News Column

Fitch Rates OAS Finance's Proposed Notes 'B+/RR4'

June 25, 2014

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'B+/RR4' rating to OAS Finance Limited'sUSD400 million proposed senior unsecured notes due 2021, which will be unconditionally and irrevocably guaranteed by OAS S.A. (OAS), Construtora OAS S.A. (Construtora OAS), and OAS Investimentos S.A. (OASI). Net proceeds from this issuance will be used to fully prepay existing debt.

Fitch's currently rates OAS and Construtora OAS with foreign and local currency Issuer Default Ratings (IDRs) of 'B+' with a national long-term rating of 'BBB+(bra)'. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

The ratings reflect OAS' high leverage and the necessity of deleveraging its capital structure on a consolidated basis in the next three years. In addition, the group's heavy construction company has a strong financial profile and is the main cash generator for OAS, which supports the group's aggressive growth strategy. OAS' strong liquidity and extended debt amortization profile were also factored in the analysis.

Fitch expects OAS to preserve a conservative cash cushion to support the group's growth strategy and debt maturities. The group's consolidated leverage is high due to its expansion in the infrastructure concession segment. However, Fitch believes that most of these investments are funded through project finance lines (with limited recourse to OAS) and that the companies should generate cash flow in the medium term to meet their obligations. A faster than expected deleveraging would predominately involve a partial divestiture of OASI's projects.

The ratings incorporate the strong expertise and position of the OAS group as one of the five largest contractors in the Brazilian civil construction sector by revenues and its long track record in domestic engineering and heavy construction. OAS is pursuing benefits from the growth potential in the international market, mainly in Latin America and Africa. The ratings also factor in the backlog concentration in some large works; the volatility inherent to the construction sector; the support required for the homebuilding company of the group; and the group's high investments over the next three years on the pre-operational projects underneath OASI.

Construtora OAS has the same ratings as its controller OAS, since it has historically been the group's main operating company and cash generator. The company is 100% controlled by and operationally integrated to OAS, besides being the guarantor of 60% of the consolidated corporate debt, net of project finance lines.

Strong Financial Profile of Construtora OAS

Construtora OAS' credit metrics should continue to improve, as the company's cash flow generation capacity expands. In the last 12 months (LTM) ended in March 31, 2014, Construtora OAS generated EBITDA of BRL660 million and funds of operations of BRL796 million. EBITDA margin was 9.9%, and Fitch expects it to remain around 9.5% in 2014. OAS group's consolidated cash generation capacity remains pressured by the negative EBITDA of OASI and OAS Empreendimentos S.A. (OAS Empreendimentos). In the LTM ended in March 31, 2014, Construtora OAS represented 94% of the group's consolidated EBITDA.

Strong Liquidity

OAS group's liquidity remains strong and supports the ratings. OAS' relevant cash position partially mitigates the group's high leverage, and limits the risks associated with the still weak operating performance of OASI and the volatility inherent in construction activities. Fitch expects OAS to preserve strong cash reserves to support the growth phase of its backlog and investments in the pre-operating companies and to maintain an extended consolidated debt amortization profile.

OAS has an extended debt amortization profile. As of March 31, 2014, consolidated cash and marketable securities were BRL2.8 billion and covered 2x its consolidated short-term debt of BRL1.4 billion. OAS has BRL2.1 billion of debt maturing before 2015. The group's liquidity is further reinforced by a four-year BRL600 million stand-by credit line closed at the end of 2013. Excluding limited-recourse debt related to project financing, cash to short-term debt coverage reduced to 2.0x in March 2014 from 2.9x in December 2013.

Leverage Should Remain High

OAS' leverage is high and expected to gradually reduce during the next three years, as EBITDA generation should grow due to the startup of activities of subsidiaries of OASI that are still in pre-operational phase and growing cash generation from Construtora OAS. The expansion of the infrastructure concessions segment of the group resulted in a significant increase in consolidated total debt. As of March 31, 2014, total consolidated debt was BRL6.9 billion and included about BRL800 million of non-recourse debt, related to investments funded with project finance lines.

In the LTM ended in March 2014, total adjusted leverage, including dividends from non-consolidated subsidiaries was 10.9x, according to Fitch criteria, in line with 2013. At the same time, net adjusted leverage reached 6.8x at the end of the first quarter of 2014, increasing from 5.7x in 2013. Total leverage reaches 9.8x (and 5.7x on a net basis) at the end of March 2014, once project finance lines are excluded. Leverage should gradually decline, becoming more intensive after 2018 following the startup of many projects currently in a pre-operational phase. OASI's potential EBITDA generation, of above BRL400 million by 2018, combined with lower expected equity commitments for the current portfolio, should contribute to reduce the group's leverage.

Divestures of the group's subsidiaries' shares could result in faster than expected deleveraging and should also reduce the group's equity commitments for the next few years. During 2013, the group has successfully sold 39% of OAS Oleo e Gas to FI-FGTS for BRL800 million and 20% of OAS Empreendimentos to Funcef for BRL400 million. Proceeds from the sale of assets should be used to support these companies' operations and to ease pressure on the group's leverage.

Strong Backlog Supports Growth

Construtora OAS' backlog was BRL20 billion at the end of March 2014 and equivalent to four years of operations. Domestic works were responsible for 66% of the backlog, while the public sector contributed with 50%. The company's international projects, mainly in Africa and Latin America, account for 34% of its total backlog and counts on client advanced payment and funding guarantees structure. The backlog is, however, concentrated with the 10 largest projects representing 42% of the total. The current backlog should support the group's growth in the upcoming periods, both in its activities as subcontractor and in the concession area.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Reduction of operating margins and deterioration of credit metrics due to downturns in the heavy construction activities or increase in execution costs. Such scenarios would further pressure margins and reduce the group's capacity to generate operating cash flow.

--A weaker liquidity and higher leverage to support increased investments could also result in a rating downgrade.

Future developments that may, individually or collectively, lead to a positive rating action include:

--A consistent reduction in net leverage adjusted by limited-recourse debt and restricted cash to levels below 4.0x and evolution of operational cash flow generation, combined with maintenance of strong liquidity position, and lengthened schedule of debt amortization.

Fitch currently rates OAS Group as follows:

OAS S.A. (OAS):

--Long-Term Foreign Currency Issuer Default Ratings (IDR) 'B+';

--Long-Term Local Currency IDR 'B+';

--Long-Term National Rating 'BBB+(bra)';

--3rd Debenture Issue, BRL300 million, maturity in December 2016, Long-term National Rating 'BBB+(bra)';

--4th Debenture Issue, BRL250 million, maturity in January 2027, Long-term National Rating 'BBB+(bra)';

--5th Debenture Issue, BRL300 million, maturity in May 2015, Long-term National Rating 'BBB+(bra)'.

Construtora OAS S.A. (Construtora OAS):

--Long-term Foreign Currency IDR 'B+';

--Long-term Local Currency IDR 'B+';

--Long-term National Rating 'BBB+(bra)'.

OAS Investments GmbH:

--Long-term Foreign Currency IDR 'B+';

--Senior Notes Issue, USD850 million, maturity October 2019 'B+'/'RR4'.

OAS Empreendimentos S.A. (OAS Empreendimentos)

--Long Term National Rating 'BBB-(bra)';

--2nd Debenture Issue, BRL60 million, maturity in July 2014, guaranteed by OAS S.A., Long-term National Rating 'BBB+(bra)'.

OAS Finance Ltd.:

--Senior Notes Issue, USD500 million, Perpetual Bonds, unconditionally guaranteed by OAS, Construtora OAS and OASI 'B+'/'RR4'.

The Rating Outlook for the corporate ratings is Stable.

Additional information is available 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'National Scale Ratings Criteria' (Oct. 31, 2013).

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

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836524

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Alexandre Garcia

Associate Director

+55-11-4504-2616

Fitch Ratings Brasil Ltda

Alameda Santos, 700- 7th andar

Sao Paulo - SP -

CEP: 01418-100

or

Secondary Analyst

Gustavo Mueller

Associate Director

+55-21-4503-2632

or

Committee Chairperson

Ricardo Carvalho

Senior Director

+55-21-4503-2627

or

Media Relations

Elizabeth Fogerty, New York, Tel: +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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