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TEXT-S&P rates OAS SA 'BB-', and 'brA-'
September 17, 2012 / 8:08 PM / 5 years ago

TEXT-S&P rates OAS SA 'BB-', and 'brA-'

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.

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