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Rating Action:

Moody's downgrades OHL's rating to B1; negative outlook

19 Nov 2014

Madrid, November 19, 2014 -- Moody's Investors Service has today downgraded to B1 from Ba3 the corporate family rating (CFR) and senior unsecured debt ratings of Obrascon Huarte Lain S.A. (OHL). Concurrently, Moody's has downgraded to B1-PD from Ba3-PD OHL's probability of default rating (PDR). The outlook on the ratings is negative.

"The downgrade primarily reflects OHL's weak operating performance and sustained negative cash flow generation, which is leading to higher-than-expected leverage. While the company has recently sold part of its equity stakes in Abertis and OHL Mexico in order to reduce debt, gross recourse leverage will remain weak with no prospects of recovery in the short term to levels commensurate with the previous Ba3 rating category," says Iván Palacios, a Moody's Vice President - Senior Credit Officer and lead analyst for OHL. "The downgrade also factors in the company's aggressive financial policies with extensive use of margin loans and its weak liquidity profile, despite the large value embedded in its equity stakes in Abertis and OHL Mexico. We also note the weakened credit profile of Grupo Villar Mir, OHL's controlling shareholder."

RATINGS RATIONALE

Today's action reflects the weakening in OHL's operating performance in 2014, which has led to an increase in recourse and consolidated leverage. The profitability of OHL's construction activities has fallen given the reduction in high margin projects, while the initial phases of some of its new contracts have lower margins. In addition, the construction business is still showing significant working capital consumption, as delays in the start or execution of some of the large international construction projects awarded in 2011 and 2012 are postponing the expected cash inflows from these contracts.

Gross recourse leverage (defined as Gross recourse debt to recourse EBITDA) for the last 12 months ended September 2014 stood at 8.7x, well above the ratio guidance for OHL's existing Ba3 rating category (between 4x and 5x). OHL's management is taking measures to reduce debt, such as the sales of a 5% equity stake in Abertis Infraestructuras, S.A. (Abertis) for EUR705 million and a 7.5% stake in OHL Mexico S.A.B de C.V. (OHL Mexico) for EUR231 million. However, Moody's expects that OHL's gross recourse leverage will remain higher than 5x by year-end 2014, even after factoring the debt reduction associated with these disposals.

In addition, OHL's concessions business currently generates little cash and requires substantial investments for new projects, which will translate into increased debt. Despite the increase in reported EBITDA, a material component of it is non-cash due to the guaranteed returns mechanism in some of OHL's Mexican concessions. As a result, consolidated net adjusted debt to cash-EBITDA has weakened materially over the past couple of years, from 8x in FY 2012 to around 14x as of Q3 2014. Given that the concessions business generates little cash flow after interest payments, Moody's expects that OHL will continue to have to raise debt to fund the pipeline of new concessions that it has secured in 2014, including five new toll motorways in Mexico, Chile and Colombia.

The rating continues to be supported by the value of equity stakes in Abertis (13.93%) and OHL Mexico (56.14%). The net asset value of these stakes, after deducting the associated debt of EUR1.7 billion is around EUR2.3 billion, which represents 1.6x the company's gross recourse debt of around EUR1.4 billion as of September 2014 (proforma for the disposal of the 5% stake in Abertis and the 7.5% stake in OHL Mexico). The value of these stakes provides OHL with financial flexibility to support the deleveraging of the recourse activities if required. However, after the recent transactions, the amount of unencumbered shares in these companies will be very small.

Moody's notes that OHL is making extensive use of margin loans backed by these equity stakes. Margin loans reduce the durability of its debt funding and limit the flexibility to sell the shares in a stress situation. In addition, reduced headroom under the loan-to-value (LTV) covenant in the event of an unexpected decline in share price may put pressure on OHL's liquidity if there is a margin call and the company has to provide additional collateral.

OHL's liquidity profile is weak because of the lack of long-term back-up facilities, and continues to be dependent on successful asset rotation and the renewal of short-term credit facilities. The liquidity buffer is small to accommodate potential margins calls, especially taking into account the large seasonal working capital swings of the construction business.

Moody's also notes that the weakening credit profile of OHL's controlling shareholder, Grupo Villar Mir (GVM), represents an overhang for the company. Leverage at GVM has increased over the past 12 months due to strategic acquisitions and reduced earnings, and it will further increase with the debt-financed acquisition of a 5% equity stake in Abertis from OHL. GVM also makes extensive use of margin loans backed by OHL's shares. OHL has historically been run as a standalone business, with GVM's credit quality not viewed as a constraint. However, a deterioration in the credit quality of its ultimate parent gives rise to the risk that this may change in the future, although Moody's notes that OHL's bond documentation includes limitations on dividends to shareholders.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the lack of visibility as to when OHL's cash flow generation will start to improve with the contribution from the new international construction contracts and increased contribution from existing concessions. It also reflects the continued weakness of OHL's credit metrics for the B1 rating category, while its liquidity profile could be exposed to margin calls if the share prices of Abertis and/or OHL Mexico drop.

WHAT COULD CHANGE THE RATING DOWN/UP

Moody's could downgrade the B1 rating if OHL's credit metrics do not improve such that the company's gross recourse debt/recourse EBITDA remains above 5.5x and it fails to be on a path to return to positive free cash flow generation on a consolidated basis. The rating could also come under downward pressure if the LTV ratio of OHL's equity stakes in Abertis and/or OHL Mexico approaches 50% and margin calls are triggered, unless the company materially strengthens its liquidity profile to mitigate this concern.

Moody's does not currently anticipate upward rating pressure in light of the negative outlook. However, the rating agency could change the outlook on the ratings to stable if OHL's credit metrics improve on a sustainable basis such that gross recourse debt/recourse EBITDA stays on a sustained basis in the 4.5x to 5.5x range. A change in outlook to stable would also require an expectation of positive free cash flow generation and a solid liquidity profile.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Global Construction Methodology published in November 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Madrid, OHL is one of Spain's leading construction companies and one of the world's largest concessions operators, with a large concessions business in Mexico and a 13.9% equity stake in Spanish infrastructure operator Abertis. In 2013, OHL reported sales of EUR3.7 billion and EBITDA of EUR1.2 billion.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Ivan Palacios
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades OHL's rating to B1; negative outlook
No Related Data.
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