Fitch Ratings has affirmed Obrascon Huarte Lain's (OHL) Long-term Issuer Default (IDR) and senior unsecured ratings at 'BB-'. Fitch has also affirmed OHL's Short-term IDR at 'B'. The Rating Outlook is Stable.
Fitch's affirmation reflects OHL's ability to keep net recourse leverage under control following two recent asset disposals, which will largely be used to repay gross corporate debt (via an early redemption of the 2015 bond). Fitch notes OHL's management's strong financial commitment to maintain net debt to EBITDA on a recourse basis below 3x. Fitch also takes a positive view that the latter has been achieved through asset disposals rather than by re-leveraging the non-recourse business and transferring the proceeds to the recourse perimeter.
Fitch adjusts leverage calculations for OHL to reflect the non-recourse nature of concessions by excluding related EBITDA and non-recourse debt but including sustainable dividends. Fitch calculated recourse leverage includes off-balance sheet receivables factoring (around EUR100m in FY14) and assumes that cash held in joint-ventures (EUR140m) is not readily available for debt repayment.
KEY RATING DRIVERS
Supportive Recent Disposals
OHL has received a total amount of EUR936m as a result of the two asset disposals. A significant part of the cash received will be used to repay back by the end of December 2014 the 7.375% bond falling due in April 2015 (EUR523.8m). The rest of the proceeds have largely been used to prepay around EUR277m of the EUR1.2bn margin call loan (non-recourse debt) at OHL Concesiones. Fitch positively assesses the company's strong commitment to keep net recourse leverage below 3x as shown with the below transactions.
Following these transactions Fitch now expects adjusted net recourse leverage (net debt plus factoring to EBITDA) to be around 3.3x in FY14. Fitch highlights that without these transactions, OHL's net leverage would have been around 5.4x (compared to Fitch's negative trigger of net leverage of 4x for a downgrade).
Decreasing Headroom
Fitch highlights that OHL's operating performance is suffering in 2014 with construction EBITDA falling around 9.4% on a like-for-like basis in 9M2014 with a large number of international projects still in ramp-up stage. Our current expectations for 2015 include a low single digit EBITDA increase mainly driven by OHL's international activity and adjusted net leverage around 3.5x in 2015 and 2016 (compared to our previous expectations of around 3x).
Working Capital Drains Cash
OHL's working capital outflows during the year have been significant (EUR391m in the first nine months of 2014).We highlight that OHL is experiencing some operational problems and late payments regarding some international projects such as Qatar, Oran and Algeria. Regarding these last two contracts, the company is claiming for a total EUR288m mainly due to contractual disputes. OHL has announced its intention to launch a new business plan during Q115 which Fitch will closely monitor.
Fitch highlights that should OHL experience a protracted working capital outflow in 2015 (similar to the one seen in 2014), the company would probably need to focus again on asset disposals to shield their financial profile. Fitch will monitor this situation as this would provide further evidence that the company is not being able to solve the late payments on significant international contracts which could be negative for the ratings.
Attractive Non-Recourse Business
The stakes in Abertis (13.9%) and OHL Mexico (56.1%) are the main concessions investments, ring-fenced from the rest of the group and self-funded with an overall combined loan to value (LTV) of around 40%. Compared to its peers, we assess OHL's concession profile as stronger given its equity value and liquidity (as shown with the recent transactions).
Complex Debt Structure
OHL's business is split between construction activities financed with unsecured facilities (recourse), its ring-fenced concession activities (non-recourse) funded with senior project finance loans and junior concession holding company debt collateralised on the underlying equity value of its Abertis and OHL Mexico stakes.
Internationally Diversified
OHL has been very proactive in diversifying its business outside Spain and other weak developed markets. As of September 2014, OHL's backlog was around EUR8.5bn providing around three years of earnings visibility with around 81% of international projects. However, downside risks relate to the execution risk of the order book, which has an element of concentration risk when compared to OHL's peers. Construction activity in Spain represented around 18% of total revenues in the first nine months of the year.
Fitch notes that the increase of international activity of OHL has improved its business profile but had also a negative impact on working capital as stated above. The unwinding of working capital suffered by the issuer since 2009 is a consequence of the lower weight of OHL's national business with a significant decrease on the use of factoring and reduced amount of advanced payments received.
Relatively High Leverage
With recourse cash flow stemming from the relatively higher risk construction industry and susceptible to operational risks such as cyclical demand and project delays, 3.0x leverage is deemed comparatively high. OHL has considerable equity value on its balance sheet from concession assets, although senior unsecured bondholders remain subordinated to non-recourse debt and potentially exposed to inherent equity value cyclicality.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
--Fitch's adjusted recourse net leverage around 2.0x and EBITDA interest cover above 3.0x on a sustained basis;
--A material increase in recurrent and stable up-streamed dividends from the concession business without a re-leveraging of assets.
Negative: Future developments that could lead to negative rating action include:
--Continued deterioration of the company's working capital position on a recourse basis;
--Fitch's adjusted recourse net leverage above 4.0x and EBITDA interest cover below 2.0x on a sustained basis;
--A LTV higher than 50% at the OHL Concesiones HoldCo level (collateralised debt/stakes in OHL Mexico and Abertis) to the extent that this may destabilise the standalone financial profile and lead to material margin calls.
LIQUIDITY AND DEBT STRUCTURE
OHL's recourse liquidity profile is healthy and should be sufficient to cover the company's financial needs for the next 24 months. As of September 2014, OHL's liquidity was around EUR1.2bn including cash and equivalents of around EUR338m (excluding EUR140m of cash held in joint ventures) plus around EUR879m of available and committed credit facilities. Fitch assumes that OHL will repay back the 2015 bond (EUR524m) as recently announced with the proceeds received by the two asset disposals explained above. Given this, OHL's next bond maturity is in 2018.
Fitch affirms the following:
Obrascon Huarte Lain, S.A. (OHL)
--Long-term IDR at 'BB-'; Outlook Stable;
--Senior unsecured rating at 'BB-';
--Short term rating at 'B'.
Additional information is available at 'www.fitchratings.com'.
Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, is available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=951116
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