Government as well as pressure from union sectors. |
Risks Relating to our Business
| · | We are subject to risks inherent to the operation of shopping malls that may affect our profitability. |
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| · | We could be adversely affected by decreases in the value of our investments. |
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| · | Our level of debt may adversely affect our operations and our ability to pay our debt as it becomes due and our capacity to successfully access the local and international markets on favorable terms affects our cost of funding. |
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| · | Our assets are highly concentrated in certain geographic areas and an economic downturn in such areas could have a material adverse effect on our results of operations and financial condition. |
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| · | The loss of tenants could adversely affect our operating revenue and value of our properties. |
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| · | We may face risks associated with acquisitions of properties, our future acquisitions may not be profitable and the properties we acquire may be subject to unknown liabilities. |
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| · | Some of the land we have purchased is not zoned for development purposes, and we may be unable to obtain, or may face delays in obtaining, the necessary zoning permits and other authorizations. |
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| · | The increasingly competitive real estate sector in Argentina may adversely affect our ability to rent or sell office space and other real estate and may affect the sale and lease price of our premises. |
Risks Relating to our Investment in Banco Hipotecario
| · | The short-term structure of the deposit base of the Argentine financial system, including Banco Hipotecario, could lead to a reduction in liquidity levels and limit the long-term expansion of financial intermediation. |
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| · | Banco Hipotecario issues debt in the local and international capital markets as one of its sources of funding and its capacity to successfully access the local and international markets on favorable terms affects its cost of funding. |
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| · | The asset quality of financial institutions is exposed to the non-financial public sector’s and Central Bank’s indebtedness. |
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| · | Banco Hipotecario operates in a highly regulated environment and its operations are subject to capital controls regulations adopted by several regulatory agencies. |
Risks Relating to our GDSs and Common Shares
| · | Shares eligible for sale could adversely affect the price of our common shares and GDSs. |
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| · | If we issue additional equity securities in the future, you may suffer dilution, and trading prices for our equity securities may decline. |
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| · | We are subject to certain different corporate disclosure requirements and accounting standards than domestic issuers of listed securities in the United States. |
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| · | Investors may not be able to effect service of process within the United States, limiting their recovery of any foreign judgment. |
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| · | Under Argentine law, shareholder rights may be fewer or less well defined than in other jurisdictions and our ability to pay dividends is limited by law and our by-laws. |
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| · | Restrictions on the movement of capital out of Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the common shares underlying the GDSs. |
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| · | The warrants are exercisable under limited circumstances and will expire. |
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Risk Factors
You should carefully consider the risks described below, in addition to the other information contained in this Annual Report, before making an investment decision. We also may face additional risks and uncertainties not currently known to us, or which as of the date of this Annual Report we might not consider significant, which may adversely affect our business. In general, you take more risk when you invest in securities of issuers in emerging markets, such as Argentina, than when you invest in securities of issuers in the United States, and certain other markets. You should understand that an investment in our common shares and GDSs involves a high degree of risk, including the possibility of loss of your entire investment.
Risks Relating to Argentina
We depend on macroeconomic and political conditions in Argentina.
The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high levels of inflation and currency devaluation. Sustainable economic growth in Argentina depends on a variety of factors including the international demand for Argentine exports, the stability and competitiveness of the Peso against foreign currencies, confidence among consumers and foreign and domestic investors and a stable rate of inflation, national employment levels and the circumstances of Argentina’s regional trade partners. The Argentine macroeconomic environment, in which we operate, remains vulnerable, as reflected by the following economic conditions: (i) according to the data published by the INDEC in 2022 and 2023, for the fiscal years ended June 30, 2021 and 2022, Argentina’s real GDP increased by 10.4% compared to the year ended June 30, 2020, and increased by 5.2% compared to the year ended June 30, 2021, respectively; (ii) continued increases in public expenditures have resulted and could continue to result in fiscal deficit and affect economic growth; (iii) inflation remains high and may continue at those levels in the future; (iv) investment as a percentage of GDP remains low to sustain the growth rate of the past decades; (v) protests or strikes may adversely affect the stability of the political, social and economic environment and may negatively impact the global financial market’s confidence in the Argentine economy; (vi) energy or natural gas supply may not be sufficient to supply increased industrial activity (thereby limiting industrial development) and consumption; (vii) unemployment and informal employment remain high; and (viii) the Argentine Government’s economic expectations may not be met and the process of restoring the confidence in the Argentine economy may take longer than anticipated.
As in the recent past, Argentina’s economy may be adversely affected if political and social pressures inhibit the implementation by the Argentine Government of policies designed to control inflation, generate growth and enhance consumer and investor confidence, or if policies implemented by the Argentine Government that are designed to achieve these goals are not successful. These events could materially affect our financial condition and results of operation or cause the market value of our GDSs and our common shares to decline. Moreover, Argentina’s economic growth was severely impacted as a consequence of the Covid-19 pandemic. For more information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Argentina—The impact of the next presidential, congressional and provincial elections on the future economic and political environment of Argentina remains uncertain.”
We cannot assure you that a decline in economic growth will not adversely affect our business, financial condition or results of operation and cause the market value of our GDSs and our common shares to decline.
The impact of the next presidential, congressional and provincial elections on the future economic and political environment of Argentina remains uncertain.
The Argentine economy is subject to the effects of uncertainty over political developments in Argentina. On October 22, 2023, Argentina will hold presidential, provincial and congressional elections. As a result of these elections, the President of Argentina, the head of the government of the CABA, the governors of certain Argentine provinces, half of the members of the Congress and one third of the members of the Senate and other positions, such as provincial legislators, mayors and municipal councilors, will be elected.
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Prior to such elections, the PASO elections were held on August 13, 2023. The PASO elections are meant to elect the definitive candidates of each party to be voted in the general election in October 2023. As a result of the PASO elections, the candidates appointed by the parties obtained these results: (i) “La Libertad Avanza” obtained 29.9% of the votes; (ii) “Juntos por el Cambio” obtained 28.0% of the votes; and (iii) “Unión por la Patria” obtained 27.3% of the votes. General elections will be held throughout the country on October 22, 2023, which will define who will be the future President of Argentina.
Electoral uncertainty could lead to high volatility in Argentine financial markets, and uncertainty regarding political developments and the policies the Argentine Government may adopt or alter may have material adverse effects on the macroeconomic environment in Argentina, as well as on businesses operating in Argentina, including ours.
On October 10, 2023, the IMF released its World Economic Outlook (“WEO”) report where it estimates that by the end of 2023 Argentina’s GDP will decrease 2.5% compared to 2022 and estimates that inflation will stand at 135.7%. The persistent inflation and lower growth could exacerbate social discontent and weaken political support, causing difficulties in implementing the planned subsidies and social assistance reforms and in securing debt rollover rates.
No assurances can be made as to the policies that may be implemented by a new Argentine Government, or that political developments in Argentina will not adversely affect the Argentine economy and our business, financial condition and results of operations. In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition, or results of operations, or cause the market value of our GDSs and our common shares to decline.
Economic and political developments in Argentina, and future policies of the Argentine Government may adversely affect the Argentine economy and the sectors in which we perform our activities
The Argentine Government has historically exercised significant influence over the economy, and our Company has operated in a highly regulated environment. In the recent past, the Argentine Government has directly intervened in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls.
In the future, the Argentine Government may introduce new exchange controls and/or strengthen the existing ones, create restrictions on transfers to other countries, restrictions to capital movement or other measures in response to an eventual capital flight or a significant depreciation in the Peso, measures that can, in turn, affect our ability to access the international capital markets. In the event of any economic, social or political crisis, companies operating in Argentina may face the risk of strikes, expropriation, nationalization, mandatory amendment of existing contracts, and changes in taxation policies, including tax increases and retroactive tax claims. In addition, Argentine courts have sanctioned modifications on rules related to labor matters, requiring companies to assume greater responsibility for the assumption of costs and risks associated with subcontracted labor and the calculation of salaries, severance payments and social security contributions. Since we operate in a context in which the governing law and applicable regulations change frequently, in part as the result of changes in government administrations, it is difficult to predict if and how our activities will be affected by such changes (See “—The impact of the next presidential, congressional and provincial elections on the future economic and political environment of Argentina remains uncertain.”)
On September 1, 2019, as a result of the economic instability and uncertainty, the depreciation of the Argentine Peso and rising inflation rates, the former Argentine administration and the Central Bank adopted a series of measures reinstating foreign exchange controls. Following the change in government, the new administration extended the validity of such measures and established further restrictions by means of the enacted Social Solidarity and Productive Reactivation Law N° 27.541, including a new tax on certain transactions involving the purchase of foreign currency by both Argentine individuals and entities. Additional volatility, appreciation or depreciation of the Peso against the U.S. dollar or reduction of the Central Bank’s reserves because of currency intervention could adversely affect the Argentine economy and our ability to service our debt obligations and could affect the value of our GDSs and our common shares. We cannot assure you that the official exchange rate will not fluctuate significantly in the future. There can be no assurances regarding future modifications to exchange controls. Exchange controls could adversely affect our financial condition or results of operations and our ability to meet our foreign currency obligations and execute our financing plans. For more information, please see “Item 10. Additional Information – D. Exchange Controls”.
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The success of these measures or other measures that the Central Bank may implement in the future, are subject to uncertainty and any further depreciation of the Argentine Peso, further inflation or our inability to acquire foreign currency could have a material adverse effect on our financial condition and results of operations. We cannot predict the effectiveness of these measures. We cannot predict whether, and to what extent, the value of the Argentine Peso may depreciate or appreciate against the U.S. dollar or other foreign currencies, and how these uncertainties will affect our businesses. Furthermore, no assurance can be given that, in the future, no additional currency or foreign exchange restrictions or controls will be imposed. Existing and future measures may negatively affect Argentina’s international competitiveness, discouraging foreign investments and lending by foreign investors or increasing foreign capital outflow which could have an adverse effect on economic activity in Argentina, and which in turn could adversely affect our business and results of operations. We cannot predict how these conditions will affect our ability to meet our liabilities denominated in currencies other than the Argentine Peso. Any restrictions on transferring funds abroad imposed by the government could undermine our ability to pay dividends on our GDSs or make payments (of principal or interest) under our outstanding indebtedness in U.S. dollars, as well as to comply with any other obligation denominated in foreign currency.
In this context, in the PASO elections held on August 13, 2023, the political party “La Libertad Avanza” obtained the highest percentage of the votes (29.9%). Javier Milei is the leader of this political party and, if elected president, he proposes a plan to dollarize the Argentine economy, among other measures (such as potentially closing the Central Bank). This could have a negative effect on the country’s economy. We cannot predict what impact it will have on our business, financial condition, or results of operations.
We cannot affirm that the Argentine economic, regulatory, social and political framework or the policies or measures that the Argentine Government adopts or may adopt, will not adversely affect the market value of our GDSs, our business, financial condition and/or results of operation.
Continuing high rates of inflation may have an adverse effect on the economy and our business, financial condition and results of operations.
Historically, high rates of inflation have undermined the Argentine economy and the Argentine Government’s ability to foster conditions for stable growth. High rates of inflation may also undermine Argentina’s competitiveness in international markets and adversely affect economic activity and employment, as well as our business, financial condition and results of operations.
Argentina has confronted inflationary pressures, evidenced by significantly higher fuel, energy and food prices, among other factors. The National CPI variation was 94.8% in 2022, 50.9% in 2021 and 36.1% in 2020. On July 7, 2023, the Central Bank announced that the new inflation estimates for 2023, 2024 and 2025 are 142.4%, 105.0% and 54.8%, respectively, pursuant to its survey of market expectations (Relevamiento de Expectativas de Mercado) which was carried out between June 28 and June 30, 2023. After the PASO elections, the Argentine Government devalued the Peso by 22%, and this devaluation, which is expected to continue until October 2023, is immediately reflected in prices and the inflation rate, which was 12.7% as of September, 2023. The Argentine Government’s adjustments to electricity and gas tariffs, as well as the increase in the price of gasoline have affected prices, creating additional inflationary pressure. If the value of the Argentine Peso cannot be stabilized through fiscal and monetary policies, an increase in inflation rates could be expected.
A high inflation rate or a hyperinflationary process affects Argentina’s foreign competitiveness by diluting the effects of the Peso depreciation, negatively impacting employment and the level of economic activity and undermining confidence in Argentina’s banking system, which may further limit the availability of domestic and international credit to businesses. In turn, a portion of the Argentine debt continues to be adjusted by the CER, a currency index, that is strongly correlated with inflation. Therefore, any significant increase in inflation would drive an increase in the Argentine external debt and consequently in Argentina’s financial obligations, which could exacerbate the stress on the Argentine economy. The efforts undertaken by the Argentine Government to reduce inflation have not achieved the desired results. A continuing inflationary environment could undermine our results of operation, adversely affect our ability to finance the working capital needs of our businesses on favorable terms and our results of operation and cause the market value of our GDSs and our common shares to decline.
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There is uncertainty regarding the effectiveness of the policies implemented by the Argentine Government to reduce and control inflation and the potential impact of those policies. An increase in inflation may adversely affect the Argentine economy, which in turn may have a negative impact on our financial condition and results of operation.
There can be no assurances that inflation rates will not continue to escalate in the future or that the measures adopted or that may be adopted by the Argentine Government to control inflation will be effective or successful. High rates of inflation remain a challenge for Argentina. Significant increases in the rates of inflation could have a material adverse effect on Argentina’s economy and in turn could increase our costs of operation, in particular labor costs, and may negatively affect our business, financial condition and results of operations.
High levels of public spending in Argentina could generate long-lasting adverse consequences for the Argentine economy.
During recent years, the Argentine Government has substantially increased public spending. Argentina recorded a primary deficit of 6.5%, 3.0% and 2.4% of GDP in 2020, 2021 and 2022, respectively. If government spending continues to outpace fiscal revenue, the fiscal deficit is likely to increase.
The Argentine Government’s ability to access the long-term financial markets to finance such increased spending is limited given the high levels of public sector indebtedness. The inability to access the capital markets to fund its deficit or the use of other sources of financing may have a negative impact on the economy and, in addition, could limit the access to such capital markets for Argentine companies, which could adversely affect our business, financial condition and results of operations.
Argentina’s ability to obtain financing in the international capital markets is limited, which may impair our ability to access international credit markets to finance our operations in Argentina.
Argentina’s history of defaults on its external debt and the protracted litigation with holdout creditors may reoccur in the future and prevent Argentine companies such as us from accessing the international capital markets readily or may result in higher costs and more onerous terms for such financing, and may therefore negatively affect our business, results of operation, financial condition, the value of our securities, and our ability to meet our financial obligations. Following the default on its external debt in 2001, Argentina sought to restructure its outstanding debt in exchange offers in 2005 and again in 2010. Holders of approximately 93% of Argentina’s defaulted debt participated in the exchanges, but a number of bondholders held out from the exchange offers and pursued legal actions against Argentina. The Argentine Government settled several agreements with the defaulted bondholders, ending more than 15 years of litigation. In addition, in August 2020, the Argentine Government successfully negotiated the debt restructuring of Argentine bonds representing approximately USD 65 billion owed to several bondholders.
On January 28, 2022, Argentina signed an agreement with the IMF (the “SAF Agreement”) to refinance indebtedness for more than USD 40 billion, which Argentina originally incurred with the IMF in 2018. Argentina and the IMF agreed on certain measures related to the reduction of public spending and subsidy rates, focused on the energy sector. The agreement was approved by the Argentinean Congress and by the Board of the IMF. Among other points, an economic and monetary policy was established, where the IMF will be the co-director, carrying out quarterly audits on Argentina’s finances and economic development.
On September 19, 2022, IMF staff and the Argentine authorities reached an agreement on an updated macroeconomic framework and associated policies needed to complete the second review under the SAF Agreement. The agreement was subject to approval by the IMF Executive Board. Upon completion of the review, Argentina would have access to about USD 3.9 billion. Most of the quantitative program targets through end-June 2022 were met, with the exception of the net international reserves floor, mainly due to higher-than-programmed import volume growth and delays in external official support. The agreement was halted due to a period of volatility in the foreign exchange and bond markets and certain measures were taken to correct earlier setbacks and rebuild credibility. On March 13, 2023, the IMF approved the fourth revision of the SAF Agreement and authorized the disbursement of approximately USD 5.3 billion. On August 23, 2023, the IMF approved the fifth and sixth revisions to the SAF Agreement, resulting in a new disbursement of USD 7.5 million.
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On March 13, 2020, the Minister of Economy addressed a letter to the Paris Club members expressing Argentina’s decision to postpone until May 5, 2021 the USD 2,100 million payment originally due on May 5, 2020, in accordance with the terms of the settlement agreement reached with the Paris Club members on May 29, 2014 (the “Paris Club 2014 Settlement Agreement”). On April 7, 2020, the Minister of Economy sent the Paris Club members a proposal to modify the existing terms of the Paris Club 2014 Settlement Agreement, mainly seeking an extension of the maturity dates and a significant reduction in the interest rate. On June 22, 2021, Argentina’s Minister of Economy announced that the Argentine Government obtained a “time bridge” within the framework of the Paris Club negotiations, consequently avoiding default. Pursuant to such agreements, Argentina should have reached a restructuring agreement with the Paris Club members by March 31, 2022. However, on March 31, 2022, such agreement was extended until July 31, 2022 and, on May 31, 2022, it was further extended until September 30, 2024.
On October 28, 2022, the Minister of Economy announced a new agreement with the Paris Club. The agreement is an addendum to the Paris Club 2014 Settlement Agreement and recognizes a principal amount of USD 1,971 million, extending a repayment period of thirteen semi-annual installments, starting in December 2022 and to be finally cancelled in September 2028. Pursuant to this new agreement, the interest rate was improved from 9% to 3.9% in the first three installments, with a gradual increase to 4.5%. The payment profile implies an average semi-annual payment of USD 170 million (principal and interest included). Over the next two years, Argentina will repay 40% of the principal due.
A breach of the aforementioned agreements could affect the ability of Argentina and our ability to obtain credit. Our company cannot predict how this agreement and the policies developed based on it will impact Argentina’s ability to access international capital markets (and indirectly in our ability to access those markets), in the Argentine economy or in our economic and financial situation or in our capacity to extend the maturity dates of our debt or other conditions that could affect our results and operations or businesses.
Fluctuations in the value of the Peso could adversely affect the Argentine economy as well as our financial condition and results of operations.
Significant fluctuation in the exchange rate of the Peso against foreign currencies may adversely affect the Argentine economy as well as our financial condition and results of operations. The Argentine Peso has been subject to significant devaluation against the U.S. dollar in the past and may be subject to fluctuations in the future. We cannot predict whether and to what extent the value of the Peso could depreciate or appreciate against the U.S. dollar and the way in which any such fluctuations could affect our business. The value of the Peso compared to other currencies is dependent, in addition to other factors listed above, on the level of international reserves maintained by the Central Bank, which have also shown significant fluctuations in recent years. As of October 11, 2023, the international reserves of the Central Bank totaled USD 25,772 million. According to the exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso depreciated by 105.0% against the U.S. dollar during our fiscal year ended June 30, 2023 (compared to 30.9%, 35.9% and 66.1% in the years ended June 30, 2022, 2021 and 2020, respectively). As of the date of this Annual Report the peso has depreciated by approximately 36%.
Fluctuations in the value of the Peso may also adversely affect the Argentine economy, as well as our products, our financial condition and results of operation. The devaluation of the Argentine Peso may have a negative impact on the ability of certain Argentine businesses to service their foreign currency-denominated debt, lead to high inflation, significantly reduce real wages, jeopardize the stability of businesses whose success depends on domestic market demand, including public utilities and the financial industry, and adversely affect the Argentine Government’s ability to honor its foreign debt obligations.
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On the other hand, a significant appreciation of the Argentine Peso against the U.S. dollar also presents risks for the Argentine economy, including the possibility of a reduction in exports (as a consequence of the loss of external competitiveness). Any such increase could also have a negative effect on economic growth and employment, reduce the Argentine public sector’s revenues from tax collection in real terms, and have a material adverse effect on our business, our results of operation, our ability to repay our debt within the respective maturity dates and affect the market value of our GDSs, as a result of the overall effects of the weakening of the Argentine economy.
The Argentine economy and finances may be adversely affected as a consequence of a decrease in the international prices of commodities
The commodities market is characterized by its volatility. Commodities exports have contributed significantly to the revenues of the Argentine Government. Subsequently, the Argentine economy has remained relatively dependent on the price of its exports (mainly soy). Given its reliance on agricultural commodities, Argentina is also vulnerable to weather events. During 2018, Argentina suffered a huge drought – presumably the biggest drought in the last 50 years. The effects of the drought in the agricultural sector caused significant economic problems for Argentina, with impacts in the soy and corn harvests that generated damages of approximately USD 6 billion. Currently, Argentina is facing another severe drought, which may negatively affect the production of agricultural commodities and is expected to result in net income losses of USD 10,425 billion for the production sector, equivalent to 2.2% of the GDP that the IMF projects for Argentina in 2023. The negative impact that the droughts which occurred in Argentina in 2018 and 2023 have had in Argentina has been reinforced by the historic drop in the Paraná river (Argentina’s main river) and a large number of fire outbreaks in multiple Argentine provinces during 2022. These environmental events have negatively affected the agriculture sector in Argentina.
A sustained decrease in the international price of the main commodities exported by Argentina, or any future climate event or condition may have an adverse effect in the agricultural sector and therefore in the revenues of the Argentine Government and its capacity to comply with the payments of its public debt, eventually generating recessive or inflationary pressures. In addition, such circumstances could have a negative impact on the government’s tax revenues and on the availability of foreign currency. Any such developments may adversely affect Argentina’s economy and, as a result, our business, results of operations and financial condition.
The interruption of the publication of Argentine economic indexes or changes in their calculation methodologies could affect the projections made by the Company.
In 2014, the INDEC established a new consumer price index, the CPI, which reflects a broad measurement of consumer prices, considering price information from the 24 provinces of the country, divided into six regions. Faced with the credibility of the CPI, as well as other indices published by the INDEC, being called into question, the Argentine Government declared a state of administrative emergency for the national statistical system and the INDEC on January 8, 2016, based on the determination that the INDEC had failed to produce reliable statistical information, particularly with respect to CPI, GDP, inflation and foreign trade data, as well as with poverty and unemployment rates. The INDEC temporarily suspended the publication of certain statistical data until the reorganization of its technical and administrative structure to recover its ability to produce reliable statistical information. In 2017, the INDEC began publishing a National CPI, which is based on a survey conducted by the INDEC and several provincial statistical offices in 39 urban areas including each of Argentina’s provinces. The official CPI inflation rate for the fiscal year ended June 30, 2023 was 115,6 %.
Any future required correction or restatement of the INDEC indexes could result in decreased confidence in Argentina’s economy, which, in turn, could have an adverse effect on our ability to access international capital markets to finance our operations and growth, and which could, in turn, adversely affect our results of operation and financial condition and cause the market value of our GDSs and our common shares to decline.
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Restrictions on transfers of foreign currency and the repatriation of capital from Argentina may impair our ability to pay dividends and distributions and investors may face restrictions on their ability to collect capital and interest payments in connection with corporate bonds issued by Argentine companies.
The Argentine government may impose restrictions on the exchange of Argentine currency for foreign currencies and on the remittance to foreign investors of funds derived from investments in Argentina in circumstances in which a serious imbalance in Argentina’s balance of payments develops or in which there is reason to anticipate such an imbalance. The Argentine Government has implemented a number of monetary and exchange control measures, including restrictions on the free use of funds deposited in banks and on the transfer of funds abroad without the prior approval of the Central Bank.
Therefore, there are certain restrictions in Argentina that affect corporations’ ability to access the MULC to acquire foreign currency to transfer funds to other countries, service debt, make payments outside Argentina and other operations, requiring, in some cases, prior approval by the Central Bank.
Through Emergency Decree No. 609/2019, the PEN established restrictions on the exchange market, establishing that the countervalue of the export of goods and services must be brought into the country in foreign currency and/or traded in the exchange market under the conditions and terms established by the Central Bank, which will provide the assumptions under which access to the exchange market for the purchase of foreign currency and precious metals and transfers abroad will require prior authorization, based on objective guidelines in accordance with the conditions in force in the exchange market, and distinguishing the situation of human persons from that of legal entities.
In this regard, pursuant to the provisions of Emergency Decree No. 609/2019, the Central Bank issued several communications which later, with some modifications, were included in the Consolidated Text on Foreign Trade and Exchange regulations established by Communication “A” No. 6844. The Consolidated Text on Foreign Trade and Exchange imposes certain foreign exchange restrictions such as prior approval of the Central Bank (i) for the payment of dividends; (ii) for the access to the foreign exchange market for non-residents, except for specific exceptions (diplomatic representations, certain international organizations and institutions abroad, individuals living abroad who receive retirements plans or pensions from ANSES); and (iii) to constitute external assets, remit family assistance and the formation of guarantees and operating payments related to derivative transactions, for resident individuals, if the total amount of the above-mentioned transactions exceeds the equivalent of USD 200 per month in all entities authorized to operate in foreign exchange, of which only up to USD 100 can be acquired in cash, otherwise, the transaction will be made by debit to local accounts.
Due to the financial complications Argentina is currently undergoing, we cannot rule out that the Argentine Government or the Central Bank may in the future impose further formal restrictions on the outflow of foreign currency from the country, such as the restrictions set forth by the Central Bank in Communication “A” No. 7746, dated 04/20/2023, for outflows through the foreign exchange market, by means of which it modified the terms to access the foreign exchange market, as well as the restrictions set forth in Communication “A” No. 7766, dated 05/11/2023, which established the obligation to inform who are the individuals or legal entities that exercise a direct control over the person accessing the foreign exchange market and those persons that are part of the same economic group. Such measures could adversely affect Argentina’s global competitiveness, discourage foreign investment and lending by foreign investors or increase the outflow of foreign capital, which could have an adverse effect on Argentina’s economic activity, and could adversely affect our business and results of operations or impair our ability to pay dividends in U.S. dollars or prevent us from servicing our international debts.
Moreover, on September 15, 2020, Communication “A” 7,106 established that companies must refinance the maturities of the capital of the financial debt in the period between October 15, 2020 and December 31, 2023. Subsequently, such period was extended in various opportunities, with the final extension being issued on October 13, 2022, pursuant to Communication “A” 7,621 by which it was further extended until December 31, 2023. In this regard, the Central Bank will grant companies access to the MULC for up to 40% of the maturities and the companies must refinance the remaining 60% within a period of at least two years.
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In addition, as a result of the deepening of exchange controls, the difference between the official exchange rate, which is currently utilized for both commercial and financial operations, and other informal exchange rates that arose implicitly as a result of certain operations commonly carried out in the capital market (“cash with liquidation”), which increased during 2023, was a gap of approximately 90% as of June 30, 2023. The Argentine Government could maintain a single official exchange rate or create multiple exchange rates for different types of transactions, substantially modifying the applicable exchange rate at which we acquire currency to service our outstanding foreign currency denominated liabilities. We cannot predict how such current restrictions may evolve after this Annual Report, mainly regarding limitations to transfer funds outside the country. The Argentine Government may impose further exchange controls or restrictions to capital transfers and modify and adopt other policies that may limit or restrict our ability to access international capital markets, to make payments of principal and interest and other additional amounts outside the country (including payments relating to our notes), to import certain products or goods that we use as inputs, undermine our ability to pay dividends on our GDSs in U.S. dollars, or affect in other ways our business and our results of operation, or cause the market value of our GDSs and our common shares to decline.
As of the date of this Annual Report, the restrictions outlined above remain in place. Such measures may negatively affect Argentina’s international competitiveness, discouraging foreign investments and lending by foreign investors or increasing foreign capital outflow which could have an adverse effect on economic activity in Argentina, and which in turn could adversely affect our business and results of operations. The challenge will be to achieve acceptance by creditors, in accordance with the Central Bank regulations mentioned above, especially when it has highly diversified and retail creditors.
The company has several dollar-denominated maturities affected by these measures. For more information see “Operating and Financial Review and Prospects—C. Liquidity and capital resources—Indebtedness”.
As of the date of this Annual Report, we have outstanding obligations pursuant to the Series VIII, XI, XIII, XIV, XV, XVI and XVII Notes issued by the Company for USD 356.4 million. We currently cannot predict whether the Government will impose further exchange controls and transfer restrictions that may impair our ability to access the MULC for the repayment of the total amount or part of such obligations.
A high level of uncertainty with regard to these economic variables, and a general lack of stability in terms of inflation, could have a negative impact on economic activity and adversely affect our financial condition.
As of July 1, 2018, the Peso qualified as a currency of a hyperinflationary economy and we were required to restate our historical financial statements in terms of the measuring unit current at the end of the reporting year, which could adversely affect our results of operations and financial condition.
Pursuant to IAS 29, the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated for the effects of changes in a suitable general price index. IAS 29 does not prescribe when hyperinflation arises, but includes several characteristics of hyperinflation. The IASB does not identify specific hyperinflationary jurisdictions. However, in June 2018, the International Practices Task Force of the Center for Quality, which monitors “highly inflationary countries”, categorized Argentina as a country with projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present, providing prima facie evidence that the Argentine economy was hyperinflationary for the purposes of IAS 29. Therefore, Argentine companies that prepare financial statements pursuant to IFRS and use the Peso as their functional currency were required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018.
Adjustments to reflect inflation, including tax indexation, such as those required by IAS 29, are in principle prohibited in Argentina. However, on December 4, 2018, the Argentine Government enacted Law No. 27,468, which lifted the ban on indexation of financial statements. Certain regulatory authorities, such as the CNV and the IGJ, have required that financial statements for periods ended on and after December 31, 2018, be restated for inflation in accordance with IAS 29.
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During the first three fiscal years beginning after January 1, 2018, inflation adjustment for tax purposes was applicable if the variation in the CPI exceeds 55% in 2019, 30% in 2020 and 15% in 2021.
Therefore, inflation adjustment for tax purposes:
| · | Year ended June 30, 2019: one third of the adjustment to be allocated to 2019 and the remaining two thirds to be allocated in equal parts in the following two years. |
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| · | Years ended June 30, 2020 and 2021: one sixth of the adjustment to be allocated to 2020 and 2021 and the remaining portions in equal parts in the five following years. |
Beginning in fiscal year 2022, the inflation adjustment for tax purposes is applicable if the variation in the accumulated CPI in the 36 months prior to the end of the fiscal year being settled is higher than 100%. In that case, the result of inflation adjustment for tax purposes is fully allocated to the fiscal year in which it originated.
We cannot predict the future impact that the eventual application of inflation adjustment for tax purposes and other related inflation adjustments described above will have on our financial statements or their effects on our business, results of operations and financial condition.
Certain measures that may be taken by the Argentine Government, or changes in policies, laws and regulations, may adversely affect the Argentine economy and, as a result, our business, financial condition and results of operations.
The Argentine government exercises substantial control over the economy and may increase its level of intervention in certain areas of the economy, including through the regulation of market conditions and prices.
On August 23, 2023, the Chamber of Deputies approved a draft amendment to the lease law, aiming to reduce the minimum term of lease agreements to two years and establish an adjustment to the rental fee using the CPI published by the INDEC, or a combination of permitted indexes, as the parties may agree. Also, this bill established that rental value adjustments could be made at periods agreed upon by the parties, which should be no shorter than four months.
This bill was approved by the Chamber of Deputies and subsequently discussed by the Senate. The Senate agreed to make changes to the bill. These changes include: (i) that the minimum term of the lease agreements is maintained at three years, (ii) that the minimum update of the value of the rental fee is made every six months, and (iii) that the Casa Propia coefficient index, developed by the Ministry of Territorial Development and Habitat (Ministerio de Desarrollo Territorial y Hábitat) is used to adjust the increase in the rental fee.
On October 11, 2023, in light of the proposed changes made by the Senate, the Chamber of Deputies revisited and approved the text proposed by the Senate, and the bill was enacted into law with the scope set forth above.
We cannot predict at this time how the approval of this new law may affect our business, the result of our operations, or our financial condition.
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Historically, actions of the Argentine government concerning the economy, including decisions regarding interest rates, taxes, price controls, wage increases, increased benefits for workers, exchange controls and potential changes in the market of foreign currency, have had a substantial adverse effect on Argentina’s economic growth.
It is widely reported by private economists that expropriations, price controls, exchange controls and other direct involvement by the Argentine government in the economy have had an adverse impact on the level of investment in Argentina, the access of Argentine companies to international capital markets and Argentina’s commercial and diplomatic relations with other countries. If the level of Government intervention in the economy continues or increases, the Argentine economy and, in turn, our business, results of operations and financial condition could be adversely affected.
The operating costs of the Company could increase as a result of the promotion or adoption of certain measures by the Argentine Government as well as pressure from union sectors
In the past, the Argentine Government has promoted and adopted laws and collective labor agreements that imposed on private sector employers the obligation to maintain certain salary levels and provide additional benefits to their employees. In addition, employers have come under strong pressure from their employees and from unions to grant wage increases and other benefits.
We cannot be sure that in the future the Argentine Government will not enact measures that result in increases in the minimum, vital and mobile salary and/or in benefits, compensation or other labor costs that employers must bear. Any salary increase and/or any other labor cost could result in higher costs and a decrease in the results of the Company’s operations.
Failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition
A lack of a solid and transparent institutional framework for contracts with the Argentine Government and its agencies and corruption allegations have affected and continue to affect Argentina. Argentina ranked 94 of 180 in the Transparency International’s 2022 Corruption Perceptions Index.
As of the date of this Annual Report, there are various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Argentine Federal Prosecutor, which have negatively impacted the Argentine economy and political environment. Depending on the results of these investigations and how long it takes to finalize them, companies involved may be subject to, among other consequences, a decrease in their credit ratings, having claims filed against them by investors in their equity and debt securities, and may further experience restrictions on their access to financing through the capital markets, all of which will likely decrease their income. Additionally, if criminal cases against companies move forward, they may be restricted from rendering services or may face new restrictions due to their customers’ internal policies and procedures. These adverse effects could restrict these companies’ ability to conduct their operating activities and to fulfill their financial obligations.
Moreover, in February 2023, the Political Trial Commission of the Chamber of Deputies approved the admissibility of files being processed against the current members of the CSJN and initiated proceedings against each member. While the outcome of the impeachment trial remains uncertain, this situation has intensified the institutional imbalance in Argentina, leading to a negative impact on the country’s politics and economy.
Recognizing that the failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Argentine Government has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption. These measures include the reduction of criminal sentences in exchange for cooperation with the government in corruption investigations, increased access to public information, the seizing of assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción) and submitting a bill for the issuance of a new public ethic law, among others. The government’s ability to implement these initiatives is uncertain as it would be subject to independent review by the judicial branch, as well as legislative support from opposition parties.
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We cannot estimate the impact that these investigations could have on the Argentine economy. Similarly, it is not possible to predict the duration of corruption investigations, nor which companies might be involved or how far-reaching the effects of these investigations might be, which may negatively impact the Argentine economy. In turn, the decrease in investor confidence resulting from any of these, among other issues, could have a significant adverse effect on the growth of the Argentine economy, which could, in turn, harm our business, our financial condition and results of operation and affect the trading price of our common shares and GDSs.
Property values in U.S. dollars in Argentina could decline significantly.
Property values in U.S. dollars are influenced by multiple factors that are beyond our control, such as a decreased demand for real estate properties due to a deterioration of macroeconomic conditions or an increase in supply of real estate properties that could adversely affect the value in U.S. dollars of real estate properties. We cannot assure you that property values in U.S. dollars will increase or that they will not be reduced. Most of the properties we own are located in Argentina. As a result, a reduction in the value in U.S. dollars of properties in Argentina could materially affect our business and our financial statements due to the valuation of our investment properties at fair market value in U.S. dollars.
The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operations
Global public health threats, such as Covid-19 (as described more fully below), influenza and other highly communicable diseases or viruses, outbreaks of which have from time to time occurred in various parts of the world, could adversely impact our operations, as well as the operations of our customers.
The Covid-19 pandemic has reached every region of the world and has resulted in widespread adverse impacts on the global economy. The outbreak of Covid-19 has already caused severe global disruptions and may continue to negatively affect economic conditions regionally as well as globally and otherwise impact our operations. Governments in affected countries may impose travel bans, quarantines and other emergency public health measures. Companies may take precautions, such as requiring employees to work remotely, imposing travel restrictions and temporarily closing businesses. These future prevention and mitigation measures, are likely to continue to have an adverse impact on global economic conditions, which could materially and adversely affect our future operations.
On March 12, 2020, the PEN issued Decree No. 260/2020 which declared a public health emergency for a period of one year (currently extended until December 31, 2023, pursuant to Decree No. 863/2022). During 2020 a mandatory quarantine was established, which was extended several times until November 8, 2020. Finally, on November 6, 2020, the Argentine Government declared the end of the mandatory quarantine and adopted social-distancing measures in the Buenos Aires metropolitan area, which were extended until December 31, 2021. As of the date of this Annual Report, these measures are not in effect.
The long-term effects on the global economy, Argentine economy and the Company of the coronavirus pandemic, are difficult to assess or predict, and may include a decline in market prices (including the market prices of our common shares), risks to employee health and safety, collapse in the demand for our products and reduced sales in the impacted geographic locations. Furthermore, the crisis caused by Covid-19 resulted in a decrease in the demand for crude oil, mainly in the second and third quarters of 2020, since industrial and domestic activity slowed down in many countries due to control measures.
Covid-19 has significantly affected economic conditions in Argentina and in the rest of the world and it is possible that it will continue to affect such conditions during 2023 and in future years. Both the Covid-19 pandemic and the measures implemented by the Argentine Government to mitigate its effects may continue to affect our business, financial condition and results of operations. Additional variants or strains of Covid-19 or an outbreak of another pandemic, disease or similar threat to public health could have or continue to have material adverse effects on the global economic, financial and trade conditions, which could materially and adversely affect our business, financial condition and results of operations.
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The continuing occurrence of any of the foregoing events or other epidemics or an increase in the severity or duration of the Covid-19 or other epidemics could have a material adverse effect on our business, results of operations, cash flows and financial condition.
The Argentine economy could be adversely affected by economic developments in other global markets.
The effects of a global or regional financial crisis and related turmoil in the global financial system may have a negative impact on our business, capacity to access credit and international capital markets, financial condition and results of operation, which is likely to be more severe on an emerging market economy, such as Argentina (See “— Argentina’s ability to obtain financing in the international capital markets is limited, which may impair our ability to access international credit markets to finance our operations in Argentina.”). This was the case in 2008, when the global economic crisis led to a sudden economic decline in Argentina in 2009, accompanied by inflationary pressures, depreciation of the Peso and a drop in consumer and investor confidence.
In 2020, a new global financial crisis began as a result of the Covid-19. The stock market crash, which began in late February 2020 and intensified throughout 2020 and 2021, affected many stock markets in the world. As a consequence of the Covid-19, the estimated contraction in the world’s economy for 2020 was 3.5% according to what both the IMF and the Organization for Cooperation and Economic Development expressed. Additionally, the IMF published that the impact of Covid-19 on the world’s economy affects both the supply and the demand side. On the supply side, the virus increases not only morbidity and mortality, but also the efforts and measures taken by governments and companies to combat these effects, which lead to restrictions in freedom of movement, higher operating costs due to the reduction in the supply chain and the tightening of credit. On the demand side, the uncertainty that the virus generates, precautionary behaviors, quarantine efforts and high financing costs all reduce the possibility of spending money. The Covid-19 pandemic has reached every region of the world and has resulted in widespread adverse impacts on the global economy. Different parts of the world are currently experiencing divergent virus case growth rates which leads to recoveries also diverging dangerously between and within countries. Although throughout 2022 and up to the date of this annual report the Covid-19 outbreak decreased significantly, the impact of Covid-19 on sectoral economic activity cannot be measured. According to a report published by the IMF in October 2022, despite the global recovery in 2021, the pandemic has continued to take an enormous health and socioeconomic toll, affecting lives and livelihoods everywhere. Inflation, which had already been rising in many countries as a result of supply-demand imbalances and policy support during the pandemic, is likely to remain high (See “—The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operations”).
We cannot assure you that events in other market countries, in the United States or elsewhere will not adversely affect our financial performance.
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The Argentine economy is vulnerable to external shocks that could be caused by significant economic difficulties of Argentina’s major regional trading partners, or by more general “contagion” effects. Such external shocks and “contagion” effects could have a material adverse effect on Argentina’s economic growth, and consequently, on our results of operation and financial condition.
Although economic conditions vary from country to country, investors’ perceptions of events occurring in certain countries have in the past substantially affected, and may continue to substantially affect, capital flows into and investments in securities of issuers from other countries, including Argentina. There can be no assurance that the Argentine financial system and securities markets will not be adversely affected by policies that may be adopted by foreign governments or the Argentine Government in the future. Argentina can also be adversely affected by negative economic or financial events that take place in other countries, subsequently affecting our operations and financial condition, including our ability to repay our debt at its maturity date.
Argentina’s economy is vulnerable to external shocks. For example, economic slowdowns, especially in Argentina’s major trading partners such as Brazil, led to declines in Argentine exports in the last few years. Specifically, fluctuations in the price of commodities sold by Argentina and a significant devaluation of the Peso against the U.S. dollar could harm Argentina’s competitiveness and affect its exports. In addition, international investors’ reactions to events occurring in one market may result in a “contagion” effect which could lead to an entire region or class of investment being disfavored by international investors.
Additionally, financial and securities markets in Argentina are also influenced by economic and market conditions in other markets worldwide.
General elections in Brazil, including the election of the president, were held on October 2, 2022. Historically, election years in Brazil, and especially presidential elections, are marked by political uncertainty which generates greater instability and volatility. Moreover, the Brazilian Supreme Court overturned criminal convictions and restored former President Luis Inácio Lula da Silva’s political rights, allowing him to run in the presidential election. According to the official results, Lula obtained 48.4% of the votes while Bolsonaro obtained 43.2% of the votes. As no presidential candidate received a majority of the votes on 2 October, Lula and Bolsonaro advanced to a runoff election, which was scheduled for October 30, 2022. On October 30, 2022, Lula da Silva won the elections for the presidency of Brazil, obtaining 50.9% of the votes, compared to the 49.1% of the votes obtained by the outgoing president, Jair Bolsonaro. As a result, Lula da Silva took office on January 1, 2023. As a consequence, we cannot provide certainties of the effects that the current administration may have on the Brazilian economy and its impact in Argentina, taking not account that both countries are close commercial partners and members of the MERCOSUR.
At the same time, general worldwide economic conditions have experienced significant instability in recent years, including high volatility in the prices of primary commodities and the recent global economic uncertainty and financial market conditions caused by the war between Ukraine and Russia and the recent attack by Hamas on Israel from the Gaza Strip. (See “The Russian invasion of Ukraine and the recent attack by Hamas on Israel from the Gaza Strip could have an unpredictable effect on the global economy and on international and local securities markets, and adversely affect our business and results of operations”).
There can be no assurance that the Argentine financial system and securities markets will not be adversely affected by policies that may be adopted by foreign governments or the Argentine Government in the future, or by events in the economies of developed countries or in other emerging markets.
Finally, international investors’ perceptions of events occurring in one market may generate a “contagion” effect by which an entire region or class of investment is disfavored by international investors. Argentina could be adversely affected by negative economic or financial developments in other emerging and developed countries, which in turn may have a material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations, and the market value of our GDSs and common shares.
The Russian invasion of Ukraine and the recent attack by Hamas on Israel from the Gaza Strip could have an unpredictable effect on the global economy and on international and local securities markets, and adversely affect our business and results of operations.
Global markets have recently experienced volatility and disruption following the escalation of geopolitical tensions, the start of military conflict between Russia and Ukraine and the recent attack by Hamas on Israel from the Gaza Strip.
The recent outbreak of war in Ukraine has affected global economic markets, including a dramatic increase in the price of oil and gas, and the uncertain resolution of this conflict could result in protracted and/or severe damage to the global economy.
Russia’s recent military interventions in Ukraine have led to, and may lead to, additional sanctions being levied by the United States, the European Union and other countries against Russia and possibly countries that support, directly or indirectly, Russia’s incursion. Russia’s military incursion and the resulting sanctions could adversely affect global energy and financial markets, including Argentina’s, and thus could affect our businesses and the businesses of our customers, even though we do not have any direct exposure to Russia or the adjoining geographic regions.
The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions caused by Russian military action or resulting sanctions may magnify the impact of other risks described herein. We cannot predict the progress or outcome of the situation in Ukraine, as the conflict and governmental reactions are rapidly developing and beyond their control. Prolonged unrest, intensified military activities or more extensive sanctions impacting the region, could have a material adverse effect on the global economy, and such effect could in turn have a material adverse effect on our business, financial condition, results of operations and prospects.
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Although up to the date of this annual report the conflict is regional in nature, the possible involvement of other member countries of the North Atlantic Treaty Organization could result in a transnational conflict, which could significantly affect the world economy and Argentina and, therefore, our results of operation. Volatility in oil and other commodity prices may adversely affect the Argentine economy and our business. The materialization of some or all of these risks, as well as the events that arise in the main regional partners, including the member countries of MERCOSUR, could have a material negative effect on the Argentine economy, on the interest of investors in Argentine companies, and, indirectly, on our business and results of operation.
On October 7, 2023, Hamas militants and members of other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a series of terror attacks on civilian and military targets. Thereafter, these terrorists launched extensive rocket attacks on Israeli population and industrial centers located along the Israeli border with the Gaza Strip. Shortly following the attack, Israel’s security cabinet declared war against Hamas. The intensity and duration of Israel’s current war against Hamas is difficult to predict, and as are such war’s economic implications on the Company’s business and operations and on the global geopolitical instability.
Any deterioration in credit markets resulting directly or indirectly from the ongoing Russian invasion of Ukraine or the recent attack by Hamas on Israel from the Gaza Strip could limit our ability to obtain external financing to fund our operations and capital expenditures. As a result, a downturn in the worldwide economy resulting from the Russian invasion of Ukraine, the recent attack by Hamas on Israel from the Gaza Strip and other conflicts with a global impact that may arise from time to time could have a material adverse effect on our business, results of operations, and/or financial condition.
Our internal policies and procedures might not be sufficient to guarantee compliance with anti-corruption and anti-bribery laws and regulations.
Our operations are subject to various anti-corruption and anti-bribery laws and regulations, including the Corporate Criminal Liability Law and the FCPA. Both the Corporate Criminal Liability Law and the FCPA impose liability against companies who engage in bribery of Argentine government officials, either directly or through intermediaries. The anti-corruption laws generally prohibit providing anything of value to Argentine government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of our business, we may deal with entities in which the employees are considered government officials. We have a compliance program that is designed to manage the risks of doing business in light of these new and existing legal and regulatory requirements.
Although we have internal policies and procedures designed to ensure compliance with applicable anti-corruption and anti-bribery laws and regulations, there can be no assurance that such policies and procedures will be sufficient. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on us, limits being placed on our activities, our authorizations and licenses being revoked, damage to our reputation and other consequences that could have a material adverse effect on our business, results of operations and financial condition. Further, litigations or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.
Argentina is subject to litigation by foreign shareholders of Argentine companies and holders of Argentina’s defaulted bonds, which have resulted and may result in adverse judgments or injunctions against Argentina’s assets and limit its financial resources.
There are outstanding claims against the Argentine Government submitted before ICSID which may entail new sanctions against the Argentine Government, which in turn could have a substantially adverse effect on the Argentine Government’s ability to implement reforms and to foster economic growth. We cannot assure you that in the future the Argentine Government will not breach its obligations.
Litigation, as well as ICSID claims against the Argentine Government, have resulted in material judgments and may result in further material judgments, and could result in attachment of or injunctions relating to assets of Argentina that the government intended for other uses. As a consequence, the Argentine Government may not have all the necessary financial resources to honor its obligations, implement reforms and foster growth, which could have a material adverse effect on Argentina’s economy, and consequently, our business, financial condition and results of operations. There are pending ICSID claims against the Argentine Government which could result in further awards against Argentina, which in turn could have a material adverse effect on the Argentine Government’s ability to implement reforms and foster economic growth.
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It is important to note the recent ruling in the lawsuit brought by Petersen and Eton Park Capital Management, L.P., Eton Park Master Fund, LTD. and Eton Park Fund, L.P. who filed opening briefs in support of cross-motions for summary judgment with respect to a claim of liability and damages against YPF and Argentina. Plaintiffs requested the District Court for summary judgment in their favor, while each of the defendants argued that they had no liability and should not indemnify the plaintiffs and requested the District Court for summary judgment in their favor and to dismiss all remaining claims against them.
In a decision rendered on March 31, 2023, the District Court granted YPF’s summary judgment motion and denied plaintiffs’ summary judgment motion as to YPF in its entirety. The District Court decided that YPF has no contractual liability and owes no damages to plaintiffs for breach of contract and, accordingly, dismissed plaintiffs’ claims against YPF. The District Court denied Argentina’s motion for summary judgment and, as a result, Argentina was sentenced to pay USD 16 billion and the proceedings are expected to continue between plaintiffs. Following the decision of the U.S. Court of Appeals for the Second Circuit, either party can seek review from the Supreme Court of the United States. As of the date of this Annual Report, the Argentine Government has not yet appealed this ruling before a higher court. Plaintiffs may appeal the District Court’s judgment as to YPF or seek to reassert previously dismissed claims against YPF, in each case, in accordance with applicable procedural law. Should that be the case, YPF is expected to continue to defend itself in accordance with the applicable legal procedure and available defenses. Following the decision of the U.S. Court of Appeals for the Second Circuit, either party can seek review from the Supreme Court of the United States. As of the date of this Annual Report, the Argentine Government has appealed this ruling before a higher court.
Also, we cannot assure that no new litigation will be filed against Argentina, nor that these new cases will not affect the Argentina´s economy and our business.
We hold Argentine securities which might be more volatile than U.S. securities and carry a greater risk of default.
We currently have and in the past have had certain investments in Argentine Government debt securities, corporate debt securities, and equity securities. Although our holding of these investments tends to be short term, investments in such securities involve certain risks, including market volatility, higher than those typically associated with U.S. Government and corporate securities and loss of principal.
Some of the issuers in which we have invested and may invest in the future, including the Argentine Government, have in the past experienced substantial difficulties in servicing their debt obligations, which have led to the restructuring of certain indebtedness. We cannot assure that the issuers in which we have invested or may invest will not be subject to similar or other difficulties in the future which may adversely affect the value of our investments in such issuers. In addition, such issuers and, therefore, such investments, are generally subject to the risks that are described in this section with respect to us, and, thus, could have little or no value.
Risks Relating to our Business
We are subject to risks inherent to the operation of shopping malls that may affect our profitability.
Our shopping malls are subject to various factors that affect their development, administration and profitability, including:
| · | declines in lease prices or increases in levels of default by our tenants due to economic conditions; |
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| · | increases in interest rates and other factors outside our control; |
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| · | the accessibility and attractiveness of the areas where our shopping malls are located; |
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| · | the intrinsic attractiveness of the shopping mall; |
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| · | the flow of people and the level of sales of rental units in our shopping malls; |
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| · | the increasing competition from internet sales; |
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| · | the amount of rent collected from tenants at our shopping malls; |
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| · | changes in consumer demand and availability of consumer credit, both of which are highly sensitive to general macroeconomic conditions; and |
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| · | fluctuations in occupancy levels in our shopping malls. |
An increase in our operating costs could also have a material adverse effect on us if our tenants were to become unable to pay higher rent we may be required to impose as a result of increased expenses. Moreover, the shopping mall business is closely related to consumer spending and affected by prevailing economic conditions. All of our shopping malls and commercial properties are located in Argentina, and consequently, these operations may be adversely affected by recession or economic uncertainty in Argentina. Persistently poor economic conditions could result in a decline in consumer spending which could have a material adverse effect on shopping mall revenue.
We could be adversely affected by decreases in the value of our investments.
Our investments are exposed to the risks generally inherent to the real estate industry, many of which are out of our control. Any of these risks could adversely and materially affect our business, financial condition and results of operations. Any returns on capital expenditures associated with real estate are dependent upon sales volumes and/or revenue from leases and the expenses incurred. In addition, there are other factors that may adversely affect the performance and value of a property, including local economic conditions prevailing in the area where the property is located, macroeconomic conditions in Argentina and globally, competition, our ability to find lessees and their ability to perform on their leases, changes in legislation and in governmental regulations (such as the use of properties, urban planning and real estate taxes) as well as exchange controls (given that the real estate market in Argentina relies on the U.S. dollar to determine valuations), variations in interest rates (including the risk of an increase in interest rates that reduces sales of lots for residential development) and the availability of third party financing. In addition, and given the relative illiquidity of the Argentine real estate market, we could be unable to effectively respond to adverse market conditions and/or be compelled to undersell one or more properties. Some significant expenses, such as debt service, real estate taxes and operating and maintenance costs do not fall when there are circumstances that reduce the revenue from an investment, increasing our relative expenditures. These factors and events could impair our ability to respond to adverse changes in the returns on the Company’s investments, which in turn could have an adverse effect on our financial position and the results of the Company’s operations.
Our level of debt may adversely affect our operations and our ability to pay our debt as it becomes due and our capacity to successfully access the local and international markets on favorable terms affects our cost of funding.
As of June 30, 2023, our consolidated financial gross debt amounted to ARS 107,941 million. We are generating sufficient funds from our operating cash flows to meet our debt service obligations and our ability to obtain new financing is adequate. Considering the current availability of loan financing in Argentina, we cannot assure you that we will have sufficient cash flows and adequate financial structure in the future. For more information see “Item 10. Additional Information—D. Exchange Controls.”
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Our leverage may affect our ability to refinance existing debt or borrow additional funds to finance working capital requirements, acquisitions and capital expenditures. In addition, the recent disruptions in the local capital and the macroeconomic conditions of Argentine markets, may adversely impact our ability to refinance existing debt and the availability and cost of credit in the future. In such conditions, access to equity and debt financing options may be restricted and it may be uncertain how long these economic circumstances may last. This would require us to allocate a substantial portion of cash flow to repay principal and interest, thereby reducing the amount of money available to invest in operations, including acquisitions and capital expenditures. Furthermore, our leverage could also affect our competitiveness and limit our ability to pay our debt due to changes in market conditions, changes in the real estate industry and/or future economic downturns.
The success of our businesses and the feasibility of our transactions depend on the continuity of investments in the real estate markets and our ability to access capital and debt financing. In the long term, lack of confidence in real estate investment and lack of access to credit for acquisitions could restrict growth. As part of our business strategy, we will strive to increase our real estate portfolio through strategic acquisitions of properties at favorable prices and properties with added value which we believe meet the requirements to increase the value of our properties.
Our credit ratings are an important part of maintaining our liquidity. Any downgrade in credit ratings could potentially increase our borrowing costs or, depending on the severity of the downgrade, substantially limit our access to capital markets, require us to make cash payments or post collateral and permit termination by counterparties of certain significant contracts. Factors that may impact our credit ratings include, among others, debt levels, planned asset purchases or sales, and near-term and long-term growth opportunities. A ratings downgrade could adversely impact our ability to access debt markets in the future, increase the cost of future debt, and potentially require us to post letters of credit for certain obligations.
We may not be able to generate sufficient cash flows from operations to satisfy our debt service requirements or to obtain future financing. If we cannot satisfy our debt service requirements or if we default on any financial or other covenants in our debt arrangements, the lenders and/or holders of our securities will be able to accelerate the maturity of such debt or default under other debt arrangements. Our ability to service debt obligations or to refinance them will depend upon our future financial and operating performance, which will, in part, be subject to factors beyond our control such as macroeconomic conditions and regulatory changes in Argentina. If we cannot obtain future financing, we may have to delay or abandon some or all of our planned capital expenditures, which could adversely affect our ability to generate cash flows and repay our obligations as they become due.
For more information see “5. Operating and Financial Review and Prospects—B. Liquidity and capital resources—Indebtedness”.
Our assets are highly concentrated in certain geographic areas and an economic downturn in such areas could have a material adverse effect on our results of operations and financial condition.
As of June 30, 2023, most of our revenue from leases and services provided by the Shopping Malls segment derived from properties located in the City of Buenos Aires and the Greater Buenos Aires metropolitan area. In addition, all of the Company’s office buildings are located in Buenos Aires and a substantial portion of our revenue is derived from such properties. Although we own properties and may acquire or develop additional properties outside Buenos Aires and the Greater Buenos Aires metro area, we could be largely affected by economic conditions or by other effects which could affect these high populated areas. Consequently, an economic downturn in those areas could cause a reduction in our rental income and adversely affect its ability to comply with the Company’s debt service and fund operations.
The loss of tenants could adversely affect our operating revenue and value of our properties.
Although no single tenant represents more than 6.9% of the Company’s revenues in any fiscal year, if a significant number of tenants at its retail or office properties were to experience financial difficulties, including bankruptcy, insolvency or a general downturn of business, or if we failed to retain them, our business could be adversely affected. Further, the Company’s shopping malls typically have a significant “anchor” tenant, such as well-known department stores, that generate consumer traffic at each mall. A decision by such tenants to cease operating at any of our shopping mall properties could have a material adverse effect on our financial condition and the results of our operations. In addition, the closing of one or more stores that attract consumer traffic may motivate other tenants to terminate or to not renew their leases, to seek rent concessions and/or close their stores. Moreover, tenants at one or more properties might terminate their leases as a result of mergers, acquisitions, consolidations, dispositions or bankruptcies. The bankruptcy and/or closure of multiple stores, if we are not able to successfully release the affected space, could have a material adverse effect on both the operating revenue and underlying value of the properties involved.
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We may face risks associated with acquisitions of properties, our future acquisitions may not be profitable and the properties we acquire may be subject to unknown liabilities.
As part of the Company’s growth strategy, we have acquired, and intend to do so in the future, properties, including large properties, that tend to increase the size of our operations and potentially alter our capital structure. Although we believe that the acquisitions we have completed in the past and that we expect to undertake enhance the Company’s financial performance, the success of such transactions is subject to a number of uncertainties, including the risk that:
| · | We may not be able to obtain financing for acquisitions on favorable terms; |
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| · | acquired properties may fail to perform as expected; |
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| · | the actual costs of repositioning or redeveloping acquired properties may be higher than the Company’s estimates; |
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| · | acquired properties may be located in new markets where we may have limited knowledge and understanding of the local economy, absence of business relationships in the area or are unfamiliar with local governmental and permitting procedures; and |
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| · | We may not be able to efficiently integrate acquired properties, particularly portfolios of properties, into the Company’s organization and to manage new properties in a way that allows it to realize cost savings and synergies. |
The Company’s future acquisitions may not be profitable.
We seek to acquire additional shopping malls to the extent we manage to acquire them on favorable terms and conditions and they meet our investment criteria. Acquisitions of commercial properties entail general investment risks associated with any real estate investment, including:
| · | the Company’s estimates of the cost of improvements needed to bring the property up to established standards for the market may prove to be inaccurate; |
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| · | properties we acquire may fail to achieve, within the time frames we project, the occupancy or rental rates we expect to achieve at the time we make the decision to acquire, which may result in the properties’ failure to achieve the returns we projected; |
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| · | the Company’s pre-acquisitions evaluation and the physical condition of each new investment may not detect certain defects or identify necessary repairs, which could significantly increase our total acquisition costs; and |
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| · | the Company’s investigation of a property or building prior to its acquisition, and any representations we may receive from the seller of such building or property, may fail to reveal various liabilities, which could reduce the cash flow from the property or increase our acquisition cost. |
If we acquired a business, we will be required to merge and integrate the operations, personnel, accounting and information systems of such acquired business. In addition, acquisitions of or investments in companies may cause disruptions in our operations and divert management’s attention away from day-to-day operations, which could impair our relationships with our current tenants and employees.
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The Company’s performance is subject to the risks associated with our properties and with the real estate industry.
Our operating performance and the value of our real estate assets, and as a result, the value of its securities, are subject to the risk that its properties may not be able to generate sufficient revenue to meet its operating expenses, including debt service and capital expenditures, its cash flow needs and its ability to service our debt service obligations. Events or conditions beyond its control that may adversely affect its operations or the value of its properties include:
| · | downturns in national, regional and local economies; |
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| · | decrease in consumer spending and consumption; |
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| · | competition from other shopping malls and sales outlets; |
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| · | local real estate market conditions, such as oversupply or lower demand for retail space; |
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| · | changes in interest rates and availability of financing; |
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| · | the exercise by our tenants of their right to early termination of their leases; |
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| · | vacancies, changes in market rental rates and the need to periodically repair, renovate and re-lease space; |
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| · | increased operating costs, including insurance expenses, salary increases, utilities, real estate taxes, federal and local taxes and higher security costs; |
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| · | the impact of losses resulting from civil disturbances, strikes, natural disasters, terrorist acts or acts of war; |
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| · | significant fixed expenditures associated with each investment property, such as debt service payments, real estate taxes, insurance and maintenance costs; |
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| · | declines in the financial condition of our tenants and our ability to collect rents when due; |
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| · | changes in our or our tenants’ ability to provide for adequate maintenance and insurance that result in a reduction in the useful life of a property; and |
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| · | changes in law or governmental regulations (such as those governing usage, zoning and real property taxes) or changes in the exchange controls or government action (such as expropriation). |
If any one or more of the foregoing conditions were to affect the Company’s activities, this could have a material adverse effect on our financial condition and results of operations, and as a result, on the Company’s results.
An adverse economic environment for real estate companies and the credit crisis may adversely affect the Company’s results of operations.
The success of the Company’s business and profitability of its operations depend on continued investment in real estate and access to long-term financing. A prolonged crisis of confidence in real estate investments and lack of credit for acquisitions may constrain our growth and the maintenance of our current business and operations. As part of the Company’s strategy, we intend to increase our properties portfolio through strategic acquisitions at favorable prices, where we believe the Company can bring the necessary expertise to enhance property values. In order to pursue acquisitions, we may require capital or debt financing. Disruptions in the financial markets may adversely impact the Company’s ability to refinance existing debt and the availability and cost of credit in the future. Any consideration of sales of existing properties or portfolio interests may be offset by lower property values. Our ability to make scheduled payments or to refinance the Company’s existing debt obligations depends on our operating and financial performance, which in turn is subject to prevailing economic conditions. If disruptions in financial markets prevail or arise in the future, we cannot provide assurances that Argentine Government responses to such disruptions will restore investor confidence.
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In September 2021, Evergrande, one of China’s largest real estate companies, announced that it would be unable to pay its debt obligations. Since then, the markets have been negatively affected by the announcement. On August 2023, Evergrande filed for Chapter 15 bankruptcy seeking recognition of foreign restructuring proceedings in the High Court of Hong Kong and in the High Court of the Eastern Caribbean Supreme Court in the British Virgin Islands. As of December 2022, the real estate industry in China accounts for approximately 26% of China’s economic activity, and more than two-thirds of household wealth is tied up in real estate.
We cannot predict whether, and to what extent, the uncertainty of the property crisis in China may and how will affect our business, stabilize the markets or increase liquidity and the availability of credit.
The Company’s revenue and profit may be materially and adversely affected by continuing inflation and economic activity in Argentina.
The Company’s business is mainly driven by consumer spending since a portion of the revenue from its Shopping Mall segment derives directly from the sales of our tenants, whose revenue relies on the sales to consumers. As a result, the Company’s revenues and net income are impacted to a significant extent by economic conditions in Argentina, including the development in the textile industry and domestic consumption. Consumer spending is influenced by many factors beyond our control, including consumer perception of current and future economic conditions, inflation, political uncertainty, rates of employment, interest rates, taxation and currency exchange rates. Any continuing economic slowdown, whether actual or perceived, could significantly reduce domestic consumer spending in Argentina and therefore adversely affect our business, financial condition and results of operations.
The properties we acquire may be subject to unknown liabilities.
The properties that we acquire may be subject to unknown liabilities, in respect to which we may have limited or no recourse to the former owners. If a liability were asserted against us based on the Company’s ownership of an acquired property, we may be required to incur significant expenditures to settle, which could adversely affect the Company’s financial results and cash flow. Unknown liabilities relating to acquired properties could include:
| · | liabilities for clean-up of undisclosed environmental contamination; |
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| · | the costs of changes in laws or in governmental regulations (such as those governing usage, zoning and real property taxes or exchange controls regulations imposed by the BCRA); and |
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| · | liabilities incurred in the ordinary course of business. |
The Company’s dependence on rental income may adversely affect our ability to meet the Company’s debt obligations.
A substantial part of our revenue is derived from rental income. As a result, our performance depends on our ability to collect rent from the Company’s tenants. Our revenue and profits would be negatively affected if a significant number of our tenants or any significant tenant were to:
| · | delay lease commencements; |
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| · | decline to extend or renew leases upon expiration; |
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| · | fail to make rental payments when due; or |
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| · | close stores or declare bankruptcy. |
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Any of these actions could result in the termination of leases and the loss of related rental income. In addition, we cannot assure you that any tenant whose lease expires will renew that lease or that we will be able to re-let the space on economically reasonable terms. The loss of rental revenue from a number of our tenants and the Company’s inability to replace such tenants may adversely affect our profitability and its ability to comply with our debt service obligations. These factors are particularly disruptive in the context of emergency situations, such as the Covid-19 pandemic, which has caused significant adverse impacts on our business as tenants have been required to shut down or significantly reduce their operating activities.
It may be difficult to buy and sell real estate quickly and transfer restrictions may apply to part of the Company’s portfolio of properties.
Real estate investments are relatively illiquid and this tends to limit our ability to change the mix of the Company’s portfolio in response to economic circumstances or other conditions. In addition, significant expenditures associated with each investment, such as mortgage payments (if any), real estate taxes and maintenance costs, are generally not reduced when an investment generates lower revenue. If revenue from a property declines while expenses remain the same, our results of operations would be adversely affected. Certain properties are mortgaged and if we were unable to meet our underlying payment obligations, we could suffer losses as a result of foreclosures on those mortgaged properties. Furthermore, if we are required to dispose of one or more of our mortgaged properties, we would not be able to obtain release of the mortgage interest without payment of the associated debt. The foreclosure of a mortgage on a property or inability to sell a property could adversely affect our business. In this kind of transactions, we may agree not to sell the acquired properties for a considerable time which could affect our results of operations.
Some of the land we have purchased is not zoned for development and we may be unable to obtain, or may face delays in obtaining, the necessary zoning permits and other authorizations.
We own several plots of land which are not zoned for our intended development plans. In addition, we have not yet applied for the required land-use, building, occupancy and other required governmental permits and authorizations for these properties. We cannot assure you that we will continue to be successful in our attempts to rezone land and to obtain all necessary permits and authorizations, or that rezoning efforts and permit requests will not be delayed or rejected. Moreover, we may be affected by building moratorium and anti-growth legislation. If we are unable to obtain the governmental permits and authorizations we need to develop our present and future projects as planned, then we may be forced to make unwanted modifications to such projects or abandon them altogether.
We may face risks associated with land-takings in Argentina.
Land-taking is a long-standing problem in Argentina that has escalated throughout the years with every economic crisis.
The spread of land takes has revived an old debate in Argentina. There is a conflict between two groups that claim, on the one hand, a right to decent housing, and on the other hand a group that claims that the right to private property should be respected Argentina’s constant and cyclical economic crises over the past 50 years have also caused poverty to rise sharply, so less people can access a roof, resulting in a housing deficit.
As a consequence, we cannot provide assurance that Argentine Government responses to such disruptions will restore investor confidence in Argentine lands, which could have an adverse impact on our financial condition and results of operations.
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The Company’s ability to grow will be limited if we cannot obtain additional financing.
Although the Company is liquid as of the date of this Annual Report, we must maintain liquidity to fund our working capital, service our outstanding indebtedness and finance investment opportunities. Without sufficient liquidity, we could be forced to curtail our operations or we may not be able to pursue new business opportunities.
The Company’s growth strategy is focused on the development and redevelopment of properties we already own and the acquisition of additional properties for development. As a result, we are likely to have to depend to an important degree on the availability of capital financing, which may or may not be available on favorable terms if at all. We cannot assure you that additional financing, refinancing or other capital will be available in the amounts we require or on favorable terms. The Company’s access to debt or equity capital markets depends on a number of factors, including the market’s perception of the Company’s growth potential, its ability to pay dividends, financial condition, credit rating and our current and potential future earnings. Depending on these factors, we could experience delays or difficulties in implementing the Company’s growth strategy on satisfactory terms or at all.
The capital and credit markets for Argentina have been experiencing extreme volatility and disruption since the last years. If the Company’s current resources do not satisfy our liquidity requirements, we may have to seek additional financing. The availability of financing will depend on a variety of factors, such as economic and market conditions, the availability of credit and our credit ratings, as well as the possibility that lenders could develop a negative perception of the prospects of risk in Argentina, of our company or the industry generally. We may not be able to successfully obtain any necessary additional financing on favorable terms, or at all.
A downgrade in our credit rating could negatively impact our cost of and ability to access capital.
Our credit ratings are an important part of maintaining our liquidity. Any downgrade in credit ratings could potentially increase our borrowing costs or, depending on the severity of the downgrade, substantially limit our access to capital markets, require us to make cash payments or post collateral and permit termination by counterparties of certain significant contracts. Factors that may impact our credit ratings include, among others, debt levels, planned asset purchases or sales, and near-term and long-term growth opportunities. Factors such as liquidity, asset quality, cost structure, product mix, and others are also considered by the rating agencies. A ratings downgrade could adversely impact our ability to access debt markets in the future, increase the cost of future debt, and potentially require us to post letters of credit for certain obligations.
Adverse incidents that occur in the Company’s shopping malls may result in damage to our reputation and a decrease in the number of customers.
Given that the Company’s shopping malls are open to the public, with significant circulation of people, accidents, theft, robbery, public protest, pandemic effects and other incidents may occur in our facilities, regardless of the preventative measures we adopt. If such an incident or series of incidents occurs, shopping mall customers and visitors may choose to visit other shopping venues that they believe are safer, which may cause a reduction in the sales volume and operating income of our shopping malls.
Argentine laws governing leases impose restrictions that limit the Company’s flexibility.
Argentine laws governing leases impose certain restrictions, including the imposition of a three-year minimum lease term for all purposes, except in particular cases such as embassy, consulate or international organization venues, room with furniture for touristic purposes for less than three months, custody and bailment of goods, exhibition or offering of goods in fairs or in cases where due to the circumstances, the subject matter of the lease requires a shorter term.
On August 23, 2023, the Chamber of Deputies approved a draft amendment to the lease law, aiming to reduce the minimum term of lease agreements to a two years and establish an adjustment to the rental fee using the CPI published by the INDEC, or a combination of permitted indexes, as the parties may agree. Also, this bill established that rental value adjustments could be made at periods agreed upon by the parties, which should be no shorter than four months.
This bill was approved by the Chamber of Deputies and subsequently discussed by the Senate. The Senate agreed to make changes to the bill. These changes include: (i) that the minimum term of the lease agreements is maintained at three years, (ii) that the minimum update of the value of the rental fee is made every six months, and (iii) that the Casa Propia coefficient index, developed by the Ministry of Territorial Development and Habitat (Ministerio de Desarrollo Territorial y Hábitat) is used to adjust the increase in the rental fee.
On October 11, 2023, in light of the proposed changes made by the Senate, the Chamber of Deputies revisited and approved the text proposed by the Senate, and the bill was enacted into law with the scope set forth above.
As a result, we are exposed to the risk of higher rates of inflation under the Company’s leases, and any exercise of rescission rights by our tenants could materially and adversely affect our business and results of operations. We cannot assure you that the Company’s tenants will not exercise such right, especially if rental rates stabilize or decline in the future or if economic conditions continue to deteriorate.
We cannot predict at this time how the approval of this new law may affect our business, result of operations or financial condition.
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We may be liable for certain defects in the Company’s buildings.
The Argentine Civil and Commercial Code imposes liability for real estate developers, builders, technical project managers and architects in case of hidden defects in a property for a period of three years from the date title on the property is tendered to the purchaser, even when those defects did not cause significant property damage. If any defect affects the structural soundness or makes the property unfit for use, the liability term is ten years.
In the Company’s real estate developments, we usually act as developers and sellers while construction generally is carried out by third party contractors. Absent a specific claim, we cannot quantify the potential cost of any obligation that may arise as a result of a future claim, and we have not recorded provisions associated with them in our financial statements. If we were required to remedy any defects on completed works, our financial condition and results of operations could be adversely affected.
We could have losses if we have to resort to eviction proceedings in Argentina to collect unpaid rent because such proceedings are complex and time-consuming.
Although Argentine law permits filing of an executive proceeding to collect unpaid rent and a special proceeding to evict tenants, eviction proceedings in Argentina are complex and time-consuming. Historically, the heavy workloads of the courts and the numerous procedural steps required have generally delayed landlords’ efforts to evict tenants. Eviction proceedings generally take between six months and two years from the date of filing of the suit to the time of actual eviction.
Historically, we have sought to negotiate the termination of leases with defaulting tenants after the first few months of non-payment in an effort to avoid legal proceedings. Delinquency may increase significantly in the future, and such negotiations with tenants may not be as successful as they have been in the past. Moreover, new Argentine laws and regulations may forbid or restrict eviction, and in each such case they would likely have a material and adverse effect on our financial condition and results of operations.
Climate change may have adverse effects on our business.
We, our customers, and communities in which we operate, may be adversely affected by the physical risks of climate change, including increases in temperatures, sea levels, and the frequency and severity of adverse climatic events including fires, storms, floods and droughts. These effects, whether acute or chronic in nature, may directly impact us and our customers through disruptions to business and economic activity or impacts on income and asset values.
Climate change implies multiple drivers of financial risk that could adversely affect us:
| · | Transition risks: the move to a low-carbon economy, both at idiosyncratic and systemic levels -such as through policy, regulatory and technological changes, and business and consumers preferences- could increase our expenses and impact our strategies. |
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| · | Physical risks: discrete events, such as flooding and wildfires, and extreme weather impacts and longer-term shifts in climate patterns, such as extreme heat, sea level rise and more frequent and prolonged drought, which could result in financial losses that could impair asset values and the creditworthiness of our customers. Such events could disrupt our operations or those of our customers or third parties on which we rely and do business with. |
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| · | Liability risks: parties who may suffer losses from the effects of climate change may seek compensation from state entities, regulators, investors and lenders, among others. |
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| · | Credit risks: physical climate change could lead to increased credit exposure and companies with business models not aligned with the transition to a low-carbon economy may face a higher risk of reduced corporate earnings and business disruption due to new regulations or market shifts. |
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| · | Market and liquidity risks: market and liquidity changes in the most carbon-intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation. Companies could face liquidity risks derived from cash outflows targeted to improve their reputation in the market or solve climate-related problems. |
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| · | Operational risks: severe weather events could directly impact business continuity and operations both of customers and ours operations. |
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| · | Regulatory compliance risks: increased regulatory compliance risk may result from the increasing pace, breadth and depth of regulatory expectations requiring implementation in short timeframes across multiple jurisdictions and from changes in public policy, laws and regulations in connection with climate change and related environmental sustainability matters. |
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| · | Conduct risks: increasing demand for “green” products where there are differing and developing standards or taxonomies. |
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| · | Reputational risk: our reputation and client relationships may be damaged as a result of our practices and decisions related to climate change, social and environmental matters, or to the practices or involvement of our clients vendors or suppliers, in certain industries or projects associated with causing or exacerbating climate change. |
Initiatives to mitigate or respond to climate change may impact market and asset prices, economic activity, and customer behavior, particularly in emissions intensive industry sectors and geographies affected by these changes. Any of the conditions described above, or failure to effectively manage and disclose these risks could adversely affect our business, prospects, reputation, financial performance or financial condition.
The recurrence of a credit crisis could have a negative impact on the Company’s major customers, which in turn could materially adversely affect our results of operations and liquidity.
Argentina is undergoing a credit crisis that could negatively impact the Company’s tenants’ ability to comply with their lease obligations. The impact of a future credit crisis on the Company’s major tenants cannot be predicted and may be quite severe. A disruption in the ability of the Company’s significant tenants to access liquidity could pose serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in future orders of their products and their inability or failure to comply with their obligations, any of which could have a material adverse effect on our results of operations and liquidity.
We are subject to risks inherent to the operation of office buildings that may affect the Company’s profitability.
Office buildings are exposed to various factors that may affect their development, administration and profitability, including the following factors:
| · | lower demand for office space as a consequence of the implementation of hybrid and home office work; |
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| · | a deterioration in the financial condition of our tenants that causes defaults under leases due to lack of liquidity, access to capital or for other reasons; |
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| · | difficulties or delays renewing leases or re-leasing space; |
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| · | decreases in rents as a result of oversupply, particularly offerings at newer or re-developed properties; |
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| · | competition from developers, owners and operators of office properties and other commercial real estate, including sublease space available from our tenants; |
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| · | maintenance, repair and renovation costs incurred to maintain the competitiveness of our office buildings; |
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| · | exchange controls that may interfere with their ability to pay rents that generally are pegged to the U.S. dollar; |
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| · | the consequences of a pandemic, epidemic or disease outbreak that would produce lower demand for offices spaces; and |
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| · | an increase in our operating costs, caused by inflation or by other factors could have a material adverse effect on us if our tenants are unable to pay higher rent as a result of increased expenses. |
The Company’s investment in property development and management activities may be less profitable than we anticipate.
We are engaged in the development and construction of properties to be used for office, residential or commercial purposes, shopping malls and residential complexes, in general through third-party contractors. Risks associated with our development, reconversion and construction activities include the following, among others:
| · | abandonment of development opportunities and renovation proposals; |
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| · | construction costs may exceed our estimates for reasons including higher interest rates or increases in the cost of materials and labor, making a project unprofitable; |
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| · | occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, resulting in lower than projected rental revenue and a corresponding lower return on our investment; |
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| · | pre-construction buyers may default on their purchase contracts or units in new buildings may remain unsold upon completion of construction; |
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| · | lack of affordable financing alternatives in the private and public debt markets; |
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| · | sale prices of residential units may be insufficient to cover development costs; |
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| · | construction and lease commencements may not be completed on schedule, resulting in increased debt service expense and construction costs; |
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| · | failure or delays in obtaining necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, or building moratoria and anti-growth legislation; |
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| · | significant time lags between the commencement and completion of projects subjects us to greater risks due to fluctuation in the general economy; |
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| · | construction may be delayed because of a number of factors, including weather, strikes or delays in receipt of zoning or other regulatory approvals, or man-made or natural disasters, resulting in increased debt service expense and construction costs; |
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| · | changes in our tenants’ demand for rental properties outside of Buenos Aires; and |
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| · | We may incur capital expenditures that require considerable time and effort and which may never be completed due to government restrictions or overall market conditions. |
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In addition, we may face claims for the enforcement of labor laws in Argentina. Many companies hire personnel from third parties that provide outsourced services, and sign indemnity agreements if labor claims from employees of such third parties arise. However, in recent years several courts have rejected the existence of independence in those labor relations and ruled that joint and several responsibilities by both companies.
While the Company’s policies with respect to expansion, renovation and development activities are intended to limit some of the risks otherwise associated with such activities, we are nevertheless subject to risks associated with property development, such as cost overruns, design changes and timing delays arising from a lack of availability of materials and labor, weather conditions and other factors outside of our control, as well as financing costs that, may exceed original estimates, possibly making the associated investment unprofitable. Any delays or unanticipated expenses could adversely affect the investment returns from these development projects and harm our operating results.
Greater than expected increases in construction costs could adversely affect the profitability of the Company’s new developments.
The Company’s businesses activities include real estate developments. One of the main risks related to this activity corresponds to potential increases in construction costs, which may be driven by higher demand and new development projects in the shopping malls and buildings sectors. Increases higher than those included in the original budget may result in lower profitability than expected.
The increasingly competitive real estate sector in Argentina may adversely affect our ability to rent or sell office space and other real estate and may affect the sale and lease price of our premises.
The Company’s real estate activities are highly concentrated in the Buenos Aires metropolitan area where the market is highly competitive due to a scarcity of properties in sought-after locations and an increasing number of local and international competitors. The Argentine real estate industry is highly competitive and fragmented and does not have high barriers to entry for new competitors. The main competitive factors in the real estate development business include availability and location of land, price, funding, design, quality, reputation and partnerships with developers. A number of residential and commercial developers and real estate service companies compete in identifying land acquisition opportunities, attracting financial resources, and appealing to prospective purchasers and tenants. Other companies, including joint ventures of foreign and local companies, have become increasingly active in the market, further increasing competition. If one or more of our competitors is able to acquire and develop desirable properties, because it has access to greater financial resources or otherwise, if we are unable to respond to such pressures as promptly as our competitors, or competition increases, our business and financial condition could be adversely affected.
All of the Company’s shopping mall and commercial office properties are located in Argentina. There are other shopping malls and independent retail stores and residential properties that are within the geographic scope of each of our properties. The number of competing properties in a particular area could have a material adverse effect both on our ability to lease retail space in our shopping malls or sell units in our residential complexes and on the amount of rent or the sale price that we are able to charge. We cannot assure you that other shopping mall operators will not invest in Argentina in the near future. If additional competitors become active in the shopping mall segment, such competition could have a material adverse effect on our results of operations.
Substantially all of the Company’s offices and other non-shopping mall rental properties are located in developed urban areas. There are many office buildings, shopping malls, retail and residential premises in the areas where the Company’s properties are located. This is a highly fragmented market, and the abundance of comparable properties in our vicinity may adversely affect our ability to rent or sell office space and other real estate and may affect the sale and lease price of our premises. In the future, both national and foreign companies may participate in Argentina’s real estate development market, competing with us for business opportunities.
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Some potential losses are not covered by insurance and certain kinds of insurance coverage may become prohibitively expensive.
We currently have insurance policies in place that cover potential risks such as civil liability, fire, lost profit and floods, including extended coverage and losses from leases on all of the Company’s properties. Although we believe the policy specifications and insured limits of these policies are customary, there are certain types of losses, such as lease and other contract claims, terrorism and acts of war that generally are not insured under the insurance policies offered in Argentina. In the event of a loss that was not insured or a loss in excess of insured limits, we could lose all or a portion of the capital we have invested in a property, as well as its anticipated future revenue. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure you that material losses in excess of insurance proceeds will not occur in the future. If any of the Company’s properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Insurance companies may no longer offer coverage against certain types of losses, such as losses due to terrorist acts and the existence of mold or, if offered, these types of insurance may become too expensive.
We do not have life or disability insurance for our key employees. If any of our key employees were to die or become disabled, we could experience losses caused by a disruption in our operations which will not be covered by insurance, and this could have a material adverse effect on our financial condition and results of operations.
An uninsured loss or a loss that exceeds policies on the Company’s properties could subject us to lost capital or revenue on those properties.
The terms of our standard form property leases currently in effect, require tenants to indemnify and hold us harmless from liabilities resulting from injury to persons or property at or outside the premises, due to activities conducted on the properties, except for claims arising from negligence or intentional misconduct of the Company’s agents. Tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability insurance policies. We cannot provide assurance that the Company’s tenants will be able to properly maintain their insurance policies or have the ability to pay deductibles. If an uninsured loss occurs or a loss arises that exceeds the combined aggregate limits for the policies, or if a loss arises that is subject to a substantial deductible under an insurance policy, we could lose all or part of the Company’s capital invested in, and anticipated revenue from, one or more of the Company’s properties, which could have a material adverse effect on our business, financial condition and results of operations.
Demand for our premium properties, aimed at high-income consumers, may not be sufficient.
We have focused on development projects that cater to affluent consumers and have entered into property barter arrangements pursuant to which we contributed undeveloped land parcels to joint venture entities with developers who agree to deliver units at premium development locations in exchange for the Company’s land contribution. When the developers return these properties to us, demand for premium residential units could be significantly lower. In such a case, we would be unable to sell these residential units at the estimated prices or time frame, which could have an adverse effect on the Company’s financial condition and results of operations.
The Company is subject to risks affecting the hotel industry.
The full-service segment of the lodging industry in which our hotels operate is highly competitive. The operational success of our hotels is highly dependent on our ability to compete in areas such as access, location, quality of accommodations, rates, quality food and beverage facilities and other services and amenities. The Company’s hotels may face additional competition if other companies decide to build new hotels or improve their existing hotels to increase their attractiveness.
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In addition, the profitability of our hotels depends on:
| · | our ability to form successful relationships with international and local operators to run our hotels; |
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| · | changes in tourism and travel trends, including seasonal changes and changes due to pandemic outbreaks, such as the Influenza A Subtype H1N1 and Zika viruses, a potential Ebola outbreak, Covid-19, monkeypox, among others, or weather phenomenons or other natural events, such as the eruption of the Puyehué and the Calbuco volcano in June 2011 and April 2015, respectively; |
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| · | affluence of tourists, which can be affected by a slowdown in global and local economy; and |
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| · | taxes and governmental regulations affecting wages, prices, interest rates, construction procedures and costs. |
The shift by consumers to purchasing goods over the internet, where barriers to entry are low, may negatively affect sales at our shopping malls.
In recent years, internet retail sales have grown significantly in Argentina, even though the market share of such sales is still modest. The Internet enables manufacturers and retailers to sell directly to consumers, diminishing the importance of traditional distribution channels such as retail stores and shopping malls. We believe that our target consumers are increasingly using the Internet, from home, work or elsewhere, to shop electronically for retail goods, and this trend is likely to continue. Retailers at the Company’s properties face increasing competition from online sales and this could cause the termination or non-renewal of their leases or a reduction in their gross sales, affecting our percentage rent based revenue. If e-commerce and retail sales through the Internet continue to grow, retailers’ and consumers’ reliance on our shopping malls could be materially diminished, having a material adverse effect on our financial condition, results of operations and business prospects.
The Company’s business is subject to extensive regulation and additional regulations may be imposed in the future.
Our activities are subject to Argentine federal, state and municipal laws, and to regulations, authorizations and licenses required with respect to construction, zoning, use of the soil, environmental protection and historical landmark preservation, consumer protection, antitrust and other requirements, all of which affect the Company’s ability to acquire land, buildings and shopping malls, develop and build projects and negotiate with customers. In addition, companies in this industry are subject to increasing tax rates, the introduction of new taxes and changes in the taxation regime. We are required to obtain permits from different government agencies in order to carry out our projects. Maintaining the Company’s licenses and authorizations can be costly. If we fail to comply with such laws, regulations, licenses and authorizations, we may face fines, project shutdowns, and cancellation of licenses and revocation of authorizations.
In addition, public agencies may issue new and stricter standards, or enforce or construe existing laws and regulations in a more restrictive manner, which may force us to incur expenditures in order to comply. Development activities are also subject to risks of potential delays in or an inability to obtain all necessary zoning, environmental, land-use, development, building, occupancy and other permits and authorizations. Any such delays or failures to obtain such government approvals may have an adverse effect on our business.
In the past, the Argentine Government issued regulations regarding leases in response to housing shortages, high rates of inflation and difficulties in accessing credit. Such regulations limited or prohibited increases on rental prices and prohibited eviction of tenants, even for failure to pay rent. Most of the Company’s leases provide that tenants pay all costs and taxes related to their respective leased areas. In the event of a significant increase in such costs and taxes, the Argentine Government may respond to political pressure to intervene by regulating this practice, thereby negatively affecting our rental income. We cannot assure you that the Argentine Government will not impose similar or other regulations in the future. Changes in existing laws or the enactment of new laws governing the ownership, operation or leasing of shopping malls and office properties in Argentina could negatively affect the real estate and the rental market and materially and adversely affect our operations and financial condition.
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Labor relations may negatively impact the Company.
As of June 30, 2023, 61.1% of our workforce was represented by unions under collective bargaining agreements. Although we currently enjoy good relations with our employees and their unions, we cannot assure you that labor relations will continue to be positive or that deterioration in labor relations will not materially and adversely affect us.
The results of our operations include unrealized revaluation adjustments on investment properties, which may fluctuate significantly over financial periods and may materially and adversely affect our business, results of operations and financial condition.
During the year ended June 30, 2023, we had fair value loss on investment properties of ARS 49,145 million. Although the upward or downward revaluation adjustments reflect unrealized capital gains or losses on our investment properties during the relevant periods, the adjustments do not reflect the actual cash flow or profit or losses generated from the sales or rental of our investment properties. Unless such investment properties are disposed of at similarly revalued amounts, we will not realize the actual cash flow. The amount of revaluation adjustments has been, and will continue to be, significantly affected by the prevailing property markets and macroeconomic conditions prevailing in Argentina and will be subject to market fluctuations in those markets.
We cannot guarantee whether changes in market conditions will increase, maintain or decrease the historical average fair value gains on our investment properties or at all. In addition, the fair value of our investment properties may materially differ from the amount we receive from any actual sale of an investment property. If there is any material downward adjustment in the revaluation of our investment properties in the future or if our investment properties are disposed of at significantly lower prices than their valuation or appraised value, our business, results of operations and financial condition may be materially and adversely affected.
Due to the currency mismatches between our assets and liabilities, we have a high currency exposure.
As of June 30, 2023, the majority of our liabilities, such as our Series VIII, XI, XIII, XIV, XV, XVI and XVII Notes, were denominated in U.S. dollars while the Company’s revenues are mainly denominated in Pesos. This currency gap mainly affects our operational flows to pay interests of our U.S. dollar denominated debt, considering our assets are transacted in U.S dollars. In addition, restrictions to access to MULC to acquire the required U.S. dollars to pay our U.S. dollar denominated debt or future regulations that may be enacted establishing a different exchange rate (higher than the current official exchange rate) to convert the Pesos into U.S. dollars exposes us to a risk of volatility, which may adversely affect our financial results if the U.S. dollar appreciates against the Peso and may affected our ability to pay interests of our U.S. dollar denominated debt. Any depreciation of the Peso against the U.S. dollar increases the nominal amount of our debt in Pesos, which further adversely affects the results of the Company’s operations and financial conditions and may increase the collection risk of our leases and other receivables from our tenants and mortgages, most of which generate Peso denominated revenue
The Company issues debt in the local and international capital markets as one of its main sources of funding and its capacity to successfully access the local and international markets on favorable terms affects its cost of funding.
The Company’s ability to successfully access the local and international capital markets on acceptable terms depends largely on capital markets conditions prevailing in Argentina and internationally. We have no control over capital markets conditions, which can be volatile and unpredictable. If we are unable to issue debt in the local and/or international capital markets and on terms acceptable to the Company, whether as a result of regulations and foreign exchange restrictions, a deterioration in capital markets conditions or otherwise, we would likely be compelled to seek alternatives for funding, which may include short-term or more expensive funding sources. If this were to happen, we may be unable to fund our liquidity needs at competitive costs and its business results of operations and financial condition may be materially and adversely affected.
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Property ownership through joint ventures or investees may limit our ability to act exclusively in our interest.
We develop and acquire properties in joint ventures with other persons or entities or make minority investments in entities when we believe circumstances warrant the use of such structures.
As of June 30, 2023, the Company owns 50% of Quality Invest S.A., which was recently sold (see “Recent Developments – Sale of Quality Invest S.A.”). In the Sales and Developments segment, the Company owns 50% of the equity of Puerto Retiro and 50% of the equity of Cyrsa S.A. In the Hotel segment, the Company owns 50% of the equity of Hotel Llao Llao and the other 50% is owned by the Sutton Group. In the Shopping Malls segment the Company owns 50% of the equity of Nuevo Puerto Santa Fe S.A., which is the tenant of a building in which it built and currently operates “La Ribera” shopping mall.
In addition, we hold approximately 29.91% of the equity of Banco Hipotecario, of which the Argentine Government is the controlling shareholder.
We could engage in a dispute with one or more of its joint venture partners or controlling shareholders in an investment that might affect its ability to operate a jointly-owned property. Moreover, its joint venture partners or controlling shareholders in an investment may, at any time, have business, economic or other objectives that are inconsistent with its objectives, including objectives that relate to the timing and terms of any sale or refinancing of a property. For example, the approval of certain of its investors is required with respect to operating budgets and refinancing, encumbering, expanding or selling any of these properties. In some instances, its joint venture partners or controlling shareholders in an investment may have competing interests in their markets that could create conflicts of interest. If the objectives of its joint venture partners or controlling shareholder in an investment are inconsistent with our own objectives, we will not be able to act exclusively in our interests.
If one or more of the investors in any of its jointly owned properties were to experience financial difficulties, including bankruptcy, insolvency or a general downturn of business, there could be an adverse effect on the relevant property or properties and in turn, on our financial performance. Should a joint venture partner or controlling shareholder in an investment declare bankruptcy, we could be liable for its partner’s common share of joint venture liabilities or liabilities of the investment vehicle.
We are dependent on our Board of Directors, senior management and other key personnel.
The Company’s success, to a significant extent, depends on the continued employment of Eduardo S. Elsztain and certain other members of our Board of Directors and senior management, who have significant expertise and knowledge of our business and industry. The loss or interruption of their services for any reason could have a material adverse effect on our business and results of operations. Our future success also depends in part upon our ability to attract and retain other highly qualified personnel. We cannot assure you that we will be successful in hiring or retaining qualified personnel, or that any of our personnel will remain employed by us, which may have a material adverse effect on our financial condition and results of operations.
We may face potential conflicts of interest relating to our principal shareholders.
Our largest beneficial owner is Mr. Eduardo S. Elsztain, according to his indirect shareholding through Cresud S.A.C.I.F. y A. As of June 30, 2023, such beneficial ownership consisted of 471,976,181 common shares held by Cresud S.A.C.I.F. y A. Conflicts of interest between our management and that of our related companies may arise in connection with the performance of their respective business activities. As of June 30, 2023, Mr. Eduardo S. Elsztain also beneficially owned approximately 58.2% of our common shares. We cannot assure you that our principal shareholders and our affiliates will not limit or cause us to forego business opportunities that our affiliates may pursue or that the pursuit of other opportunities will be in our interest.
Disease outbreaks or other public health concerns could reduce traffic in our shopping malls.
As a result of the Covid-19 pandemic, the Argentine government enacted several regulations limiting the operation of schools, cinemas and shopping malls, which has significantly reduced traffic at our shopping malls. See “Risks Relating to Argentina –The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operations.” We cannot assure you that new disease outbreaks or health hazards will not occur in the future, or that such an outbreak or health hazard would not significantly affect consumer and/or tourists’ activity. The recurrence of such a scenario could adversely affect our business and the results of operations.
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Risks Relating to our Investment in Banco Hipotecario
As of June 30, 2023, we owned approximately 29.91% of the outstanding capital stock of Banco Hipotecario. Banco Hipotecario’s assets as of such date were ARS 672,049.9 million. All of Banco Hipotecario’s operations, properties and customers are located in Argentina. Accordingly, the quality of Banco Hipotecario’s loan portfolio, financial condition and results of operations depend on economic, regulatory and political conditions prevailing in Argentina. These conditions include growth rates, inflation rates, exchange rates, changes to interest rates, changes to government policies, social instability and other political, economic or international developments either taking place in, or otherwise affecting, Argentina.
The short-term structure of the deposit base of the Argentine financial system, including Banco Hipotecario, could lead to a reduction in liquidity levels and limit the long-term expansion of financial intermediation.
Given the short-term structure of the deposit base of the Argentine financial system, credit lines are also predominantly short-term, with the exception of mortgages, which represent a low proportion of the existing credit base. Although liquidity levels are currently reasonable, no assurance can be given that these levels will not be reduced due to a future negative economic scenario. Therefore, there is still a risk of low liquidity levels that could increase funding cost in the event of a withdrawal of a significant amount of the deposit base of the financial system, and limit the long-term expansion of financial intermediation including Banco Hipotecario.
The growth and profitability of Argentina’s financial system partially depend on the development of long-term funding. During 2019, Central Bank reserves registered an abrupt fall mainly due to U.S. dollars sales by the Central Bank and the National Treasury to the private sector; cancellation of public debt; and outflow of dollar deposits from the private sector. As a consequence, there is a reduction of loans denominated in U.S. dollars. Since most deposits in the Argentine financial system are short-term, a substantial portion of the loans have the same or similar maturities, and there is a small portion of long-term credit lines. The uncertainty with respect to the level of inflation in future years is a principal obstacle to a faster recovery of Argentina’s private sector long-term lending. This uncertainty has had, and may continue to have a significant impact on both the supply of and demand for long-term loans as borrowers try to hedge against inflation risk by borrowing at fixed rates while lenders hedge against inflation risk by offering loans at floating rates. If longer-term financial intermediation activity does not grow, the ability of financial institutions, including Banco Hipotecario, to generate profits will be negatively affected.
Banco Hipotecario issues debt in the local and international capital markets as one of its sources of funding and its capacity to successfully access the local and international markets on favorable terms affects its cost of funding.
In recent years, Banco Hipotecario has diversified its financing sources by increasing deposits. Still, Banco Hipotecario remains having presence in the local and international capital markets. As of June 30, 2023, the issuance of notes represented 2.8% of its total liabilities. The ability of Banco Hipotecario to successfully access the local and international capital markets and on acceptable terms depends largely on capital markets conditions prevailing in Argentina and internationally. Banco Hipotecario has no control over capital markets conditions, which can be volatile and unpredictable.
The stability of the financial system depends upon the ability of financial institutions, including Banco Hipotecario, to maintain and increase the confidence of depositors.
The measures implemented by the Argentine Government in late 2001 and early 2002, in particular the restrictions imposed on depositors to withdraw money freely from banks and the “pesification” and restructuring of their deposits, were strongly opposed by depositors due to the losses on their savings and undermined their confidence in the Argentine financial system and in all financial institutions operating in Argentina.
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If depositors once again withdraw their money from banks in the future, there may be a substantial negative impact on the manner in which financial institutions, including Banco Hipotecario, conduct their business, and on their ability to operate as financial intermediaries. Loss of confidence in the international financial markets may also adversely affect the confidence of Argentine depositors in local banks.
In the future, an adverse economic situation, even if it is not related to the financial system, could trigger a massive withdrawal of capital from local banks by depositors, as an alternative to protect their assets from potential crises. Any massive withdrawal of deposits could cause liquidity issues in the financial sector and, consequently, a contraction in credit supply.
The occurrence of any of the above could have a material and adverse effect on Banco Hipotecario’s expenses and business, results of operations and financial condition.
The asset quality of financial institutions is exposed to the non-financial public sector and Central Bank’s indebtedness.
Financial institutions carry significant portfolios of bonds issued by the Argentine Government and by provincial governments as well as loans granted to these governments. The exposure of the financial system to the non-financial public sector’s indebtedness had been shrinking steadily, from 49.0% of total assets in 2002 to 16.8% towards the end of 2022. To an extent, the value of the assets held by Argentine banks, as well as their capacity to generate income, is dependent on the creditworthiness of the non-financial public sector, which is in turn tied to the Argentine Government’s ability to foster sustainable long-term growth, generate fiscal revenue and reduce public expenditure.
In addition, financial institutions currently carry securities issued by the Central Bank in their portfolios, which generally are short-term. As of June 30, 2023, Banco Hipotecario’s total exposure to the public sector was ARS 80,932.203 million, which represented 12.04% of its assets as of that date, and the total exposure to securities issued by the Central Bank was ARS 144,256.440 million, which represented 21.47% of its total assets as of June 30, 2023.
Banco Hipotecario could suffer losses in its investment portfolios due to volatility in the capital markets and in the exchange rate, which could significantly affect Banco Hipotecario’s financial condition and results of operations.
As of June 30, 2023, Banco Hipotecario had a total exposure in Leliq of ARS 141,818 million, and had arranged swap transactions with the Central Bank against Leliq amounting to ARS 221,303 million. Banco Hipotecario could suffer losses related to its U.S. dollar investments due to changes in market prices, defaults, fluctuations in market interest rates and exchange rates, changes in the market perception of the credit quality of both public sector instruments and private issues, or other reasons. A decline in the performance of the capital markets may cause Banco Hipotecario to record net losses due to a decrease in the value of its investment portfolios, in addition to losses from trading positions caused by volatility in financial market prices, even in the absence of a general economic downturn. Any of these losses could have a material adverse effect on Banco Hipotecario’s financial condition and results of operations.
The quality of Banco Hipotecario’s assets and that of other financial institutions may deteriorate if the Argentine private sector is affected by economic events in Argentina or international macroeconomic conditions.
The capacity of many Argentine private sector debtors to repay their loans has in the past deteriorated as a result of certain economic events in Argentina or macroeconomic conditions, materially affecting the asset quality of financial institutions, including Banco Hipotecario. The ratio of non-performing private sector loans has increased in recent years, as Argentina’s economic outlook deteriorated. Banco Hipotecario recorded non-performing loan ratios of 12.3%, 13.4% and 4.2% for June 30, 2020, 2021, and 2022, respectively. The quality of its loan portfolio is highly sensitive to economic conditions prevailing from time to time in Argentina, and as a result if Argentina were to experience adverse macroeconomic conditions, the quality of Banco Hipotecario’s loan portfolio and the recoverability of its loans would likely be adversely affected. This might affect the creditworthiness of Banco Hipotecario’s loan portfolio and the results of operations.
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The Consumer Protection Law may limit some of the rights afforded to Banco Hipotecario.
Argentine Law No. 24,240 (the “Consumer Protection Law”) sets forth a series of rules and principles designed to protect consumers, which include Banco Hipotecario’s customers. The Consumer Protection Law was amended by Law No. 26,361 on March 12, 2008 to expand its applicability and the penalties associated with violations thereof. Additionally, Law No. 25,065 (as amended by Law No. 26,010 and Law No. 26,361, the “Credit Card Law”) also sets forth public policy regulations designed to protect credit card holders. Recent Central Bank regulations, such as Communication “A” 5,388, also protects consumers of financial services.
In addition, the Civil and Commercial Code has a chapter on consumer protection, stressing that the rules governing consumer relations should be applied and interpreted in accordance with the principle of consumer protection and that a consumer contract should be interpreted in the sense most favorable to it. The application of both the Consumer Protection Law and the Credit Card Law by administrative authorities and courts at the federal, provincial and municipal levels has increased. This trend has increased general consumer protection levels. If Banco Hipotecario is found to be liable for violations of any of the provisions of these laws, the potential penalties could limit some of Banco Hipotecario’s rights, for example, with respect to its ability to collect payments due from services and financing provided by us, and adversely affect Banco Hipotecario’s financial results of operations.
We cannot assure you that court and administrative rulings based on the newly-enacted regulation or measures adopted by the enforcement authorities will not increase the degree of protection given to Banco Hipotecario’s debtors and other customers in the future, or that they will not favor the claims brought by consumer groups or associations. This may prevent or hinder the collection of payments resulting from services rendered and financing granted by us, which may have an adverse effect on Banco Hipotecario’s business and results of operations.
Class actions against financial institutions for unliquidated amounts may adversely affect the financial system’s profitability.
Certain public and private organizations have initiated class actions against financial institutions in Argentina. The National Constitution and the Consumer Protection Law contain certain provisions regarding class actions. However, their guidance with respect to procedural rules for instituting and trying class action cases is limited. Nonetheless, through an ad hoc doctrine, Argentine courts have admitted class actions in some cases, including various lawsuits against financial entities related to “collective interests” such as alleged overcharging on products, interest rates and advice in the sale of public securities, etc. If class action plaintiffs were to prevail against financial institutions, their success could have an adverse effect on the financial industry in general and indirectly on Banco Hipotecario’s business.
Banco Hipotecario operates in a highly regulated environment and its operations are subject to capital controls regulations adopted by several regulatory agencies.
Financial institutions are subject to a major number of regulations concerning functions historically determined by the Central Bank and other regulatory authorities. The Central Bank may penalize Banco Hipotecario and its directors, members of the Executive Committee and members of its Supervisory Committee, in the event of any breach of the applicable regulation. Potential sanctions, for any breach of the applicable regulations, may vary from administrative and/or disciplinary penalties to criminal sanctions. Similarly, the CNV, which authorizes securities offerings and regulates the capital markets in Argentina, has the authority to impose sanctions on us and Banco Hipotecario’s Board of Directors for breaches of corporate governance established in the capital markets laws and the CNV Rules. The UIF regulates matters relating to the prevention of asset laundering and has the ability to monitor compliance with any such regulations by financial institutions and, eventually, impose sanctions.
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We cannot assure you whether such regulatory authorities will commence proceedings against Banco Hipotecario, its shareholders, directors or its Supervisory Committee, or penalize Banco Hipotecario. Banco Hipotecario has adopted “Know Your Customer” and other policies and procedures to comply with its duties under currently applicable rules and regulations.
In addition to regulations specific to the banking industry, Banco Hipotecario is subject to a wide range of federal, provincial and municipal regulations and supervision generally applicable to businesses operating in Argentina, including laws and regulations pertaining to labor, social security, public health, consumer protection, the environment, competition and price controls. We cannot assure you that existing or future legislation and regulation will not require material expenditures by Banco Hipotecario or otherwise have a material adverse effect on Banco Hipotecario’s consolidated operations.
The effects of legislation that restricts our ability to pursue mortgage foreclosure proceedings could adversely affect us.
The ability to pursue foreclosure proceedings through completion, in order to recover on defaulted mortgage loans, has an impact on financial institutions activities. On December 13, 2006, pursuant to Law No. 26,177, the “Restructuring Unit Law” was created to allow all mortgage loans to be restructured between debtors and the former Banco Hipotecario Nacional, insofar as such mortgages had been granted prior to the effectiveness of the Convertibility Law. Law No. 26,313, the “Pre-convertibility Mortgage Loans Restructuring Law,” was enacted by the Argentine Congress on November 21, 2007 and partially signed into law on December 6, 2007 to establish the procedure to be followed in the restructuring of mortgage loans within the scope of Section 23 of the Mortgage Refinancing System Law in accordance with the guidelines established by the Restructuring Unit Law. To this end, a recalculation was established for certain mortgage loans originated by the former Banco Hipotecario Nacional before April 1, 1991.
Executive Branch Decree No. 2,107/08 issued on December 19, 2008 regulated the Pre-convertibility Mortgage Loans Restructuring Law and established that the recalculation of the debt applies to the individual mortgage loans from global operations in effect on December 31, 2008 and agreed upon prior to April 1, 1991, and in arrears at least since November 2007 and remaining in arrears on December 31, 2008. In turn, the Executive Branch Decree No. 1,366/10, published on September 21, 2010, expanded the universe of Pre-convertibility loans subject to restructuring to include the individual mortgage loans not originating in global operations insofar as they met the other requirements imposed by Executive Branch Decree No. 2,107/08. In addition, Law No. 26,313 and its regulatory decrees also condoned the debts on mortgage loans granted before the Convertibility Law in so far as they had been granted to deal with emergency situations and in so far as they met the arrears requirement imposed on the loans subject to recalculation.
Subject to the Central Bank’s supervision, Banco Hipotecario implemented the recalculation of mortgage loans within the scope of the aforementioned rules by adjusting the value of the new installments to a maximum amount not in excess of 20% of household income. In this respect, we estimate that Banco Hipotecario has sufficient loan loss provisions to face any adverse economic impact on the portfolio involved. We cannot assure that the Argentine Government will not enact additional laws restricting our ability to enforce our rights as a creditor and/or imposing a condition or a reduction of principal on the amounts unpaid in our mortgage loan portfolio. Any such circumstance could have a significant adverse effect on our financial condition and the results of our operations.
Increased competition and M&A activities in the banking industry may adversely affect Banco Hipotecario.
Banco Hipotecario foresees increased competition in the banking sector. If the trend towards decreasing spreads is not offset by an increase in lending volumes, the ensuing losses could lead to mergers in the industry. These mergers could lead to the establishment of larger, stronger banks with more resources than us. Therefore, although the demand for financial products and services in the market continues to grow, competition may adversely affect Banco Hipotecario’s results of operations, resulting in shrinking spreads and commissions.
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Future governmental measures may adversely affect the economy and the operations of financial institutions.
The Argentine Government has historically exercised significant influence over the economy, and financial institutions, in particular, have operated in a highly regulated environment. We cannot assure you that the laws and regulations currently governing the economy or the banking sector will remain unaltered in the future or that any such changes will not adversely affect Banco Hipotecario’s business, financial condition or results of operations and Banco Hipotecario’s ability to honor its debt obligations in foreign currency.
Several legislative bills to amend the Financial Institutions Law have been sent to the Argentine Congress. If the law currently in force were to be comprehensively modified, the financial system as a whole could be substantially and adversely affected. If any of these legislative bills were to be enacted or if the Financial Institutions Law were amended in any other way, the impact of the subsequent amendments to the regulations on the financial institutions in general, Banco Hipotecario’s business, its financial condition and the results of operations is uncertain.
Law No. 26,739 was enacted to amend the Central Bank’s charter, the principal aspects of which are: (i) to broaden the scope of the Central Bank’s mission (by establishing that such institution shall be responsible for financial stability and economic development while pursuing social equity); (ii) to change the obligation to maintain an equivalent ratio between the monetary base and the amount of international reserves; (iii) to establish that the Board of Directors of the institution will be the authority responsible for determining the level of reserves required to guarantee normal operation of the MULC based on changes in external accounts; and (iv) to empower the monetary authority to regulate and provide guidance on credit through the financial system institutions, so as to “promote long-term production investment.”
In addition, the Civil and Commercial Code, among other things, modifies the applicable regime for contractual provisions relating to foreign currency payment obligations by establishing that foreign currency payment obligations may be discharged in Pesos. This amends the legal framework, pursuant to which debtors may only discharge their foreign currency payment obligations by making payment in the specific foreign currency agreed upon in their agreements; provided however that the option to discharge in Pesos a foreign currency obligation may be waived by the debtor is still under discussion. However, in recent years some court decisions have established the obligation to pay in foreign currency when it was so freely agreed by the parties. We are not able to ensure that any current or future laws and regulations (including, in particular, the amendment to the Financial Institutions Law and the amendment to the Central Bank’s charter) will not result in significant costs to Banco Hipotecario, or will otherwise have an adverse effect on Banco Hipotecario’s operations.
Banco Hipotecario’s obligations as trustee of PROCREAR trust are limited.
Banco Hipotecario currently acts as trustee of the PROCREAR Trust, which aims to facilitate access to housing solutions by providing mortgage loans for construction and developing housing complexes across Argentina. Under the terms and conditions of the PROCREAR Trust, all the duties and obligations under the trust have to be settled with the trust estate. Notwithstanding, if the aforementioned is not met, Banco Hipotecario could have its reputation affected. In addition, if the Argentine Government decides to terminate the PROCREAR Trust and/or terminate Banco Hipotecario’s role as trustee of the PROCREAR Trust, this may adversely affect Banco Hipotecario’s results of operations.
The exposure of Banco Hipotecario to individual borrowers could lead to higher levels of past due loans, allowances for loan losses and charge-offs.
A substantial portion of Banco Hipotecario’s loan portfolio consists of loans to individual customers in the lower-middle to middle income segments of the Argentine population. The quality of Banco Hipotecario’s portfolio of loans to individuals is dependent to a significant extent on economic conditions prevailing from time to time in Argentina. Lower-middle to middle income individuals are more likely to be exposed to and adversely affected by adverse developments in the Argentine economy than corporations and high-income individuals. As a result, lending to these segments represents higher risk than lending to such other market segments. Consequently, Banco Hipotecario may experience higher levels of past due amounts, which could result in higher provisions for loan losses. Therefore, there can be no assurance that the levels of past due amounts and subsequent charge-offs will not be materially higher in the future.
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An increase in fraud or transaction errors may adversely affect Banco Hipotecario.
As with other financial institutions, Banco Hipotecario is susceptible to, among other things, fraud by employees or outsiders, unauthorized transactions by employees and other operational errors (including clerical or record keeping errors and errors resulting from faulty computer or telecommunications systems). Given the high volume of transactions that may occur at a financial institution, errors could be repeated or compounded before they are discovered and remedied. In addition, some of our transactions are not fully automated, which may further increase the risk that human error or employee tampering will result in losses that may be difficult to detect quickly or at all. Losses from fraud by employees or outsiders, unauthorized transactions by employees and other operational errors might adversely affect Banco Hipotecario’s reputation, business, the results of operations and financial condition.
Risks Relating to the GDSs and the Common Shares
Shares eligible for sale could adversely affect the price of our common shares and GDSs.
The market prices of our common shares and GDS could decline as a result of sales by our existing shareholders of common shares or GDSs in the market, or the perception that these sales could occur. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The GDSs are freely transferable under U.S. securities laws, including common shares sold to our affiliates. Cresud, which as of June 30, 2023, owned approximately 56.0% (without considering treasury shares) of our common shares (or approximately 454,612,016 common shares which may be exchanged for an aggregate of 45,461,201 GDSs), is free to dispose of any or all of its common shares or GDSs at any time in its discretion. Sales of a large number of our common shares and/or GDSs would likely have an adverse effect on the market price of our common shares and GDSs.
If we issue additional equity securities in the future, you may suffer dilution, and trading prices for our equity securities may decline.
We may issue additional shares of our common stock for financing future acquisitions or new projects or for other general corporate purposes. Any such issuance could result in a dilution of your ownership stake and/or the perception of any such issuances could have an adverse impact on the market price of the GDSs.
We are subject to certain different corporate disclosure requirements and accounting standards than domestic issuers of listed securities in the United States
There is less publicly available information about the issuers of securities listed on the Argentine stock exchanges than information publicly available about domestic issuers of listed securities in the United States and certain other countries.
Although the GDSs are listed on the NYSE, as a foreign private issuer we are able to rely on home country governance requirements rather than relying on the NYSE corporate governance requirements. See “Item 16.G. Corporate Governance—Compliance with NYSE listing standards on corporate governance.” Additionally, as a foreign private issuer, we are exempt from certain rules under the Exchange Act including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. In addition, foreign private issuers are not required to file their Annual Report on Form 20-F until four months after the end of each fiscal year, while United States domestic issuers that are accelerated filers are required to file their Annual Report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, you may not have the same protections afforded to shareholders companies that are not foreign private issuers.
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Investors may not be able to effect service of process within the United States, limiting their recovery of any foreign judgment.
We are a publicly held corporation (sociedad anónima) organized under the laws of Argentina. Most of our directors and our senior managers are located in Argentina. As a result, it may not be possible for investors to effect service of process within the United States upon us or such persons or to enforce against us or them in United States courts judgments obtained in such courts predicated upon the civil liability provisions of the United States federal securities laws. We have been advised by our Argentine counsel, Zang, Bergel & Viñes, that there is doubt whether the Argentine courts will enforce, to the same extent and in as timely a manner as a United States or foreign court, an action predicated solely upon the civil liability provisions of the United States federal securities laws or other foreign regulations brought against such persons or against us.
If we are considered to be a passive foreign investment company for United States federal income tax purposes, United States holders of our common shares or GDSs would suffer negative consequences.
Based on the past and projected composition of our income and assets and the valuation of our assets, including goodwill, we do not believe we were a passive foreign investment company (a “PFIC”)for United States federal income tax purposes for the taxable year ending June 30, 2023, and do not currently expect to become a PFIC, although there can be no assurance in this regard. The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may be a PFIC in the current or any future taxable year due to changes in our asset or income composition or if our projections are not accurate. The volatility and instability of Argentina’s economic and financial system may substantially affect the composition of our income and assets and the accuracy of our projections. In addition, this determination is based on the interpretation of certain United States Treasury regulations relating to rental income, which regulations are potentially subject to different interpretations. If we become a PFIC, U.S. Holders (as defined in “Item 10. Additional Information—F. Taxation—United States Taxation”) of our common shares or GDSs will be subject to certain United States federal income tax rules that have negative consequences for them such as additional tax and an interest charge upon certain distributions by us or upon a sale or other disposition of our common shares or GDSs at a gain, as well as reporting requirements. See “Item 10. F—Additional Information—F. Taxation—United States Taxation—Passive Foreign Investment Company” for a more detailed discussion of the consequences if we are deemed a PFIC. You should consult your own tax advisors regarding the application of the PFIC rules to your particular circumstances.
Changes in Argentine tax laws may affect the tax treatment of our common shares or GDSs.
Law No. 26,893, which amended Law No. 20,628 (the “Income Tax Law”), was enacted on September 12, 2013, and published in the Official Gazette on September 23, 2013. According to the amendments, the distribution of dividends by an Argentine corporation was subject to income tax at a rate of 10.0%, unless such dividends were distributed to Argentine corporate entities.
The dividend tax was repealed by Law No. 27,260, published in the Official Gazette on July 22, 2016, and consequently no income tax withholding was applicable on the distribution of dividends in respect of both Argentine and non-Argentine resident shareholders, except when dividends distributed were greater than the income determined according to the application of the Income Tax Law, accumulated at the fiscal year immediately preceding the year in which the distribution is made. In such case, the excess was subject to a rate of 35%, for both Argentine and non-Argentine resident shareholders. This treatment still applies to dividends to be distributed at any time out of retained earnings accumulated until the end of the last fiscal year starting before January 1, 2018.
However, pursuant to Law No. 27,430, as amended by Law No. 27,541 and Law No. 27,630, dividends distributed out of earnings accrued in fiscal years starting on or after January 1, 2018, and other profits paid in cash or in kind —except for stock dividends or quota dividends— by companies and other entities incorporated in Argentina referred to in the Income Tax Law, to Argentine resident individuals, resident undivided estates and foreign beneficiaries are subject to income tax at a 7% rate on profits accrued in fiscal years starting on January 1, 2018 and onwards. If dividends are distributed to Argentine corporate taxpayers (in general, entities organized or incorporated under Argentine law, certain traders and intermediaries, local branches of foreign entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina), no dividend tax would apply.
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In addition, capital gains originated from the disposal of shares and other securities, including securities representing shares and deposit certificates, are subject to capital gains tax. Law No. 27,430 effective as of January 1, 2018, provides that capital gains obtained by Argentine resident individuals from the disposal of shares and GDSs are exempt from capital gains tax in the following cases: (i) when the shares are placed through a public offering authorized by the CNV, (ii) when the shares are traded in stock markets authorized by the CNV, under segments that ensure priority of price-time and interference of offers, and/or (iii) when the sale, exchange or other disposition of shares is made through an initial public offering and/or exchange of shares authorized by the CNV.
Such law also provides that the capital gains tax applicable to non-residents for transactions entered into until December 30, 2017 is still due, although no taxes will be claimed to non-residents with respect to past sales of Argentine shares or other securities traded in the CNV’s authorized markets (such as GDSs) as long as the cause of the non-payment was the absence of regulations stating the mechanism of tax collection at the time the transaction was closed. The AFIP’s General Resolution No. 4,227, which came into effect on April 26, 2018, stipulates the procedures through which the income tax should be paid to the AFIP. The payment of capital gains tax applicable for transactions entered into before December 30, 2017 was due on June 11, 2018.
In addition, Decree No. 824/2019, published in the Official Gazette on December 6, 2019 and which introduced the new consolidated text of the Income Tax Law, maintains the 15% capital gains tax (calculated on the actual net gain or a presumed net gain equal to 90% of the sale price) on the disposal of shares or securities by non-residents. However, non-residents are exempt from the capital gains tax on gains obtained from the sale of (a) Argentine shares in the following cases: (i) when the shares are placed through a public offering authorized by the CNV, (ii) when the shares were traded in stock markets authorized by the CNV, under segments that ensure priority of price-time and interference of offers, and/or (iii) when the sale, exchange or other disposition of shares is made through an initial public offering and/or exchange of shares authorized by the CNV; and (b) depositary shares or depositary receipts issued abroad, when the underlying securities are shares (i) issued by Argentine companies, and (ii) with authorization of public offering. The exemptions will only apply to the extent the foreign beneficiaries reside in, and the funds used for the investment proceed from jurisdictions not considered as not cooperating for purposes of fiscal transparency.
In case the exemption is not applicable and, to the extent foreign beneficiaries neither reside in, nor the funds arise from, jurisdictions considered as not cooperating for purposes of fiscal transparency, the gain realized from the disposition of shares would be subject to Argentine income tax at a 13.5% effective rate on the gross price. In case such foreign beneficiaries reside in, or the funds arise from, jurisdictions considered as not cooperating for purposes of fiscal transparency, a 31.5% effective rate on the gross price should apply.
Therefore, holders of our common shares, including in the form of GDSs, are encouraged to consult their tax advisors as to the particular Argentine income tax consequences under their specific facts.
Holders of the GDS may be unable to exercise voting rights with respect to the common shares underlying their GDSs.
As a holder of GDS, we will not treat you as one of our shareholders and you will not have shareholder rights. The depositary will be the holder of the common shares underlying your GDSs and holders may exercise voting rights with respect to the common shares represented by the GDSs only in accordance with the deposit agreement relating to the GDSs. There are no provisions under Argentine law or under our bylaws that limit the exercise by GDS holders of their voting rights through the depositary with respect to the underlying common shares. However, there are practical limitations on the ability of GDS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our common shares will receive notice of shareholders’ meetings through publication of a notice in the CNV’s website, an Official Gazette in Argentina, an Argentine newspaper of general circulation and the bulletin of BASE, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. GDS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide the notice to the GDS Depositary. If we ask the GDS Depositary to do so, the GDS Depositary will mail to holders of GDSs the notice of the meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, GDS holders must then instruct the GDS Depositary as to voting the common shares represented by their GDSs. Under the deposit agreement, the GDS Depositary is not required to carry out any voting instructions unless it receives a legal opinion from us that the matters to be voted on would not violate our by-laws or Argentine law. We are not required to instruct our legal counsel to give that opinion. Due to these procedural steps involving the GDS Depositary, the process for exercising voting rights may take longer for GDS holders than for holders of common shares and common shares represented by GDSs may not be voted as you desire.
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We are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets.
In addition to the trading of our GDSs in the United States, our common shares are traded in Argentina. Trading the GDSs or our common shares on these markets will take place in different currencies (U.S. dollars on the NYSE and Pesos on ByMA), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Argentina). The trading prices of these securities on these two markets may differ due to these and other factors. Any decrease in the price of our common shares on ByMA could cause a decrease in the trading price of the GDSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the GDSs available for trading on the other exchange. In addition, holders of GDSs will not be immediately able to surrender their GDSs and withdraw the underlying common shares for trading on the other market without effecting necessary procedures with the GDS Depositary. This could result in time delays and additional cost for holders of GDSs.
Under Argentine law, shareholder rights may be fewer or less well defined than in other jurisdictions.
Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the States of Delaware or New York, or in other jurisdictions outside Argentina. In addition, your rights or the rights of holders of our common shares to protect your or their interests in connection with actions by our Board of Directors may be fewer and less well defined under Argentine corporate law than under the laws of those other jurisdictions. Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets are not as highly regulated or supervised as the United States securities markets or markets in some other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well defined and enforced in Argentina than in the United States, putting holders of our common shares and GDSs at a potential disadvantage.
Restrictions on the movement of capital out of Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the common shares underlying the GDSs.
Over the last twenty years in Argentina exchange controls and transfer restrictions have been periodically imposed, substantially limiting the ability of companies to retain foreign currency or make payments abroad. Since 2019, new regulations have significantly curtailed access to the foreign exchange market by individuals and private sector entities.
In this regard, the Argentine Government imposed restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Argentina. Argentine law currently permits the Argentine Government to impose these kind of restrictions temporarily in circumstances where a serious imbalance develops in Argentina’s balance of payments or where there are reasons to foresee such an imbalance. We cannot assure you that GDS Depositary for the GDSs may hold the Pesos it cannot convert for the account of the GDS holders who have not been paid. No assurance can be given that payments to non-resident investors will not suffer delays under the current foreign exchange market regulations or be subject to any additional restrictions, such as a different exchange rate to convert the Pesos into U.S dollars, that may be higher than the current official exchange rate. In this regard, we suggest consulting with the corresponding custodian banks about the exchange regulations applicable. See “Item 10. Additional Information—D Exchange Controls.”
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The protections afforded to minority shareholders in Argentina are different from and more limited than those in the United States and may be more difficult to enforce.
Under Argentine law, the protections afforded to minority shareholders are different from, and much mo