(Debtwire) OHLA boosted by cash inflows as 2023 PIK coupon climb provides debt paydown incentive

OHLA (formerly OHL) has resurfaced from a 2021 restructuring and is now armed with swathes of cash following disposals and the receipt of a litigation settlement. This means excess liquidity can be used to fund a further tender at par of its outstanding EUR 488m 5.1% cash-pay plus 1.5% PIK senior secured 2026s given the 1.5% PIK interest rate climbs to 465bps from mid-September 2023, according to three buysiders and an analyst.

The Spain-headquartered construction company has used funds received from its CEMONASA litigation payment to fully repay EUR 54.5m of its ICO-guaranteed loan and launch a tender offer for EUR 43.2m of its senior secured notes, as reported.

OHLA’s subsidiary CEMONASA received EUR 162.5m in December 2021 from the Community of Madrid for a payment to settle a rail link contract.

Tender offer results will be announced on 8 March with the company offering a par cash price to take out bondholders. The outstanding notes may be redeemed in whole or in part at par at any time.

Liquidity is strong, with a cash position of EUR 356m as of 3Q21. Additionally, under its other current financial assets, OHLA had a restricted deposit of EUR 140m securing the Syndicated Multiproduct Financing guarantee facility that can boost liquidity in future.

“In the financial assets they have a EUR 140m pledge to the banks for a guarantee line and this collateralized cash can become monetized,” the analyst noted.

The company had a total of EUR 424.5m recent cash inflows, comprising some estimated circa EUR 262m of disposals and the EUR 162.5m litigation proceeds.

OHLA announced in its 9M21 results that it had completed divestments in assets, namely Old War Office in London (raising close to its book value with the asset stake having a FY20 carrying amount of EUR 98.6m), Hospital de Toledo (raising EUR 75m), Sociedad Concesionaria Aguas de Navarra (raising EUR 26m) and Hospital CHUM (raising EUR 62m), with the latter two done in October 2021 post 3Q21 quarter-end, which will provide further firepower to consider paying down its outstanding bonds.

Xtract Research, a Debtwire sister service, noted in its bond covenant report that there is no requirement that Asset Sales are made for fair market value or that at least 75% of the consideration received is in cash or cash equivalents. Asset Sale proceeds must be applied in accordance with the Intercreditor Agreement, including to offer to repurchase Notes though it isn't clear what else the Intercreditor Agreement permits, for example what other debt can be repaid and under what conditions and whether Asset Sale proceeds can be reinvestment in the business, Xtract added.

OHLA has other assets it can still dispose of to raise further cash, including a 50% stake in its Canalejas project, which includes its Four Seasons Hotel asset. The 50% Canalejas stake was valued at EUR 145.8m at FY20 according to the OHLA consolidated group annual report.

“The company sold the Old War Office which means now after the ICO loan [paydown] they can pay down the bond,” one buysider said. “They also have the Madrid Four Seasons property that can be sold and other assets that can be monetized.”

The Canelejas project was hit by Covid but the hotel has now opened and the current 30% occupancy in the retail space will pick-up, according to independent special situations firm Sarria. They have sold all of their high-end apartments there so risks have reduced but they will not rush to sell Canelejas and will hold these assets as occupancy rates pick up, they added.

“They will focus more on civil projects which are less risky than one would face with a development book,” Sarria said. “We like the name and Canelejas could be worth more than EUR 200m while they will receive the Old War Office cash [this was due in 4Q21] plus the CEMONASA litigation settlement.”

Yield PIK-up

The coupon structure of OHLA’s outstanding bonds means the company is incentivized to pay down its existing debt or be in a position to refinance it. The EUR 488m senior secured notes have a 5.1% cash-pay coupon and 1.5% PIK interest but the PIK interest rate climbs to 465bps from mid-September 2023, which would mean a total interest rate of 9.75% after that date.

The company concluded a restructuring process in June 2021 that included a capital increase, debt reduction and three-year extension of maturities with a 50% debt maturity on 31 March 2025 and 50% on 31 March 2026 versus former maturities in March 2022 and March 2023 (see chart below for maturity profile from 9M21 financial report).

<image001.png>

The company in mid-April 2021 secured the green light to implement a scheme of arrangement aimed at restructuring its bonds as part of a wider overhaul of the group’s debt structure, as reported.

Click here for the Scheme that commenced in March 2021 and here for the May 2020 bankruptcy case on the Debtwire’s Restructuring Database (subscription required).

As part of the 2021 restructuring, OHL's notes were replaced with new notes with a face value equal to 88% of the aggregate amount of the sum of the existing notes. Outside of the scheme, the restructuring provided for injection of new equity capital (through a rights issue coupled with a private placement of additional shares with the Amodio family and an investment fund). These steps enabled OHL to raise between EUR 42m and EUR 71.4m of new equity capital.

The company’s largest shareholders at FY20 ahead of the recapitalization were Inmobilaria Espacio with 14.641%, Luis Fernando Martin Amodio with 8%, Julio Mauricio Martin Amodio with 8%, Simon Davies with 4.995%, and Sand Grove with 3.949%.

The Amodio family since upped their stake to become the 26% largest shareholder at 1H21 following the set of capital increases. The Amodio family also own 100% of Mexican construction business CAABSA. OHL and CAABSA terminated an exclusivity period over a merger in May 2020. The two businesses on 9 February announced a collaboration agreement with potential synergies arising.

A change of control would be triggered on the OHL notes if more than 50% voting control is acquired.

C“The Amodio’s have been to the Spanish regulator and there is now a co-operation agreement between CAABSA and OHL registered with the CNMV,” Sarria said. “If EU and US infrastructure spend takes off, then OHLA could become an attractive target to be taken over by CAABSA even if it is three years down the line.”

The Mexican family holds 26% of OHLA’s shares so it shows that they have long term views and they could potentially take it private in future, the second buysider noted.

One risk for OHLA revolves around litigation relating to a project awarded in 2009 by Qatar Foundation and then terminated by the Foundation in 2014 due to project delays. Qatar Foundation has previously claimed EUR 1.134bn but as of October 2019 there had been no order to pay any amount whatsoever, according to a most recent company statement.

A September 2021 Oddo research note argued that assuming the project went 100% beyond budget, set at around EUR 4bn, the penalty for the consortium could be in the magnitude of EUR 200m (including EUR 110m for OHLA's share), an amount that would be more than covered by the guarantees already executed.

The Oddo note positively added that on an estimated sum of parts valuation the bond is covered by group assets. At 1H21, the company had EUR 434m peripheral assets (assuming a 25% discount on Canalejas and Montreal Hospital) and an ordinary business value of EUR 323m based on a 4x FY21 EBITDA estimate, meaning a total asset value of EUR 757m. Adding EUR 254m of pro forma cash, deducting EUR 40m bank debt and deducting EUR 487m of high yield bonds would leave a positive net equity value of EUR 485m at 1H21, according to the research note.

OHLA ole

Another potential source of upside for OHLA is its US expansion. The US was 46% of its 9M21 short-term order book versus 34.9% for Europe and 18.1% for Latin America. The company earlier this month was awarded a USD 150m contract to build Destination Sport Miami, one of the largest indoor multi-sports facilities in North America, as reported.

Current metrics are low. OHLA was 2.9x net levered based on IAS 17 EBITDA at 3Q21, according to Debtwire analyst calculations. LTM 3Q21 IAS 17 adjusted EBITDA was EUR 66m. Upcoming seasonality could benefit its operations further as OHLA tends to have a cash burn in the first nine months of the year due to working capital outflows but historically has had a cash inflow in its 4Q.

The group had a EUR 191.3m working capital outflow for the 9M21 period versus a EUR 226.3m working capital outflow for the 9M20 period.

“The underlying business is still not doing well and one needs to see the 4Q21 results [as they] are crucial seasonally for cash generation,” the analyst noted. “There is now less upside than before but the name has held up well despite a horrible track record.”

OHL Operaciones’ (issued out of the OHLA subsidiary OHL Operaciones) Caa2 rated EUR 488m 5.1% senior secured 2026s are quoted at 96-mid on Markit. OHLA’s shares are indicated at 0.89 per share leaving a EUR 535m market capitalization.

The notes could benefit from a Moody’s ratings upgrade in the near-term. The senior secured notes were rated Caa2 with a positive outlook back in July 2021. The agency noted a B3 credit rating could be possible if it improved profitability and operating performance, which combined with further debt repayment using the possible proceeds from the disposal of certain assets, leave metrics in-line with a B3 rating.

“They have a positive outlook with Moody’s as they have a high gross debt to EBITDA ratio but now they have repaid the IFCO loan and some of the bonds the ratio will reduce and they could get upgraded,” the analyst noted.

They have a lot of cash on balance sheet that insulates them from issues, Sarria noted. “The equity price could go up above EUR 1.00 and the bonds will be pulled to par (as OHLA will want to avoid the rise in PIK from September 2023).”

OHLA declined to comment.

by Adam Samoon and Jou Yu with capital structure by Ignacio Cano