S & P Downgrades Odebrecht

Confirmation of the decline in the financial capacity of the construction company has strengthened arguments by those calling for the revision of their contracts and that the firm not be awarded others.

Friday, April 1, 2016

From a statement issued by Standard & Poor's:

SAO PAULO (Standard & Poor's) March 29, 2016--Standard & Poor's Ratings Services lowered its global scale corporate credit rating on Odebrecht Engenharia e Construção S.A. (OEC) to 'BB' from 'BB+' and its national scale long-term rating to 'brA+' from 'brAA+'. We affirmed our 'brA-1' short-term corporate credit rating on the company. The outlook on the corporate credit
ratings remains negative.

See also: "Panama: Tender for Urban Improvement Suspended"

We also lowered our issue-level ratings on Odebrecht Finance Ltd. (OFL) to 'BB' from 'BB+'. At the same time, we removed this rating from CreditWatch developing. We also assigned a recovery rating of '4L' to this debt, indicating our expectation that lenders would receive average (30%-50%; the lower range of the band) recovery of their principal in the event of a payment

The downgrade reflects our view of OEC's rising financial constraints as the corruption investigations of the company progresses. Although OEC is cooperating with authorities to reach a leniency agreement in the short term, the fine and penalties amount remains uncertain. Nevertheless, we believe the litigation related to the corruption probe, along with weaker business conditions for the company, could result weaker credit metrics.

See also: "Panama: Proposal to Audit Odebrecht's Works"

While OEC hasn't disclosed a final agreement with the authorities, reputational risks have exacerbated, weakening business conditions and hampering working-capital management. The benefits from new advanced payments to the company have shrunk because its backlog has plunged. Also, OEC is experiencing delays in collecting accounting receivables because of
deterioration of its clients' overall creditworthiness. As a result, OEC has posted about R$4.2 billion in working-capital needs as of September 2015, and we expect it to post a shortfall in FOCF for that year. OEC's lesser ability to access debt markets is also weighing on backlog replenishment because the project lenders have also increased the scrutiny over the compliance
standards; perceived financial stability; and accuracy of the bidding process for the engineering, procurement, and construction provider they extend credit to in order to assure that they won't have to change the contractor in the middle of the project.

See also: "Former President of Odebrecht Convicted"

We acknowledge that FOCF among engineering and construction companies may be volatile due to large working-capital swings, and unexpected and often large cost overruns. Therefore, OEC's cash flow leverage may deteriorate quickly in in a stressful scenario, which we incorporate in our assessment of OEC's significant financial risk profile.

We revised our view of OEC's liquidity to adequate from strong. The company posts a comfortable and smooth amortization schedule, because the bulk of its debt matures after 2025 and its sources-over-uses ratio is above 2.0x.
However, we view OEC's ability to absorb high-impact, low-probability events without the need for refinancing as more restricted. The company is also exposed to higher working-capital swings and a large volume of advances from clients that could reduce its cash holdings under a more stressful scenario. Even though OEC has no financial covenants under its debt agreements, its
standing in credit markets has also weakened.

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