Brazil’s Odebrecht Freezes New Investments on Funding Fears

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Odebrecht SA, owner of Latin America’s biggest building company, is suspending new investments in Brazil on concern it will have a hard time borrowing at attractive rates.

A looming fiscal tightening and the Brazilian development bank’s reluctance to release loans for an oil rig supplier have led the company to put new investments on hold, Chief Executive Officer Marcelo Odebrecht said Monday in an interview. The halt doesn’t include the firm’s existing backlog.

With Brazil boosting interest rates to combat inflation, the economy is heading for its worst year since at least 1992 as a widening graft scandal prompts street protests. For builders like Odebrecht that once fueled the country’s World Cup-led development boom, financing options are narrowing.

“We’re avoiding new commitments until we have a clear vision of how the credit market will behave,” Odebrecht, 46, said from his Sao Paulo offices. “The big risk to Brazil’s growth in the next two years is the question of the credit outlook.”

The Salvador-based empire controlled by the billionaire Odebrecht family is Brazil’s biggest construction and engineering conglomerate by revenue, and has operations in 21 countries. The holding, which also has interests in petrochemicals, energy and infrastructure, reported gross revenue growth of 11 percent in 2014 to 108 billion reais ($37 billion at today’s rate), according to an e-mailed statement. The group’s 2014 net income was little changed from the year before at 498 million reais.

Rig Supplier

Its Construtora Norberto Odebrecht unit was cited in a probe into graft at state-run oil producer Petroleo Brasileiro SA, or Petrobras.

The company faces allegations it bribed officials at Petrobras to obtain contracts from the oil producer. It has denied any wrongdoing and neither Odebrecht nor its executives have been charged with any crime.

The bribery investigation at Petrobras has sent ripples through the country’s construction and energy sectors. Three major builders -- OAS SA, Galvao Engenharia and Grupo Schahin -- filed for bankruptcy protection for some of their units after the allegations choked off access to bond financing.

Brazil’s development bank has yet to disburse a 10-billion-real loan it approved 15 months ago for Sete Brasil, a Petrobras oil rig supplier also cited in the bribery scheme. The bank’s head told lawmakers on April 16 he is waiting for Sete Brasil to restructure before disbursing funds. Sete Brasil said in an e-mailed response that external auditors didn’t find any irregularities in its contracts.

Braskem Stake

Moody’s said March 12 that a Comptroller General investigation of 10 companies including Construtora Norberto Odebrecht is a credit negative because of potential penalties, fines or limitations on future public auctions. The rating firm cut the builder’s outlook to negative in January, citing industry deterioration on the back of the corruption scandal.

Agencia Estado reported on April 13 that Petrobras aims to sell its 36 percent stake in petrochemical company Braskem SA, which it controls with Odebrecht. Marcelo Odebrecht said that while the builder hasn’t received any communication from Petrobras confirming or denying intentions to sell, the construction company would likely have the capacity to buy Petrobras’ Braskem stake, if the price is right.

Odebrecht’s Chief Financial Officer Marcela Drehmer said in an interview that the company has no need to sell assets to raise cash, though it is considering minority partners to help raise funds for its energy unit. The company’s Odebrecht Energia unit is in talks with four international pension funds that are interested in the company’s wind, biomass and hydroelectric plants, Felipe Jens, chief investment officer of Sao Paulo-based Odebrecht Energia, said in a separate interview.

Borrowing Costs

Odebrecht bonds rebounded from a plunge sparked by Brazil’s largest kickback investigation when Petrobras released long-delayed earnings last week. Odebrecht Finance Ltd perpetual bonds are trading at 95 cents on the dollar, up from a Feb. 10 low of 69 cents.

Petrobras contracts represent less than 1 percent of Odebrecht’s backlog, and public works are only about 5 percent of contracts of the company’s building arm, Odebrecht said.

“There’s a lot of blah, blah, blah, but nothing concrete in terms of risk,” Odebrecht said. “That whole question of systemic risk and the rating agencies is really a lack of knowledge. We’re trying to talk with Moody’s to clear it up.”

Brazil economists expect the economy to contract 1.1 percent this year, according to a central bank survey published Monday. Annual inflation accelerated to 8.1 percent in March, the highest in a decade.

“Will there be money to finance infrastructure in Brazil?” Odebrecht said. “In what conditions?”

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