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Rating Action:

Moody's assigns definitive Ba2 rating to OHL's senior notes

Global Credit Research - 05 Apr 2011

Madrid, April 05, 2011 -- Moody's Investors Service has today assigned a definitive Ba2 rating and Loss Given Default (LGD) Assessment of LGD3 to the company's EUR425 million worth of senior unsecured notes due in 2018. The outlook on all Obrascon Huarte Lain S.A. (OHL) ratings remains negative.

The final terms of the notes are in line with the drafts reviewed for the provisional ratings assignments.

RATINGS RATIONALE

The proceeds from the bond issuance will be used to refinance OHL's EUR422 million bond due in 2012, thereby improving its debt maturity profile.

The Ba2/LGD3 instrument ratings for the senior notes due in 2018 reflect their senior unsecured status and pari passu ranking with a large majority of OHL's existing and future obligations.

Moody's recognises that OHL has managed to address a number of concerns embedded in the negative outlook, achieving sales of EUR4.9 billion and EBITDA of EUR1 billion for 2010 and significant year-on-year growth in operating margins, EBITDA and EBIT. The main growth driver was the group's concession business, which at EUR1.5 billion sales and EUR747 million EBITDA, reported growth of 32.1% and 71.3% over the prior year. International construction activity became the leading segment in terms of sales, accounting for 37% of the total.

However, OHL's recourse business has weakened and remains under stress in the current economic environment. Domestic construction activity saw a 23% reduction in sales and a 30% drop at the EBITDA level, driven by lower activity levels due to the substantial cuts in government spending, while international construction activity remained flat in terms of revenues, in line with Moody's expectations. Overall, the construction business showed a drop in sales of 10.4%. Going forward, Moody's expects that the decline in domestic construction will be offset by a growing international recourse business, which presented a y-o-y increase of 24% in its order book.

OHL reported higher than expected recourse debt of EUR1.17 billion as at 31 December 2010 up from EUR731 million as at end-2009, resulting in a reported recourse debt/recourse EBITDA ratio of 3.5x. The increase was due to (i) investments in concession companies, (ii) working capital fluctuations due to the reduction in commercial financing as a consequence of the drop of the domestic construction activity and (iii) delayed payments by some international customers. Nevertheless, the company expects to reduce recourse debt in the coming months, through the sale of non-core assets and an improvement in collections. Net reported debt/EBITDA stood at 4.4x, improving from 4.6x reported last as of end-2009.

The Ba2 CFR continues to take into account OHL's (i) portfolio of businesses, through which it balances cyclical construction activities with more predictable concession-generated revenues; and (ii) its gradually decreasing exposure to the Spanish economy, with its involvement in international construction projects and a growing portfolio of Latin American infrastructure assets. At the same time, the rating factors in: (i) the potential for volatility in the cyclical construction industry; and (ii) the challenges OHL faces in controlling its expanding international activities. The outlook remains negative given the significant decline in domestic construction activity during 2010 and higher than expected recourse debt as at December.

Upward pressure on the rating could develop if net consolidated debt/EBITDA (as adjusted by Moody's) falls well below 5x and gross recourse debt/recourse EBITDA (as reported by OHL) moves to below 3.5x on a sustained basis.

The Ba2 rating could come under pressure if OHL's net consolidated debt/EBITDA ratio (as adjusted by Moody's) increases above 5.5x and the company's gross recourse debt/recourse EBITDA ratio (as reported by OHL) rises above 4.0x on a sustained basis.

Moody's previous rating action on OHL was implemented on 10 March 2011, when the rating agency affirmed OHL's CFR and assigned a provisional (P)Ba2 rating to the new senior notes.

The principal methodologies used in this rating were Global Construction Methodology published in November 2010, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Headquartered in Madrid, OHL is one of Spain's leading construction and concession operators, involved in environmental, development and industrial activities. For 2010, OHL reported sales of EUR4.9 billion and EBITDA of EUR1 billion.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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Madrid
Ivan Palacios
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Barbara de Braganza, 2
Madrid 28004
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns definitive Ba2 rating to OHL's senior notes
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