SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'B' rating to OAS Investments GmbH's Issuer Default Rating (IDR) and a 'B'/'RR4' rating to its first proposed issuance of USD300 million to USD500 million in senior notes due 2019.
The notes are unconditionally guaranteed by OAS S.A. (OAS), Construtora OAS Ltda (Construtora OAS) and OAS Investimentos (OASI). The majority of this new issuance proceeds will mostly be used to refinance indebtedness.
Fitch currently rates OAS Group as follows:
--Long-Term Foreign Currency IDR 'B';
--Long-Term Local Currency IDR 'B';
--Long-Term National Rating 'BBB(bra)';
Construtora OAS Ltda. (Construtora OAS):
--Long-term Foreign Currency IDR 'B';
--Long-term Local Currency IDR 'B';
--Long-term National Rating 'BBB(bra)'.
OAS Empreendimentos S.A. (OAS Empreendimentos):
--Long-term National Rating 'BB+(bra)' (BB plus (bra)).
The Outlook for the corporate ratings is Stable.
The ratings reflect the expertise and the position of the OAS group as one of the five largest contractors in the domestic civil construction sector by revenues, and its long track record in engineering and heavy construction in Brazil. The ratings also incorporate increased consolidated leverage, combined with operating margins lower than the industry average. The ratings also factor the backlog concentration in nine large works; business inherent volatility; the challenges of the recent surge of the homebuilding company of the group; and the increased financing needs to support the group's business growth strategy.
Fitch expects the maintenance of OAS's adequate cash position to support the growth phase of its business segments and the short term debt. The agency also expects the maintenance of current leverage position even under some pressure of debt. A retraction in group's liquidity position will negatively pressure the ratings.
Recovering operating margins on a consistent basis has continued to be a challenge for the OAS Group. Fitch also expects that the company will manage the relevant new projects (Of OAS and OAS Investments S.A. (OAS Investments), without substantially impacting its capital structure and liquidity position. The company will have to control costs in the heavy construction sector, increase the contribution of results from infrastructure segment and recover the operating results of real estate construction in 2012 and 2013.
The Construtora OAS is the main operating company and group's cash generator. The Construtora OAS has the same ratings as the controller OAS, since it is the main operating company of group OAS. The company is 100% controlled by and operationally integrated to OAS, besides being the guarantor of 40% of the consolidated corporate debt, net of 'Project Finance' financings. During the last 12 months ended on June 30, 2012, Construtora OAS represented 80% of the group's consolidated revenue and 20% of EBITDA. Historically its contribution for group's consolidated EBITDA is around 50% and 55%.
Cancellation and Interruption of Works Weakens Operating Performance
The pace of operating margins recovery shown in 2011 was interrupted by the standstill of two relevant works of OAS's international portfolio. The consolidated impact of the interruption of these two works is estimated around BRL200 million in the half-yearly revenues, besides the impacts of demobilization costs. One of these works should generate a negative impact in the 2012 third quarter revenue, estimated at around BRL45 million. On the other hand, the startup of relevant works, such as Guarulhos Airport, Parque Via Rimac and Canta Lima should positively contribute to increment the revenue stream of Construtora OAS in coming years.
During the last 12 months ended on June 30, 2012, OAS recorded consolidated adjusted EBITDA of BRL221 million, as per Fitch's criteria, and EBITDA margin of 4.1%, as compared to BRL350 million and 7.6% in 2011. Fitch expects Construtora OAS to achieve partial recovery of its operating margin in the second half of 2012 and returns in 2013 to the margin levels recorded in 2011, thus contributing for the recovery of group OAS consolidated operating profitability.
Historically Strong Liquidity
The group's liquidity is robust. Its relevant cash position has been an important factor for sustaining the group's ratings, and limiting the risks associated to the weak operating performance during the first half of the year. Fitch expects OAS to preserve satisfactory liquidity cash reserve to support the growth phase of its backlog and group's working capital needs and keep advancing in its strategy of lengthening its consolidated debt profile.
The expansion of new businesses of the group resulted in a significant increase on consolidated debt. On June 30, 2012, OAS reported consolidated position of cash and marketable securities of BRL1.869 million and total debt of BRL4.869 million, compared with BRL1.465 million and BRL3.753 million, respectively, at year-end 2011. Cash reserves were sufficient to cover 146% of the short-term consolidated debt of BRL1.282 million. The group contracted financing for the relevant infrastructure concession segment. From the total consolidated debt, BRL1.4 billion was related to projects that have financing facilities structured in the modality of 'Project Finance'.
Leverage Should Remain High
The group's aggressive business expansion in heavy construction and the investments in infrastructure concessions and in real estate have resulted in a significant increase of OAS' consolidated debt. The deterioration in consolidated operating margins has also contributed to leverage worsening in June 2012. OAS net leverage, measured by net debt/EBITDA ratio was of 13.6x at the end of June 2012, against 6.5x at year-end 2011 and 8.1x at year-end 2010.
The adjusted leverage excluding the debt and the cash generation from the projects was of total debt/EBITDA of 10.4x and net debt/EBITDA of 4.7x on a net basis, if excluding the non-recurring losses reported in the period. For the next three years it is not expected relevant flow of dividends from these projects that could benefit group's adjusted EBITDA.
Fitch expects that during 2013 the adjusted leverage should remain at same level of June 2012, excluding the non-recurring adjustments.
Participation in Invepar Should Not Pressure OAS Cash Flow
In March 2012, OAS increased its participation in Investimentos e Participacoes em Infraestrutura S.A. (Invepar) to 25% of the total capital. Fitch's believes OAS cash flow should not be pressured by Invepar investments. However, any potential new debts by Invepar to face the high investments made in the consortium for Guarulhos Airport (SP) should generate some pressure on OAS leverage, on a consolidated basis, including debt related to Project Finance, since the group consolidates 25% of Invepar.
Robust Backlog Ensures Growth & Expansion of Concessions
During the first semester of 2012 there was a slight contraction in OAS work backlog. In June, the total backlog was BRL17.8 billion and reflected the cancellation of relevant work in Bolivia estimated at BRL598 million. The current work backlog and the positive scenario for the infrastructure sector should ensure the group's growth in the next periods, both in its activities as subcontractor and in the concession area.
Key Rating Drivers
Future developments that may, individually or collectively, lead to a negative rating action include:
--Non-recovery or a new reduction of operating margins and credit metrics due to downturns in the heavy construction activities or increase in execution costs. Such scenarios would further pressure margins and reduce capacity to generate operating cash.
--A weaker cash position and higher leverage could also result in a rating downgrade.
Future developments that may, individually or collectively, lead to a positive rating action include:
--A consistent evolution of the consolidated operating results, combined with maintenance of strong liquidity position, and lengthened schedule of debt amortization.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria
Liliana Yabiku, +55-11-4504-2208
Jose Romero, +55-11-4504-2603
Ricardo Carvalho, +55-21-4503-2600
Elizabeth Fogerty, +1-212-908-0526
Source: Fitch Ratings