SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has assigned ratings to OAS Engenharia e Participacoes S.A. (OAS Participacoes) and its wholly owned subsidiary Construtora OAS Ltda (Construtora OAS), as follows:
OAS Participacoes
--Foreign and Local Currency Issuer Default Ratings (IDRs) 'B';
--Long-term National Rating 'BBB(bra)'.
Construtora OAS
--Foreign and Local Currency IDRs 'B+';
--Long-term National Rating 'BBB+(bra)'.
In addition, Fitch has affirmed the following ratings:
OAS Empreendimentos S.A. (OAS Empreendimentos)
--Long-term National Rating 'BB+(bra)'
--Long-term National Rating of the BRL60 million second debenture issuance due in 2014, guaranteed by OAS Participacoes, 'BBB(bra)'.
The Rating Outlook for all the corporate ratings is Stable.
The ratings reflect the size, expertise and the position of the OAS group (described below) 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 operational margins lower than the industry average; the exposure of its main business to the public sector; 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. The current high leverage is above historical parameters and is partially mitigated by the satisfactory liquidity position and debt repayment schedule. The expectation that the expansion of the group's new businesses, which has led to increased consolidated debt, may achieve a greater contribution to the consolidated cash generation also supports leverage reduction.
Conservative Financial Profile of Construtora OAS:
On a standalone basis, Construtora OAS presents a conservative financial profile, supported by low leverage and adequate liquidity. Construtora OAS operates in the heavy construction business and is the OAS group's main operating and cash generating company. Construtora OAS is fully owned by OAS Participacoes, the group's holding company, which also consolidates the group's equity investments in public concessions and infrastructure, through Invepar, and the operations in the homebuilding sector, through OAS Empreendimentos. The contractor business represented 90% of the OAS group consolidated revenue and 73% of the consolidated EBITDA generation in the last 12 months (LTM) ended June 2010.
Given the subordinated nature of its debt, OAS Participacoes is rated one-notch lower than Construtora OAS. OAS Participacoes' indebtedness is high and is dependent on the cash generation and dividend payments from its subsidiaries to meet debt obligations. The holding company also provides guarantees to its subsidiaries, mainly for OAS Empreendimentos.
High Leverage to Decrease in 2011:
On a consolidated basis, OAS Participacoes' total debt/EBITDA ratio increased to 6.4 times (x) in the LTM ended June 2010, from 6.2x in 2009 and 4.0x in 2008. Net debt/EBITDA also increased to 4.5x, from 2.8x and 2.0x over the same periods, reflecting higher debt to support the recent expansion of the group in its contractor, infrastructure and homebuilding businesses, as well as lower EBITDA generation. As of June 30, 2010, total debt was BRL1.7 billion, compared to BRL724 million at the end of 2008. As a characteristic of the contractor business, Construtora OAS' leverage is low. Total debt/EBITDA ratio was 2.0x for the LTM ended June 2010, while net debt/EBITDA was 1.1x. Fitch expects OAS group to conservatively manage its debt, and leverage should benefit from the expected recovery of Construtora OAS' operational margins. OAS Participacoes consolidated total debt/EBITDA ratio should remain high at the end of 2010, at about 8.0x, and is expected to gradually fall to approximately 5.5x during 2011.
Moderate Refinancing Risk
Fitch expects OAS group to continue to extend its consolidated debt maturity profile and to conservatively manage its liquidity position. Since June 2010, OAS group has taken several measures to extend its debt maturity profile, which resulted in a more adequate capital structure, and strengthened liquidity to support the growth of its activities. On Nov. 10, 2010, OAS Participacoes concluded the issuance of a BRL400 million debenture, due in eight years. The proceeds will be used for debt repayment and extending maturities (BRL220 million), while the remaining BRL180 million will cover working capital needs. Following this transaction, debt refinancing pressure was reduced, as per the groups' pro forma consolidated cash position, which improved to near BRL1 billion, and was equivalent to 173% of short-term debt maturities at end September 2010 and 82% of debt maturities coming due by the end of 2012. At end June 2010, OAS Participacoes's consolidated cash and marketable securities of BRL493 million covered 105% of its short-term debt of BRL470 million.
EBITDA Margins Expected to Recover
The OAS group has the challenge to strengthen its operating margins and cash generation capacity in 2011. Fitch expects both OAS Participacoes and Construtora OAS to recover their EBITDA margins, returning to levels near those reported in 2007-2008, to around 7.0% in 2011 and between 7.5% and 8.0% in 2012. The reduction of higher costs in the course of the project developments and the improved operational margins of OAS Empreendimentos should support this recovery.
OAS group has consistently grown its consolidated revenues, to BRL4.5 billion in the LTM ended June 2010, from BRL1.6 billion in 2007. The significant increase in Construtora OAS' activities supported this growth. EBITDA also increased over the same period, up 126%, to BRL260 million; however, EBITDA margin was down to 5.8% in the LTM ended June 2010, compared to 7.4% in 2007, and was below the industry average. The rapid increase in backlog has required the acceleration of investments and higher costs for the initial development of projects, which pressured EBITDA margins and reduced the generation of funds from operations (FFO) to BRL210 million in the LTM ended June 2010 (BRL480 million in 2009). After BRL413 million of cash outflows for working capital, cash flow from operations (CFO) was a negative BRL202 million in the LTM ended June 2010. Fitch expects a positive CFO, above BRL200 million in 2011 and 2012, sufficient for generation of a positive free cash flow (FCF) after covering capex needs.
Strong Backlog Sustains Business Growth
Construtora OAS ranked as the fifth largest contractor in Brazil in terms of revenues in 2009. The total backlog has grown substantially to BRL12 billion in September 2010, from BRL8.5 billion at end 2009 and BRL6.4 billion in 2008. About BRL2.3 billion of total backlog was related to projects abroad. Fitch believes that the consistent increase of Construtora OAS' backlog should sustain the group's business growth in the medium-to-long term and expects that the company will be successful in its expansion strategy and diversification of works by sector, and internationally, thus reducing its exposure to the public sector in Brazil.
OAS Empreendimentos Dependent on Parent Support
OAS Empreendimentos, which operates in real estate development and construction, is fully owned by OAS Participacoes. Its ratings reflect its full integration with the structure and business strategy of the OAS group as well as its high dependence on the group's support for the development and growth of its operations. In the LTM ended June, OAS Empreendimentos achieved BRL352 million of net revenues, compared to BRL258 million for the whole of 2009, with an increase in EBITDA margin to 7.0% (5.5% in 2009), still lower than the industry average, and high net leverage ratio of 9.4x (7.9x in 2009) reflecting the taking of adequate financing for real estate development in Brazil. Of its total BRL504 million debt at end June 2010, BRL411 million (or 81%) was represented by BRL107 million from the Housing Financing System (SFH) and BRL304 million from a five-year debenture, guaranteed by OAS Participacoes, subscribed to by the Brazilian Employees Severance Indemnity Fund (FGTS), with repayment based on delivery of receivables of ready units. Fitch expects further improvements in the company's margins which will contribute to the reduction in leverage ratios.
Key Rating Drivers:
The ratings could be negatively pressured by a downturn in consolidated performance and operational margins; a downturn in the core heavy construction business (i.e. a reduction in backlog and further reduction in margins; limited access to adequate long-term financing for the homebuilding activity; and participations in infrastructure business draining substantial funds from the group. A rating downgrade could also be driven by lower consolidated cash generation capacity and liquidity, combined with high leverage ratios.
Positive rating actions could be driven by consistent increases in margins of the core heavy construction business, combined with the improvement of performance of the main segments of operation; increasing consolidated cash generation; maintenance of high levels of liquidity; and leverage reduction.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research
--'Parent and Subsidiary Rating Linkage Criteria Report', July 14, 2010;
--'Corporate Rating Methodology', Aug. 13, 2010.
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
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