OREANDA-NEWS. Fitch Ratings has affirmed Spain-based construction company Obrascon Huarte Lain SA's (OHL) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BB-'. Fitch has also affirmed OHL's Short-term IDR at 'B'. All ratings have been removed from Rating Watch Negative (RWN). The Outlook is Stable.

The rating actions follow the group's announcement of the successful EUR1.0bn capital increase completed in October, with the proceeds to be used to reduce the recourse indebtedness (about EUR630m) and to fund the non-recourse business (the remaining, net of transaction costs). They also reflect the healthy trading performance in the first nine months ending September 2015 and the progress made towards a satisfactory resolution of the dispute regarding corruption allegations at OHL Mexico level.

Fitch focuses its analysis on the recourse perimeter, adjusting leverage calculations to reflect the ring-fenced nature of the concession business by excluding related funds from operations (FFO) and non-recourse debt but including sustainable dividends from the non-recourse operations

KEY RATING DRIVERS
Reinforcing The Capital Structure
The EUR1.0bn rights issue strengthened the group's balance sheet by reducing the recourse leverage and improving the financial position of OHL Concesiones SA, the holding company for OHL's concessions projects. Proceeds from the capital increase will potentially be used at recourse level to redeem early the more expensive EUR300m senior notes due 2020 and to repay some bank facilities to a combined total amount of roughly EUR630m. The non-recourse business will benefit from around EUR340m to finance new greenfield concessions projects and be in a better position to sustain potential cash calls linked to existing margin loans without support from OHL SA.

OHL Mexico Allegations
Allegations of corruption and an irregular tariff increase at OHL Mexico resulted mainly in remarks relating to the accounting policies made by the Mexican stock market regulator (CNBV). Although cash sanctions cannot be excluded, Fitch believes they are unlikely to have a detrimental impact on OHL SA's ratings.

Fitch previously noted the risks around an adverse reputational impact on the business itself and by the potential support from OHL SA linked to OHL Concesiones' margin loan, the latter triggered by the fall of the share price of the Mexican toll operator (see 'Fitch: No Impact on OHL's Ratings from OHL Mexico Events' dated 14 May 2015 on www.fitchratings.com). Positively for the ratings, the investigation is now moving towards conclusion and there is no evidence of additional cash contribution from OHL SA outside the cash injection linked to the capital increase and of detrimental consequences on OHL SA's construction business.

Potential To Mitigate Group Complexity
Some group complexity still exists, with significant debt sitting at OHL Concesiones and OHL Investments and evidence of intragroup financing. However, we expect a substantial reduction of amounts owed by OHL SA to OHL Concesiones, to a range of EUR350m-EUR400m by 2015 year-end from EUR1.08bn at FYE2014 . The injection of part of the capital increase proceeds into the concessions business would also limit future support to the non-recourse by OHL SA, moving towards a more clear separation of the concessions activities.

Proceeds From Asset Disposal
We note that the company is completing the disposal of some assets pertaining to the Engineering & Construction division, the largest cash contributor to the recourse-perimeter. Management intends to use the proceeds, which are expected to be around EUR250m, to further reduce the gross recourse debt. The closing of around 75% of the assets being divested is expected by the year end.

Healthy Recourse Business
Recourse activity is healthy, registering an order intake of EUR1.9bn in the first nine months of 2015 and totalling EUR7.4bn at period-end. The construction division leads the growth (+23.8% on revenues year-on-year), driven by major projects in US, achieving solid recourse EBITDA of EUR322.5m (334.5m FYE2014).

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Dividend contribution from the non-recourse perimeter aligned with the historical level.
- Stable operating margins at the construction division.
- Proceeds from the capital increase deployed as disclosed to the market.
- Asset disposal in line with management expectations.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Fitch's adjusted recourse net leverage around 2.0x and EBITDA interest cover above 3.0x on a sustained basis.
- A material increase in recurrent and stable up-streamed dividends from the concession business without a re-leveraging of assets.
- Full self-funding structures and firm separation between OHL Concesiones and OHL SA.

Negative: Future developments that could lead to negative rating action include:
- Fitch's adjusted recourse net leverage above 4.0x and EBITDA interest cover below 2.0x on a sustained basis.
- Material cash support to OHL Concesiones.
- Negative implication for OHL SA's construction business due to a negative impact on the group's reputation.
- Continued deterioration of the company's working capital position on a recourse basis.

LIQUIDITY
Active Debt Management
The company refinanced the 8.75% EUR425m bond maturing in 2018 in March this year with a cheaper 5.5% EUR325m bond maturing 2023. As a result, OHL SA reduced the weighted cost of capital market issuances and extended the maturity profile, with the first bond virtually maturing in 2020. Together with the capital increase announcement, the company launched a tender offer up to EUR300m to acquire some of the existing bonds (totalling around EUR1bn). At the closing date, only EUR45.7m was tendered and the company could consider early redemption of the EUR300m senior notes due 2020 in March 2016.

Adequate Liquidity
The recourse available liquidity as of September 2015 was EUR880m, comprising EUR530m in cash and equivalents and EUR350m in undrawn facilities. This compares with EUR260m of credit lines and EUR50m commercial paper maturing in 4Q, and does not take into account the proceeds from the capital increase.