Fitch: Lava-Jato Increases Pressure on Odebrecht Engenharia e Construcao

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings believes the latest phase of the Lava-Jato investigation puts additional pressure on Odebrecht Engenharia e Construcao S.A. (OEC; rated 'BB'/'AA-(bra)'/Outlook Negative) as well as on Odebrecht group's reputational risk.

This current scenario can prevent OEC from adequately replacing its backlog in the future. Fitch foresees no liquidity issues for the construction company in the short and medium terms due to its strong cash position; however, potential fines associated with the outcome of the investigation are unknown and may change this view.

The 26th phase of the Lava-Jato investigation has mainly focused on Odebrecht Group's subsidiaries and included warrants for coercive questioning and the arrest of several of its executives. Fitch notes that this event further weakens Odebrecht Group's refinancing capability and financial flexibility within an already restrictive credit market environment.

Odebrecht Group has stated that the company and its executives, including the former CEO of the group, Marcelo Odebrecht, will collaborate with the investigation in exchange for a lenience agreement for the company and plea bargaining for the individuals. Fitch believes that if this agreement is accepted, it will remove the risk of Odebrecht being banned from participating in new public contracts and from obtaining funds from public institutions. However, it will not prevent the group from paying a heavy reimbursement.

Fitch in its analysis does not incorporate direct support from OEC to affiliates. The strategy to shield OEC may weaken under such a stress scenario. The agency expects OEC support to be limited to the minimum dividend distribution to Odebrecht S.A. and the service of Odebrecht Finance Limited's (OFL) issuances. A direct support to any affiliate or evidences of unsustainable dividends to the parent could trigger a negative rating action.

OEC's liquidity remains strong. On Sept. 30, 2015, the company reported cash and cash equivalents of BRL11.5 billion, which covered the short-term debt of BRL1.6 billion 7.2x. The company also benefits from a USD1 billion undrawn committed credit facility, a prolonged debt maturity profile and clients' advances. The next amortization is a BRL500 million only in 2018.

Fitch does not foresee any contract cancelations for OEC as a result of the latest events. The company's contracts contain several clauses to protect contractors. Heavy fines and the use of advances to demobilize the project could represent a loss to the client. The interruption in the execution of the contract discourages clients from changing the contractor. In addition, OEC has a robust track record of delivering projects on time, without major amendments.

Additional information is available on www.fitchratings.com

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160323006569/en/

Fitch Ratings
Alexandre Garcia
Associate Director
+5511-4504-2616
Fitch Ratings Brasil Ltda
Alameda Santos, 700 - 7 andar
Sao Paulo - SP - CEP: 01418-100
or
Gustavo Mueller
Associate Director
+5521-4503-2632
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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