SAO PAULO–(BUSINESS WIRE)–Fitch Ratings has affirmed Odebrecht Engenharia e Construcao S.A.’s (OEC) Long- Term Foreign and Local Currency Issuer-Default Ratings (IDRs) and National Long-Term Ratings at ‘B+’ and ‘A-(bra)’, respectively and removed the ratings from Negative Watch.
The Rating Outlook for the corporate ratings is Negative.
The ratings decision affects approximately USD3 billion worth in issuances from Odebrecht Finance Ltd (OFL), which are fully and irrevocably guaranteed by OEC and two other subsidiaries. A complete list of ratings follows at the end of this press release.
KEY RATING DRIVERS
The resolution of the Negative Watch status for OEC’s corporate ratings and OFL’s issuances is due to the publication of OEC’s 2015 results, which reduces potential liquidity pressures from creditors. The company was not able to release 2015 financial statements up to April 30th, and triggered a clause that would have allowed OFL’s bondholders to declare an event of default.. The delay was due to discussions between the company and the independent auditor, who requested more information on the latest phases of the Lava-Jato investigation.
The Negative Rating Outlook stems from a myriad of medium-term challenges and risks that require more clarity before the ratings can stabilize. Operationally, OEC would need to be more efficient in replacing its backlog without compromising margins. The Brazilian adverse scenario and maintenance of low oil prices affects approximately 60% of the company’s backlog as important clients, namely Venezuela and Angola, depend on oil exports to execute their infrastructure agendas.
Financially, potential fines from Lava-Jato and other countries, as well as potential contamination from liquidity issues of the Odebrecht group are the main risks. According to the Brazilian press, OEC is in the process of signing a lenience agreement — a sort of plea agreement for corporates — with Brazilian authorities. This agreement should result in a fine that the agency estimates to be material, but that can be paid in several instalments. In addition, Fitch still has concerns related to potential fines from countries where OEC operates in and that have more restrictive anti-corruption policies.
Fitch sees an increasing risk of contamination from the Odebrecht group. OEC has advanced USD300 million to its ultimate parent, Odebrecht S.A., in the form of intercompany loans that are expected to be repaid to the construction company over the next few months. The sugar and ethanol segments of the Odebrecht group could also face financial constraints. The delay in selling assets and in finding a solution for the oil and gas unit also erodes franchising; reducing the odds that OEC will remain immune to the group’s problems.
OEC’s and OFL’s ratings could be further downgraded if one or a combination of the following risks materializes:
–Decreasing backlog due to maintenance of low oil prices and the Brazilian adverse economic scenario;
–Harsh payment conditions for any fines as part of a leniency agreement;
–A public investigation or fine from other countries; and
–Direct support to affiliates.
A positive rating action is unlikely in the short term.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Odebrecht Engenharia e Construcao S.A.
–Long-Term Foreign- and Local-Currency IDRs at ‘B+’;
–National Scale Rating at ‘A-(bra)’.
Odebrecht Finance Limited (OFL)
–BRL500 million senior unsecured notes due 2018 at ‘B+/RR4’;
–USD500 million senior unsecured notes due 2020 at ‘B+/RR4’;
–USD600 million senior unsecured noted due 2022 at ‘B+/RR4;
–USD800 million senior unsecured notes due 2023 at ‘B+/RR4’;
–USD550 million senior unsecured notes due 2025 at ‘B+/RR4’;
–USD500 million senior unsecured notes due 2029 at ‘B+/RR4’;
–USD850 million senior unsecured notes due 2042 at ‘B+/RR4’;
–USD750 million perpetual bonds at ‘B+/RR4’.
The Negative Watch was removed, and the Outlook for the corporate ratings is Negative.
Date of Relevant Rating Committee: [10, June, 2016.]
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form