Fitch: Odebrecht's Leniency Agreement Moderates Uncertainties on OEC

SAO PAULO--(BUSINESS WIRE)-- Fitch considers the signing of the leniency agreement by Odebrecht S.A. (Odebrecht) to be an important step in eliminating uncertainties related to the amount and payment conditions of the fine as a result of the Lava Jato investigations. The conclusion of the agreement should partially attenuate the challenges Odebrecht Engenharia e Construcao S.A. (OEC; 'B-'/'BB-(bra)'/Watch Negative) faces in restoring its deteriorating operations and to monetize late receivables.

Fitch believes the amount and conditions negotiated in the leniency agreement to be manageable for the Odebrecht group and OEC, despite expected continued contraction of cash flow from operations (CFFO) in the short- and medium-term. It appears to Fitch the agreement signed on Dec. 1, 2016 considers a BRL6.8 billion fine payable annually within 23 years. It is not clear yet which companies will be responsible for the payments. The long-term nature of the penalty should allow the group to mitigate the burden on currently limited financial flexibility. At the end of June 2016, OEC had BRL5.6 billion in cash, compared with total adjusted debt of BRL10.6 billion and short-term debt of BRL617 million. OEC's ability to avoid cash burns remains a crucial factor in the ratings.

The agency considers this event favorable for OEC in the short term as it reduces the risks of having OEC banned from bidding on governmental contracts and accessing public funds. The agreement should also reduce restrictions OEC faces in negotiating with funding institutions and clients for potential new projects to its backlog.

Fitch remains concerned with the operating environment for Brazilian contractors. Engineering and Construction (E&C) companies still face difficulties in collecting receivables and backlogs are shrinking and deteriorating in terms of quality. Public foreign clients with economies dependent on oil exports are still delaying payments to the main Brazilian E&C companies despite the recent hike in oil prices to around USD50 per barrel. Countries that depend on oil exports represent on average 50% of these companies' backlogs.

Additional information is available on www.fitchratings.com

Related Research:

2017 Outlook: Brazilian Construction (Recovery Still Uncertain)

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Source: Fitch Ratings

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