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Rating Action:

Moody's downgrades OHL to Caa1, stable outlook

16 Nov 2018

Frankfurt am Main, November 16, 2018 -- Moody's Investors Service, ("Moody's") has today downgraded to Caa1 from B3 the corporate family rating (CFR) of Spanish construction company Obrascon Huarte Lain S.A. ("OHL" or "group") and to Caa1-PD from B3-PD the group's probability of default rating (PDR). Concurrently, Moody's has downgraded to Caa1 from B3 the instrument ratings on the group's senior unsecured notes due 2020, 2022 and 2023. The outlook on all ratings remains stable.

RATINGS RATIONALE

The downgrade reflects OHL's poor results for its third fiscal quarter ended 30 September 2018 (Q3-18), considering an unexpected sizeable cash consumption in its regular businesses and for legacy projects of EUR133 million in Q3-18 and EUR582 million on an accumulated basis over the first nine months of 2018. Together with EUR128 million investments in development projects, a EUR100 million extraordinary dividend, restructuring and other cash requirements, total cash consumed in the first nine months of 2018 summed to almost EUR800 million. Although recognizing the group's strongly improved liquidity situation after the sale of its stake in OHL Concesiones in April this year, its recourse net cash position has swiftly reduced since then and recently dropped to EUR345 million as of 30 September 2018 from EUR617 million at the end of June 2018.

Other than expected, also OHL's profitability in the construction business has turned significantly negative in Q3-18, after the group's new management conducted a thorough review of all projects in the Construction and Industrial order book. As a result, losses from all projects expected to have negative gross margins were captured in the group's profits for the first nine months of 2018, which negatively affected EBITDA for this period by around EUR286 million. Although management has confirmed an average 6.5% gross margin of orders in its existing backlog after the revision and a margin target of 8% by 2020, Moody's more strongly emphasizes the ongoing substantial cash burn of OHL. Even for Q4-18, while the final fiscal quarter is usually the seasonally strongest in terms of cash generation, the group expects some cash consumption and its recourse net cash position to amount to around EUR300 million by year-end 2018. Also for 2019, Moody's expects to see the group's cash flow to be considerably negative, at least as cash outflows for legacy projects are concerned. Cash flow generation in the regular businesses may also remain depressed and probably still negative until later into 2019. Visibility of improving cash flow generation in the coming quarters remains very limited, while management has not provided any guidance for 2019 and beyond as it has not yet finalized its cash flow forecasts at this stage. Although the group still had an ample cash position of EUR531 million as of 30 September 2018 and EUR518 million of other current financial assets (including cash held by joint-ventures and associates), this could fairly rapidly diminish in Moody's view should it be unable to slow down the current pace of cash drain during 2019 and beyond.

LIQUIDITY

OHL's liquidity is still adequate, but has materially deteriorated over the last two quarters. With a cash position of EUR531 million as of 30 September 2018, excluding cash sitting at joint-ventures and associates and cash used as collateral (around EUR471 million), which is not necessarily immediately available to the parent, and estimated cash consumption from legacy projects over the next 18 months, there is hardly any cushion left for potential persistent cash burn in its regular businesses. Also, OHL currently does not have committed bank credit facilities available, which it could utilize for seasonal spikes in working capital or other exceptional cash needs, at least in the medium term. Proceeds from potential asset disposals, such as OHL's stakes in the Canalejas and Old War Office development projects (both in construction stage with a combined net book value of EUR299 million at 30 September 2018), are not included in the short-term liquidity assessment, albeit Moody's recognizes that these could provide some liquidity buffer in case of need. After the redemption of its bank and part of its bond debt in April and May 2018 (together EUR930 million), with proceeds from the sale of its stake in OHL Concesiones, the group's next debt maturity will be in March 2020 when the remaining 2020 bond (EUR73 million) is due.

Overall, however, Moody's expects that OHL's available cash sources will continue to shrink in the coming quarters, at least until year-end 2019, while visibility for 2020 and beyond remains very limited.

RATING OUTLOOK

The stable outlook is supported by OHL's liquidity, which, although recently weakening, is still sufficient for the group to manage its upcoming cash needs over the next 12-18 months.

WHAT COULD CHANGE THE RATING DOWN / UP

Downward pressure on the ratings would build, if OHL's liquidity were to deteriorate further beyond our expectations during 2019, driven either by an ongoing sizeable cash burn in its regular construction businesses or higher than anticipated cash outflows for its legacy projects.

The ratings could be upgraded, if (1) OHL could sustainably improve profitability with positive operating margins in its construction business, (2) cash flows in the regular construction division improved to positive territory, and (3) liquidity could be sustained at a comfortable level in Moody's view to address all near-term cash requirements.

..Issuer: Obrascon Huarte Lain S.A.

Downgrades:

....LT Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 from B3

Outlook Actions:

....Outlook, Remains Stable

The principal methodology used in these ratings was Construction Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Madrid, OHL is one of Spain's leading construction groups. The group's activities comprise its core engineering and construction business (including industrial and services divisions) and concessions development in identified core markets in Europe, North and Latin America. In the 12 months ended 30 September 2018, OHL reported sales of around EUR2.9 billion and EUR526 million negative EBITDA. The Villar Mir family, via its investment vehicles Inmobiliaria Espacio and Grupo Villar Mir (GVM), currently holds a 51.1% equity stake in OHL.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Goetz Grossmann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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