Approximately USD3.1 billion of Debt Securities Affected
New York, April 11, 2017 -- Moody's Investors Service, ("Moody's") downgraded
the foreign currency ratings assigned to the senior unsecured notes issued
by Odebrecht Finance Ltd. (OFL) and guaranteed by Odebrecht Engenharia
e Construção S.A. (OEC) to Caa2 from Caa1.
At the same time, Moody's has downgraded the corporate family rating
assigned on its global scale to OEC to Caa2 from Caa1. The outlook
for all ratings was changed to negative from positive.
The following rating actions were taken:
Outlook Actions:
..Issuer: Odebrecht Engenharia e Construcao S.A.
(OEC)
..Issuer: Odebrecht Finance Ltd.
....Outlook, Changed To Negative From
Positive
Downgrades:
..Issuer: Odebrecht Engenharia e Construcao S.A.
(OEC)
.... Corporate Family Rating, Downgraded
to Caa2 From Caa1
..Issuer: Odebrecht Finance Ltd.
....Backed Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Downgraded to Caa2 From Caa1
RATINGS RATIONALE
The downgrade to Caa2 and the change in outlook to negative reflect the
company's backlog erosion, higher than expected cash burn
in a moment of slow construction activity leading to weak cash conversion.
As well, the downgrade incorporates significant project cancelations
especially in important markets to the company outside of Brazil with
no significant signs of recovery in the near term.
Moody's expected that, after the signature of the lenience
agreement by its parent company Odebrecht S.A. (ODB,
unrated) with Brazilian federal prosecutors in December, 2016,
the company would be able to gradually start replacing its backlog.
The expectations did not materialize in Brazil so far while many other
countries in Latin America initiated parallel investigations. Going
forward, in order to improve liquidity and backlog profile,
OEC relies on the sale of assets such as Odebrecht Ambiental for the repayment
of USD 450 million in intercompany loans from its parent company ODB,
signing of leniency agreements in main countries in Latin America,
and on the rebound of the South American economies especially Brazil.
According to OEC, during the last quarter of 2016 project backlog
was reduced to about USD 17 billion, a USD 4.3 billion decline
in one quarter. The amount is pro-forma for the exclusion
of some projects Latin America and represents a steep decrease from USD
28.1 billion in the end of 2015 and well under Moody's expectations
of backlog replacement. 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 and intercompany loans to parent ODB. As of June 2016,
ODB reported consolidated cash availability of around BRL 17.5
billion and approximately BRL 23.8 billion in short term debt maturities,
during the 3Q'16 Odebrecht Agroindustrial concluded the restructuring
of its debt reducing ODB's consolidated short term debt by BRL 5.7
billion. During the last quarter of 2016 OEC consumed around USD
250 million in cash further reducing its liquidity to USD 1.3 billion
in the end of 2016, which compares to around USD 2.6 billion
in the end of 2015. As of December 2016, the cash availability
represented around 38% of total debt outstanding (unaudited),
including Moody's standard adjustments and off-balance debt
guarantees, that compares to 66% in the end of 2015.
OEC's Caa2 ratings reflect the deterioration in the company's business
fundamentals, reputational risk since the Lava Jato scandal broke,
uncertainties for the near future such as the timing and success of its
asset sale program, and closing of leniency agreements with other
Latin American countries. Despite the still adequate cash position
and long debt tenor, OEC's cash cushion has been weakening fast
together with its project backlog and cash conversion cycle increasing
the company's probability of default.
The negative outlook reflects our view that OEC's internal cash generation
and financial profile will remain weak in the next 12 months as per the
challenging environment for infrastructure investments in Latin America
and the frustrated expectations that with the conclusion of the leniency
the company to be able to gradually resume the normal course of its business.
Further negative pressure could arise if OEC keeps struggling to return
to its normal operations, if the company fails to comply with its
annual audited reporting requirements, possibly triggering a debt
acceleration, or if the company enters into a debt restructuring
that results in higher than expected losses to creditors.
Although unlikely in the near term positive pressure on the ratings or
outlook would require a sustainable recovery in OEC's operations.
A positive rating action would also be dependent on OEC improving and
maintaining 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 positive conclusion of ongoing negotiations of sisters
companies' debt, alleviating ODB liquidity pressures, would
also affect OEC's rating positively.
OEC is the largest engineering and construction company in Latin America,
with USD 10.5 bn billion in net revenues in the last twelve months
ended September 2016. The company's project backlog of USD 17 billion
is diversified into contracts comprising large-scale construction
projects in the transportation segment, energy and sewage infrastructures,
buildings and industrial facilities, located in Brazil, other
Latin American countries and Africa.
OEC is a subsidiary of Odebrecht S.A., a family-owned
investment holding company for one of the largest non-financial
conglomerates in Brazil that controls Braskem S.A. (Ba1
stable), 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 BRL 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 BRL 17.5
billion for a total reported debt of BRL 94.5 billion.
The principal methodology used in these ratings was Construction Industry
published in March 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Marcos Schmidt
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300
Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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