Rating Action:
Moody's confirms OHL's B3 CFR, outlook stable
25 May 2018
Frankfurt am Main, May 25, 2018 -- Moody's Investors Service, ("Moody's") has today confirmed the B3 corporate family rating (CFR) and the B3-PD probability of default rating (PDR) of Spanish construction company Obrascon Huarte Lain S.A. ("OHL" or "group"). Concurrently, Moody's confirmed the B3 instrument ratings on the group's senior unsecured notes due 2020, 2022 and 2023. The outlook is stable.
The rating action follows the group's successful completion of the sale of OHL Concesiones S.A.U. (OHL Concesiones) to IFM Global Infrastructure Fund (IFM), guidance on its future business strategy and redemption of almost all bank debt and a portion of its senior unsecured notes due 2020, 2022 and 2023. The rating action concludes Moody's review for possible upgrade initiated on 1 December 2017.
RATINGS RATIONALE
The B3 rating with a stable outlook reflects the material improvement in OHL's liquidity profile following the receipt of almost EUR2 billion of net cash proceeds for the sale of its stake in OHL Concesiones to IFM, which closed on 12 April 2018. It further recognizes the group's significantly reduced indebtedness following a EUR702 million repayment of almost all bank debt from disposal proceeds as well a portion of its outstanding unsecured notes. Upon expiration of a tender process related to a put event triggered by the completed IFM deal on 12 May 2018, EUR228 million of notes (due 2020, 2022 and 2023) in aggregate have been tendered. This will leave around EUR679 million of total debt outstanding at the group's recourse level and EUR59 million of non-recourse debt, compared with total gross indebtedness of about EUR1.7 billion as of 31 March 2018. Pro forma for the transaction, and assuming no excessive extraordinary dividend payment to shareholders, OHL's cash position increases to about EUR1.5 billion as of 31 March 2018. With this, the rating agency recognizes OHL's substantially enhanced liquidity situation, which it now regards as solid and which strongly supports the assigned rating.
Nevertheless, the B3 rating also factors in Moody's view that OHL's weak profitability and loss making legacy contracts combined with restructuring actions will continue to consume cash in the near term and that OHL will only slowly improve profitability over the next two to three years. For instance, Moody's-adjusted EBITDA will remain negative in 2018 (EUR98 million negative reported EBITDA in the 12 months ended March 2018, including large one-off charges for a penalty and related costs during Q1-18) due to expected sizeable restructuring costs associated with legacy projects, redundancy measures and the ongoing rightsizing of the group's loss-making industrial division. As a result, and despite potential further debt reductions in the short to medium term, OHL's Moody's-adjusted gross leverage will likely stay above 6x debt/EBITDA over the next two years. However, Moody's acknowledges measures implemented by management to almost half the group's substantial overhead costs with the aim to improve construction EBITDA margins towards 5% by 2020 (2.1% in 2017, excluding redundancy costs and legacy losses). Moody's still considers that the visibility on future performance remains very limited.
The rating confirmation further reflects OHL's sustained weak free cash flow generation, which has been negative in the past couple of years and will only gradually improve as the cash drain from legacy projects, industrial activities and restructuring (EUR268 million in aggregate projected for 2018 and 2019) is phasing out in 2020. While available excess cash post the transaction, together with proceeds from planned asset disposals in 2018 and 2019, will help cover these cash needs, Moody's expects free cash flow generation in OHL's recourse business to remain negative until 2020. However, should the group show its ability to sustainably turn free cash flow positive, whilst maintaining an adequate liquidity position, upward pressure on the ratings would build.
LIQUIDITY
OHL's liquidity has materially strengthened post the transaction, which Moody's now regards as overall solid. While a major portion of net cash proceeds from the disposal of OHL Concesiones of almost EUR2 billion were used for debt repayments, the group still faces significant cash requirements over the next 12-18 months. For instance, taking into account estimated transaction costs, committed equity investments for developments as well as cash outflows for restructuring and legacy projects, Moody's estimates OHL's available cash sources to shrink materially. Combined with a EUR308 million cash position as of 31 March 2018, projected negative free cash flow generation, net of expected cash proceeds from asset disposals in 2018 and 2019, however, Moody's expects OHL's currently available cash sources to sum to around EUR1 billion, which leaves a net cash position and would allow for potential further debt repayments and gross de-leveraging in the near future.
After the redemption of its bank debt, OHL has currently no access to committed external liquidity, although Moody's expects the group to put in place a committed credit line over the next few months, which would provide additional financial flexibility, such as for typically highly seasonal working capital swings.
RATING OUTLOOK
The stable outlook reflects the solid liquidity and the expectation that OHL's profitability will gradually strengthen, supporting positive Moody's-adjusted EBITDA and free cash flow generation in the construction business over the next 18 months. Moreover, the stable outlook assumes OHL's Moody's-adjusted leverage to steadily decline towards 6x gross debt/EBITDA, driven primarily by forecast earnings growth.
WHAT COULD CHANGE THE RATING DOWN / UP
OHL's ratings could be upgraded, if (1) OHL's profitability improves sustainably with Moody's-adjusted EBITDA margins of at least 5%, (2) Moody's-adjusted gross debt/EBITDA sustainably trends to below 6x, (3) Moody's-adjusted EBITA/interest expense exceeds 1.5x, and (4) liquidity remains adequate.
Downward pressure on the ratings would build, if (1) EBITDA remains sustainably negative after 2018, (2) Moody's-adjusted gross debt/EBITDA sustainably exceeds 7x, (3) Moody's-adjusted EBITA/interest expense falls below 1x. Negative rating pressure would also build, if the group's short-term liquidity deteriorated unexpectedly.
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 31 March 2018, OHL reported sales of around EUR3.2 billion and EUR98 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.
https://www.moodys.com/research/Moodys-confirms-OHLs-B3-CFR-outlook-stable--PR_383910