By Robert Smith

LONDON, Aug 12 (IFR) - Obrascon Huarte Lain's bonds allow it to return more than 1bn to shareholders, according to a report from credit research firm Covenant Review, as long as the Spanish construction firm can meet an all-important interest coverage covenant.

OHL's bonds fell to distressed levels last week, after poor first-half results were compounded by reports of a damaging shareholder agreement and an unexpected stock buyback. On Friday, its 317m 5.50% 2023 bond is bid at 64.50 to yield over 14%, having recovered from lows of 54 a week before.

Attention turned to the finances of the company's majority owner, Grupo Villar Mir (GVM), after it emerged that the drop in OHL's share price could create liabilities for GVM under a complex share agreement with hedge fund Tyrus Capital.

The agreement ends in May 2017 and GVM's CFO told Reuters last week that they are "covered" on the deal, without providing further detail. GVM said at the end of 2015 it had a 180m liability with Tyrus, but the share price has more than halved since the start of 2016.

GVM is a holding company run by OHL's chairman, Juan Miguel Villar Mir, and the two companies' finances are entwined in other ways, as GVM also has margin debt and a 150m convertible bond on OHL stock.

A report Covenant Review published on Friday said that if GVM "wishes to extract value" from OHL to meet its obligations, OHL's bonds restricted payments basket gives it room to do so.

High-yield bonds place strict limitations on what borrowers can do with their money, through a series of covenants and terms investors usually require to lend money to riskier companies. But they typically have certain baskets and carve-outs allowing specific pots of money to be used more freely, with restricted payments baskets allowing cash to be returned to shareholders.

"OHL currently has well over 1bn in Restricted Payments build-up basket capacity under the covenants for its outstanding bonds," the report said.

This is because OHL raised 1bn in a rights issue last year, which builds up this basket on a "one-for-one basis". The company earmarked 632m of the equity raise's proceeds to reduce "recourse leveraging", but has since only paid down 78m of its bond debt. OHL considers debt at its subsidiaries, such as OHL Concesiones, "non-recourse".

In order to unlock this substantial dividend capacity, the Spanish firm would need to meet a 2.5x interest coverage ratio, which measures Ebitda versus interest payments at the recourse level.

OHL includes in its "recourse Ebitda" dividends from its non-recourse subsidiaries, a controversial practice that ratings agency Moody's said last week it discounts in its analysis, as it believes these payments are netted against an intercompany loan.

OHL Concesiones made a 1bn intercompany loan to parent company OHL SA at the end of 2014, which IFR reported last year some investors believe was made in order to then meet the interest coverage test.

Covenant Review notes that OHL's 2023 bonds issued in March 2015 - shortly after the intercompany loan was made - explicitly allow the company to include these dividends, using the phrase "but for the avoidance of doubt" to clarify this point.

Its 2020 and 2022 bonds issued earlier, however, make no mention of these dividends being used in its recourse Ebitda.

"The use of 'but for the avoidance of doubt' suggests that the company will take the position that the new parenthetical does not change the meaning of the Recourse Ebitda definition but rather only clarifies it," the report said.

"We are not sure that we agree with that position."

The report adds that investors could argue OHL should have included specific language around this point if it wanted to include these dividends in recourse Ebitda for the 2020 and 2022 bonds.

OHL did not respond to a request for comment.

(Reporting by Robert Smith, editing by Alex Chambers and Philip Wright)