Sao Paulo, March 23, 2011 -- Moody's Investors Service assigned a Baa3 foreign currency rating to the
proposed senior unsecured notes due in 2022 and 2023 to be issued by Odebrecht
Finance Ltd (Cayman Islands) and irrevocably and unconditionally guaranteed
by Construtora Norberto Odebrecht ("CNO"). The rating outlook is
stable. The net proceeds from the issuance will be entirely used
to prepay part of USD 1.1 billion outstanding notes due 2014,
2017 and 2020, thus not increasing CNO's leverage. The deal
is part of CNO's liability management strategy and aims at reducing its
funding cost while also improving its debt maturity profile. The
notes rating is not constrained by Brazil's sovereign ceiling of Baa2
with a positive outlook.
Rating assigned is as follows:
Issuer: Odebrecht Finance Ltd. (Cayman Islands)
- senior unsecured guaranteed notes due 2022 and 2023: Baa3
foreign currency rating
Issuer: Construtora Norberto Odebrecht S.A.
- Senior Unsecured Issuer Rating: Baa3 (global scale);
Aa1.br (Brazilian national scale)
Issuer: Odebrecht Finance Ltd (Cayman Islands)
- USD 500 million senior unsecured guaranteed notes due 2020:
Baa3 foreign currency rating
- USD 500 million senior unsecured guaranteed perpetual notes:
Baa3 foreign currency rating
The outlook for all ratings is stable.
The rating of the proposed notes and the stable outlook assume that the
final transaction documents will not be materially different from draft
legal documentation reviewed by Moody's to date and assume that these
agreements are legally valid, binding and enforceable.
CNO's Baa3 rating reflects its position as the largest construction company
in Latin America, benefiting from a leading position in major markets
supported by high entry barriers. The company has a conservative
financial policy that translates into healthy liquidity and strong debt
protection metrics relative to higher rated global peers, although
we expect some modest decline in operating margin as the backlog in Brazil
grows. While CNO has a strong management team with a solid track
record of execution of complex projects and has a large backlog supporting
near term revenues, its considerable exposure to countries with
political risk and economic volatility, and the risk of cash transfer
to CNO's holding company to support the group's investments in new projects
are constraining factors to the rating.
The Baa3 senior unsecured issuer and debt ratings also incorporate effective
subordination of the unsecured debt to CNO's secured debt and the structural
subordination to debt at its subsidiaries and joint ventures, which
do not provide upstream guarantees. Approximately 8% of
CNO's consolidated adjusted debt is secured by specific assets and about
35% of its consolidated EBITDA generation and assets are located
at subsidiaries or joint ventures.
In 2010 CNO continued to report strong operational performance in spite
of the weakened economic conditions in Angola, where the company
has historically generated a relevant portion of its revenues, affected
by lower oil prices that constrained the country's ability to fund
infrastructure projects. The decline in foreign revenues (namely
Africa -46% in USD terms) could, however, be
fully offset with higher revenues in Brazil, so that consolidated
revenues in 2010 remained virtually flat over 2009 in USD terms.
Despite the general downward pressure on margins of the global construction
industry, CNO managed to improve EBITA margin to 10.2%
in 2010 from 9% in 2009, which translated into strengthened
cash flow generation and further improved debt protection metrics,
including Funds From Operations (FFO) to Total Adjusted Debt (adjusted
for off-balance sheet guarantees and debts with non-consolidated
consortium affiliates) of 57% compared with 31% in the previous
fiscal year. Free cash flow of BRL 2.3 billion (+150%
yoy) was partially used to repay debt. Liquidity as of December
31, 2010 remained solid based on a cash position of BRL 4.6
billion that comfortably covers total adjusted debt of BRL 3.7
billion (thereof BRL 1.4 billion short term), in addition
to full availability under its USD 500 million committed credit facility.
CNO ended 2010 with a backlog of USD 26.1 billion which was 29%
higher than 2009 year-end thanks to the increased number of infrastructure
and industrial projects in Brazil and Latin America. We note,
however, that some 21% of its backlog as of December 31,
2010 was with related parties and that a large portion of CNO's
backlog is concentrated on countries with high political risk and economic
volatility such as Venezuela (B2, outlook stable), Argentina
(B3, outlook stable) and Angola (B1, under review for possible
The stable outlook reflects our belief that CNO will maintain efficient
risk management and prudent financial policy in support of healthy liquidity.
Although we anticipate that revenues will remain fairly stable at current
level and operating margins will decline modestly in the near term,
we expect that CNO will manage capital expenditures and dividends in order
to maintain strong debt protection metrics for the Baa3 rating category,
thus mitigating the risks inherent to operating in countries with political
risk and volatile economies.
Given CNO's high exposure to risky countries, our expectation of
lower margins moderately affecting debt protection metrics in the near
term, and the cash drain risks deriving from the group's investments
in new projects, upward pressure on the ratings or outlook is unlikely
in the near term.
The ratings or outlook could come under negative pressure if CNO's credit
metrics deteriorate with Retained Cash Flow less Capex to Total Adjusted
Net Debt dropping to below 20% without expectation of improving
in the near term, or if liquidity deteriorates, most likely
due to cash drain to support new ventures of the group. A downgrade
in the ratings or outlook could also be triggered by a substantial increase
in secured debt at CNO or its subsidiaries or a proportional decrease
in the percentage of consolidated EBITDA or assets located at CNO,
compared to those at the operating subsidiaries or joint ventures.
Moody's last rating action on CNO occurred on May 3, 2010 when we
assigned a Baa3 foreign currency rating to its guaranteed perpetual notes,
which issuance was concluded in September 2010.
The principal methodology used in rating CNO was Moody's Global Construction
rating methodology available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Construtora Norberto Odebrecht S.A. ("CNO") is the largest
engineering and construction company in Latin America, with revenues
of about BRL 16.2 billion (USD 9.5 billion) in 2010 primarily
from large-scale construction projects, including highways,
railways, bridges, power plants, tunnels, subways,
buildings, port facilities, dams, manufacturing and
processing plants, mining and industrial facilities.
CNO is a subsidiary of Odebrecht S.A. ("ODB"; unrated),
the family-owned investment holding company for one of the largest
non-financial Brazilian conglomerates that also controls Braskem
S.A. (Ba1, outlook stable), the largest chemical
company in Latin America producing olefins and polyolefins. ODB's
consolidated net revenues attained BRL 46.7 billion (USD 26.5
billion) in 2010, with 35% generated by CNO, 42%
by Braskem, and 23% by other subsidiaries mostly engaged
in the infrastructure and energy sectors. The group has diversified
its operations through significant investments in the oil & gas and
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's assigns Baa3 rating to Odebrecht's notes
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