SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has upgraded the ratings of the OAS group as follows:
OAS S.A. (OAS):
--Long-Term Foreign Currency Issuer Default Ratings (IDR) to 'B+' from 'B'';
--Long-Term Local Currency IDR to 'B+' from 'B';
--Long-Term National Rating to 'BBB+(bra)' from 'BBB(bra)';
--2nd Debenture Issue, BRL200 million, maturity in June 2013, Long-term National Rating to 'BBB+(bra)' from 'BBB(bra)';
--3rd Debenture Issue, BRL300 million, maturity in December 2016, Long-term National Rating to 'BBB+(bra)' from 'BBB(bra)';
--4th Debenture Issue, BRL250 million, maturity in January 2027, Long-term National Rating to 'BBB+(bra)' from 'BBB(bra)';
--5th Debenture Issue, BRL300 million, maturity in May 2015, Long-term National Rating to 'BBB+(bra) from 'BBB(bra)'.
Construtora OAS S.A. (Construtora OAS):
--Long-term Foreign Currency IDR to 'B+' from 'B';
--Long-term Local Currency IDR to 'B+' from 'B';
--Long-term National Rating to 'BBB+(bra)' from 'BBB(bra)'.
OAS Investments GmbH:
--Long-term Foreign Currency IDR to 'B+' from 'B';
--Senior Notes Issue, USD500 million, maturity October 2019 - to 'B+' /''RR4' from 'B'/'RR4'
OAS Empreendimentos S.A. (OAS Empreendimentos)
--Long Term National Rating to 'BBB-(bra)' from 'BB+(bra)';
--2nd Debenture Issue, BRL60 million, maturity in July 2014, guaranteed by OAS S.A., Long-term National Rating to BBB+(bra) from BBB(bra).
Fitch also assigned 'B+'/'RR4' rating to OAS Finance Ltd's proposed Perpetual Bonds issuance of US200 million to USD300 million. The Bonds are unconditionally guaranteed by OAS,Construtora OAS and OAS Investimentos (OASI). The majority of the proceeds will be used to finance CAPEX investments.
The Outlook for the corporate ratings is Stable.
KEY RATING DRIVERS
The upgrade of the ratings of OAS group companies reflects Construtora OAS' improved credit metrics, the group's heavy construction company and the main cash generator, and the expectation that the company will continue to report improved results, following the spin-off of the activities of the investments segment. OAS' stronger liquidity and extended debt amortization profile were also factored in the analysis. Fitch expects OAS to preserve conservative cash cushion to support the group's growth strategy and debt maturities.
The rating action also considers the OAS's capacity to deleverage in the next 3 years faster than previously expected by Fitch, as EBITDA generation should grow especially due to the startup of activities of subsidiaries of OASI that are still in pre-operational phase. Fitch considers the group's consolidated leverage high due to the expansion in the infrastructure concession segment, but considers 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.
The ratings also incorporate the strong 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 factor the backlog concentration in some large works; the volatility inherent to the construction sector; and the support required for the homebuilding company of the group.
Construtora OAS has the same ratings as the 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 46% of the consolidated corporate debt, net of project finance lines. In 2012, OAS's engineering division represented 72% of the group's consolidated gross revenues.
Construtora OAS Improved Credit Metrics
Construtora OAS' credit metrics should continue to improve, as the group finalized the spin-off of OAS Investimentos's assets in December 2012. The investments and expenses of these projects under the Construtora OAS's structure negatively impacted the company's margins and leverage ratios during the last periods. In 2012, Construtora OAS generated EBITDA of BRL306 million and represented 93% of the group's consolidated operating EBITDA as per Fitch's criteria. Fitch expects Construtora OAS to increase its EBITDA margin to around 8% from 2013 onwards, compared to 5.6% reported in 2012.
Stronger Liquidity
OAS group's liquidity improved. Fitch expects OAS to preserve strong cash reserves to support the backlog's growth and the group's working capital needs, and to continue with its strategy of lengthening the consolidated debt amortization profile. As of Dec. 31, 2012, consolidated cash and marketable securities were BRL3.179 billion and total debt, BRL6.749 billion. These numbers compare with BRL1.465 billion and BRL3.753 billion, respectively, at year-end 2011.
OAS has an extended debt amortization profile, especially excluding limited-recourse debt related to project financing. Cash reserves were sufficient to cover 217% of the short-term consolidated debt of BRL1.462 billion and 127% of BRL2.495 billion of debt due up to December 2014. The expansion of the infrastructure concession segment of the group resulted in a significant increase in total debt. From the total consolidated debt, about BRL2.1 billion are limited -recourse debt, related to investments funded with project finance lines, which reduces the pressure on OAS consolidated liquidity.
Leverage Should Gradually Reduce
OAS' leverage is high and is expected to gradually reduce in the next 3 years. The group's aggressive business expansion in heavy construction and the investments in infrastructure concessions and in homebuilding have resulted in a significant increase of OAS' consolidated debt. In 2012, net leverage adjusted by limited-recourse debt and restricted cash was 6,7x according to Fitch criteria, and should gradually decline, more intensively after 2015 following the startup of great part of current projects in pre-operational phase. OASI's additional potential EBITDA generation above BRL400 million by 2015, combined with lower expected equity commitments for the current portfolio of about BRL500 million during 2013-2015, compared to high equity injections of BRL1.4 billion between 2010 and 2012, should contribute to reduce the group's leverage.
Strong Backlog Supports Growth
Construtora OAS' backlog increased to BRL18.2 billion at end 2012 from BRL17.9 billion in June 2012, despite some work cancellation and the delay for signing new contracts. The backlog is, however, somewhat concentrated with six projects representing 40% of the total. The current 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.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--Non-recovery or a 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 leverage and evolution of operational cash flow generation, 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. 08, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 08, 2011);
--'National Ratings Criteria' (Jan. 19, 2011)
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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.