Industry Trend Analysis - International Lifeline Closing For Odebrecht - FEB 2017

BMI View: Odebrecht's access to international contract s and much-needed operating income will be constricted as governments in key markets move forward with restrictions, fines and outright bans. This will put the Brazilian major under considerable pressure as these cashflows have provided a lifeline for the company which has faced contracting restrictions and struggled to raise capital in its domestic market.

Continued fallout from the Lavo Jato corruption scandal will limit Odebrecht's ability to operate throughout the Latin America region, as huge fines, lack of credit and outright banning in some countries all limit the firm's ability to bid on and win projects. Since 2014, the Brazilian major - which is the largest construction firm in Latin America by 2015 revenues - has not entered into any new contracts in its domestic market and has been explicitly banned from Petrobras and public contracts in Brazil for roughly two years. Against this backdrop, international contracts have presented a lifeline for the firm, with international revenue accounting for 58% of total revenue through the 12 months ending in June 2016. However, further revelations about the full scope of the bribery scandal as part of an Odebrecht leniency agreement in Brazil and a joint Brazilian, US and Swiss investigation will put pressure on governments across Latin America to place further restrictions on the firm. In December 2016, the US Justice Department, following an Odebrecht plea bargain, disclosed that the firm had paid approximately USD788mn in bribes on over 100 projects in 12 countries, including Angola Argentina, Brazil, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Mozambique, Panama, Peru and Venezuela.

This, combined with the scale of Odebrecht's order books in the region, raises potential downside risk to growth rates in a number of Latin American construction markets, including Brazil, Panama and Peru, as major works may be retendered and it takes time for new firms to come in and fill the void. However, over the longer term we note the potential for more transparency and competitiveness in the bidding process to boost infrastructure development and construction output in these economies.

Yields Remain Elevated
Yield On Odebrecht Finance Ltd's 2049 USD Denominated Bonds, %
Source: Bloomberg, BMI

Record Anti-Corruption Fines Will Further Limit Operational Capacity

A record anti-corruption settlement of between USD2.6bn and USD4.5bn will further limit Odebrecht's operational capital and ability to take on new projects. In December 2016, the Brazilian firm agreed to a deal with Brazilian, US and Swiss authorities according to the US Department of Justice which brought charges against the firm under the US's Foreign Corrupt Practices Act. The size of the eventual penalty will be determined based on the firm's ability to pay, with the full amount being USD4.5bn and the minimum amount USD2.6bn, and will be paid over the course of 23 years. Braskem, an Odebrecht affiliate and best operating asset in the Odebrecht portfolio, will also be forced to pay an additional USD957mn in fines.

Odebrecht Facing Bans And Restrictions Across Latin America

As a result of the recent revelations into the full scope of the corruption scandal at Odebrecht, a number of governments across Latin America have announced investigations, with fines and/or bans and restrictions on the Brazilian major's operations in their respective countries likely to follow. Panama - where it was revealed in the plea agreement in the US court that USD59mn in bribes had been paid on contracts - announced in late December that it would cancel a USD1bn contract won by Odebrecht for the construction of a hydroelectric facility in Bocas del Toro, force the company to withdraw from the bidding process for a fourth bridge over the Panama Canal and the Panama City Metro Line 3 Project, and ban the company from future public bids. Odebrecht had previously been one of the major players in the Panamanian market and is currently participating in the construction of Panama City's Metro Line 2.

In Peru - where the plea deal revealed USD12mn in bribes and USD143mn in illicit gains - government prosecutors are seeking compensation and demanding an undisclosed sum from the Brazilian firm, likely to be roughly equivalent to the reported illicit gains. Odebrecht has already been forced to sell its 55% stake in the USD7bn Peruvian Southern Gas Pipeline, after a syndicated bank loan was held up on the contingency that the Brazilian firm no longer be involved in the project. Investigations have also been launched - or bolstered - on the back of the plea deal revelation in Argentina, Colombia and Ecuador.