Overview -- Brazil-based infrastructure company OAS S.A. should benefit from higher infrastructure investments in Latin America. -- We expect OAS will reduce its debt in the next several years as it captures cash dividends from its several investments without incurring significant additional debt. -- We are assigning our 'BB-' global scale and 'brA-' national scale corporate credit ratings to OAS. -- The stable outlook reflects our expectations that OAS' growth will moderate in the next few years, allowing it to reduce debt consistently. Rating Action On Sept. 17, 2012, Standard & Poor's Ratings Services assigned its 'BB-' global scale corporate credit rating to OAS S.A. We also assigned our 'brA-' national scale corporate credit rating to the company. The outlook is stable. Rationale The ratings on OAS reflect its "fair" business risk profile and "aggressive" financial risk profile. The ratings also reflect the company's high indebtedness that resulted from its aggressive growth strategy in previous years and some execution risks associated with the ramp-up of its main investments. The positive rating factors are OAS' favorable market position in Brazilian engineering and construction (E&C) industry and the expectation that growth appetite will moderate and financial leverage will decrease in the next few years. We assume that OAS will maintain its "fair" business profile due to the following factors: -- Its positive track record and expertise in large infrastructure projects; -- Expected expansion of operations internationally; -- A reversal of current losses into profits at its homebuilding business, as it adopts a more conservative growth strategy; and -- New growth opportunities in infrastructure will come through its 25% ownership of Investimentos e Participacoes em Infraestrutura S.A. - Invepar (not rated), which will reduce capital requirements at OAS. Our base-case scenario assumes that infrastructure investments in Brazil and other Latin American countries will remain strong in the next few years, thanks to government incentives and availability of long-term credit, despite weakening global credit markets. As a result, we believe OAS' technical and financial expertise in developing and participating in sophisticated engineering projects, as well as its ability to assist clients in structuring funding solutions, will allow it maintain a strong, diversified backlog in the next few years, which was R$15.2 billion as of June 30, 2012. We view OAS' stake in Invepar, which has recently been awarded the concession to operate the Guarulhos International Airport in Sao Paulo and to construct and operate the Transolimpica toll expressway in Rio de Janeiro, as positive for OAS' backlog. We expect Invepar will directly participate in these new investments without requiring equity contributions from OAS but still generate opportunities for OAS' E&C business to participate in the construction contracts of the new projects. We also assume that OAS' growth will moderate, as the company remains committed to debt reduction in the next several years, while benefiting from investments made in previous years. In particular, we assume that OAS' participation in oil and gas projects, either directly or through its stake in shipyard Estaleiro Enseada do Paraguacu (not rated) will be structured under nonrecourse debt and that potential equity contributions will not jeopardize OAS' debt reduction. We project OAS will complete the construction of the three sports arenas (two of them for the upcoming World Cup tournament) in Brazil and manage them with technical help from Amsterdam ArenA. We also assume that OAS' operations outside of Brazil will improve the consolidated EBITDA margins in the next few quarters as losses from ramping up these operations will turn into profits as its expanding backlog starts accruing. We assume international projects will account for about 25% of OAS' backlog in the next years, which is currently at a similar level. We project EBITDA to be 9%-10% over the next several years, up from 5% in previous years, when OAS was building up its international E&C operation and its homebuilding operation incurred in cost overruns. These margins are comparable with those of its national peers. We expect OAS to maintain a conservative strategy for its homebuilding operation, reducing working-capital requirements in the next few years and managing its homebuilding portfolio prudently amid a more slowing economy in Brazil. The improvement in its credit metrics, adequate liquidity, and consolidated cash reserves of more than R$1.3 billion in the next three years underpin our "aggressive" assessment of OAS' financial risk profile. We adjust OAS' figures by excluding the effects of nonrecourse projects, such as the sports arenas and those under Invepar. As E&C cash flows improve, we expect OAS to gradually reduce debt in the next years, with adjusted debt to EBITDA dropping to less than 6.0x in the next two years and less than 4.0x afterwards from about 8.6x in 2011 and projected 7.3x in 2012. Adjusted funds from operations (FFO) to total debt should improve to mid-teens in our base case from about 9% in 2011. Seasonality affects the company's credit metrics in second-quarter 2012, as intrayear working-capital requirements are high and cash collections primarily occur in the fourth quarter. As a result, we project significant debt reduction from mid-2012 levels. Because we analyze OAS by deconsolidating nonrecourse projects and Invepar's results and debt, we assume that OAS' adjusted debt will decline in absolute terms in 2012 and afterwards. We expect a significant improvement in cash generation in 2013, especially from OAS' E&C operation and from stronger results at its homebuilding business. Liquidity In our view, OAS' liquidity is "adequate." The company reported consolidated cash reserves of R$1.4 billion as of June 30, 2012, out of which R$761 million was invested at OAS and its E&C subsidiary, compared with short-term debt of R$1.26 billion (R$643 million at E&C and holding). Our opinion about OAS' liquidity reflects the following assumptions: -- Cash sources (including cash reserves, projected FFO, cash from shareholders, and loans issued in the first half of 2012) will exceed cash uses (debt amortization, working-capital swings especially at the E&C company, capital expenditures, and cash dividends) by more than 1.2x in the next two years; -- Cash sources will exceed cash uses even if EBITDA declines by more than 20%; -- We assume adjusted FFO will continue to improve in the next few years, to about R$240 million in 2012 and R$300 million in 2013 (excluding nonrecourse projects and Invepar); -- We take account of shareholders' R$80 million contribution that paid down intercompany transactions, and assume that OAS will keep contributing equity to projects in the next several years from its funds; and -- OAS could comply with its debt covenants even if EBITDA declined by 30%, since they are calculated based on the unconsolidated financial metrics of OAS or its E&C subsidiary. Outlook The stable outlook assumes that OAS will consistently improve credit metrics over the next few years through not only stronger cash flows but also with some marginal adjusted debt reduction. The outlook reflects our expectations that OAS will maintain sufficient cash reserves at its E&C operation to handle seasonal working-capital swings and that its equity contributions to projects will be modest. We expect adjusted total debt to EBITDA of less than 6.0x by 2013 and lower afterwards. A downgrade could result from OAS' failure to improve credit metrics throughout 2013 due to slower improvement in cash flow (which could come from weaker performance at the E&C company or larger cost overruns at its homebuilding operation) or from financial support for its projects (which could result from the sports arenas facing cost overruns to be concluded). An upgrade would depend on adjusted total to EBITDA dropping below 4.0x, which we believe is possible when the new projects start contributing dividend streams to OAS by 2014. Related Criteria And Research -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List New Rating; CreditWatch/Outlook Action OAS S.A. Corporate Credit Rating BB-/Stable/-- Brazilian Rating Scale brA-/Stable/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.