Approximately USD3.1 billion of Debt Securities Affected
New York, October 20, 2016 — Moody’s Investors Service, (“Moody’s”) Moody’s Investors Service downgraded to Caa1 from B3 the foreign currency rating assigned to the senior unsecured notes issued by Odebrecht Finance Ltd. (OFL) and guaranteed by Odebrecht Engenharia e Construção S.A. (OEC). At the same time, Moody’s has downgraded to Caa1 from B3 the corporate family rating assigned on its global scale to OEC. The outlook for all ratings is negative.
Issuer: Odebrecht Engenharia e Construção S.A. (OEC), Brazil
–Corporate Family Rating: to Caa1 from B3 (Global Scale Rating)
Issuer: Odebrecht Finance Limited (OFL), Cayman Islands
–BRL500 million (BRL500 million outstanding) senior unsecured guaranteed notes due 2018: to Caa1 from B3 foreign currency rating
–USD500 million (USD72.7 million outstanding) senior unsecured guaranteed notes due 2020: to Caa1 from B3 foreign currency rating
–USD600 million (USD143 million outstanding) senior unsecured guaranteed notes due 2022: to Caa1 from B3 foreign currency rating
–USD800 million (USD101.6 million outstanding) senior unsecured guaranteed notes due 2023: to Caa1 from B3 foreign currency rating
–USD550 million (USD518.6 million outstanding) senior unsecured guaranteed notes due 2025: to Caa1 from B3 foreign currency rating
–USD500 million (USD500 million outstanding) senior unsecured guaranteed notes due 2029: to Caa1 from B3 foreign currency rating
–USD850 million (USD850 million outstanding) senior unsecured guaranteed notes due 2042: to Caa1 from B3 foreign currency rating
–USD750 million (USD750 million outstanding) senior unsecured guaranteed perpetual notes: to Caa1 from B3 foreign currency rating
The downgrade reflects Moody’s perception of increased credit risk for OEC, due to the company’s deteriorated liquidity profile up to June 2016 and business uncertainties amid evolving reputational risks. The Caa1 rating considers a low likelihood that OEC’s internal cash generation and financial profile will significantly recover in the next 12 months as per the challenging environment for infrastructure investments in Latin America and for the company, in particular, along with potential contingent liabilities.
Despite OEC’s strong expertise in construction and solid track record of execution in complex engineering projects, its market position has been severely challenged by the ongoing corruption allegations. Odebrecht S.A., OEC’s parent, is seeking a definitive collaboration within the scope of the “Lava Jato” Operation and it is discussing a leniency agreement with the authorities to resolve this matter. However, the meaning of the collaboration agreement has not been disclosed yet, neither were the terms and economic and financial effects for the group or the construction company. Moody’s deem the completion of this process as paramount for the company’s operating sustainability.
The prolonged investigations procedures resulted in limited funding availability to the group’s projects, creating further challenges for OEC to participate in ongoing and future infrastructure developments within its key markets in Latin America and Africa. The challenging financing environment affect the business profile of OEC to the extent of potential project cancelations, revenue deferrals due to negotiated delays in the pace of execution for existing projects and weak backlog replacement ratio. As such, our ability to forecast revenues and cash flows out of the company’s contracted projects is less certain.
Adding pressure to OEC’s businesses are the softer growth rates in infrastructure spending throughout Latin America, reflective of economic uncertainties, fiscal constraints and low commodity prices trends to the metals and mining and oil and gas industries. A situation that we expect to continue through 2017.
In June 2016, OEC reported a project backlog of USD22.9 billion, reflecting a 19% reduction in the business portfolio since fiscal year end 2015 and a 33% accumulated reduction since 2014. The backlog reductions have been accompanied by large cash outlays, driven by delays in the collection of receivables, lower book-to-bill ratio reducing the volume of cash advances and foreign exchange losses, which jeopardized the company’s liquidity position. As a result, its cash balance fell to USD1.7 billion on 30 June 2016, down from BRL2.5 billion on 31 December 2015 and USD4.4 billion on 31 December 2014. As of June 30, 2016, the cash availability represented 52% of total debt outstanding (unaudited), including off-balance debt guarantees.
The negative outlook reflects the challenges ahead of OEC’s management to improve the company’s credit and liquidity profile, while ensuring business continuity amid the evolving corruption investigations, with potential monetary fines and other business sanctions affecting the company’s liquidity position.
OEC’s ratings could be downgraded if Moody’s perceives a higher risk arising from the developments of the legal proceedings. Further downgrade would be considered if OEC fails to comply with its annual audited reporting requirements, triggering a debt acceleration, or if the company enters into a debt restructuring that results in higher than expected losses to creditors.
A rating upgrade is unlikely at this point, however, a rating stabilization may occur in the event of a constructive resolution of the legal proceedings, along with progress towards the company’s timely delivery of audited financial statements. A rating upgrade would also require OEC to improve and maintain a stronger liquidity profile along with evidence of improvement in its business environment that translates into a backlog replacement ratio (book-to-bill) above 1.0x on a sustainable basis.
The principal methodology used in these ratings was Construction Industry published in November 2014 . Please see the Rating Methodologies page on http://www.moodys.com for a copy of this methodology.
Moody’s National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody’s global scale credit ratings in that they are not globally comparable with the full universe of Moody’s rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a “.nn” country modifier signifying the relevant country, as in “.za” for South Africa. For further information on Moody’s approach to national scale credit ratings, please refer to Moody’s Credit rating Methodology published in May 2016 entitled “Mapping National Scale Ratings from Global Scale Ratings”. While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_189530.
Odebrecht Engenharia e Construção S.A. (OEC), is the largest engineering and construction company in Latin America, with $13.3 billion in net revenues in the last twelve months ended June 2016. The company’s project backlog of $22.9 billion is diversified into 146 contracts comprising large-scale construction projects in the transportation segment, energy and sewage infrastructures, buildings and industrial facilities, of which 23% is located in Brazil, 55% in other Latin American countries and 20% in Africa.
OEC is a subsidiary of Odebrecht S.A. (unrated), a family-owned investment holding company for one of the largest non-financial conglomerates in Brazil that controls Braskem S.A., the largest chemical company in Latin America, along with other investments in the oil & gas, energy sectors, toll roads, water sewage concessions and real estate. Odebrecht consolidated net revenues reached $31.8 billion (R$117.7 billion) in the LTM 2Q16, of which 41% generated by OEC, 42% by Braskem, and 17% by other subsidiaries. As of June 30, 2016, the group’s consolidated cash position was $5.4 billion (R$17.5 billion) for a total reported debt of $29.4 billion (R$94.5 billion).