S&P downgrades Odebrecht unit amid Lava Jato challenges

Thursday, February 22, 2018

Standard & Poor's downgraded the rating of Brazil's embattled infrastructure company Odebrecht Engenharia e Construcao (OEC), as huge challenges surrounding the firm remain.

S&P cut the company's rating to 'CCC' from 'CCC+,' and maintained a negative outlook.

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"The downgrade reflects our view that OEC's currently weak cash flow generation that exposes the company to a potential debt restructuring, given its very high debt and sizable interest burden," said the ratings agency. "The fall in cash flows is due to difficulties in replenishing its backlog and in working capital management, and a slow pace of projects' execution."

The Odebrecht conglomerate is deeply involved in the Lava Jato corruption probe, which uncovered wrongdoings involving construction contracts with state-owned Petrobras. The construction conglomerate is thus dealing with falling revenues and selling assets to service its debts.

According to local media, the company is facing difficulties securing a credit line to service its short-term debt obligations. It is seeking to raise 3.5bn reais (US$1.07bn) from its creditors, but they're offering just 1bn reais.

Among Odebrecht's main creditors are Bradesco, Itaú Unibanco, Banco do Brasil and Santander Brasil, said a recent Folha de S. Paulo newspaper report. Those banks are pressuring the company to restructure its overseas debt, which could reduce interest paid to international creditors.

Although Odebrecht reached leniency agreements with authorities in Brazil and a few other countries, creditors worry about its inability to reach similar deals in other nations. A failure to do that increases the likelihood of fines imposed on the conglomerate in the future.