Bond Traders Burned by Odebrecht CEO Arrest Poised for More Pain

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For bond investors in Brazil’s biggest construction company, the pain may have just begun.

Odebrecht Finance’s $519 million of notes due 2025 have handed traders some of the biggest losses in emerging markets after the group’s chief executive officer was arrested June 19 as part of an unprecedented bribery investigation. The bonds have plunged 11.6 percent since Marcelo Odebrecht was detained.

That’s because financing will probably be harder to come by for Odebrecht, which had net debt of 63.3 billion reais ($20 billion) as of December, as it’s further tainted by the kickback scandal roiling Brazil, says Sita Corretora SA. Jefferies LLC also warns of more losses as ratings companies signal they’re likely to cut Odebrecht further after two downgrades already this year.

“Access to bank financing is definitely harder for them now,” Bernardo Rodarte, who oversees 1 billion reais of assets at Sita Corretora, said in an e-mail message. “The company has a lot of assets it could sell. But who would buy it now?”

The company has been transparent with investors and rating companies to reduce any doubt regarding the recent events, Marco Rabello, the finance chief at Odebrecht Engenharia e Construcao, which issued the bonds, said in an e-mailed response to questions. Price fluctuations in the bonds can also be attributed to macroeconomic volatility, he said.

The company considers its current ratings unjustifiably low and isn’t having a harder time finding financing, Rabello added.

Odebrecht Investigation

In a June 22 statement, Odebrecht denied allegations it was part of a cartel of Brazilian builders that paid bribes to the state-run oil producer in return for contracts. It also said the imprisonment of its CEO was unfair since executives have always made themselves available to speak to authorities.

The week before, Brazilian federal judge Sergio Moro said there was mounting evidence the CEO of Odebrecht was aware of the decade-long scheme to bribe executives at Petroleo Brasileiro SA.

“The more you start opening wide the closet, the more skeletons start falling out,” Marcelo Lima, a fixed-income manager at INTL FCStone, said by e-mail. “While much of the scandal has been priced in, things tend to get worse before they improve.”

Jacobo Gadala-Maria, president of asset-manager Unimar Financial Services, said he’s sticking with his Odebrecht bonds as the company will be able to weather the scandal.

Global Company

“You’re looking at a world-class company that has world-class projects, generating revenue around the planet,” he said by telephone from Miami. “You can’t replace a builder like Odebrecht overnight and you wouldn’t want to. Is the threat of bribery accusation so big that it’s going to bring the company down? My answer is absolutely not.”

Brazil’s real climbed 0.7 percent to 3.1396 per U.S. dollar Monday as of 12:52 p.m in New York.

To Jefferies’s Alexis Panton, Odebrecht’s bonds still don’t compensate investors for the risk of further losses, especially as all three major ratings companies have a negative outlook on the builder.

He points to the notes’ yield premium over similar-maturity debt from Petrobras. At 8.1 percent, the Odebrecht’s bonds yield

1.5 percentage points more than Petrobras debt. That’s down from a record spread of 2 percentage points in February.

“Bondholders are receiving insufficient premium for the considerable fundamental and headline risks involved with the credit,” Panton, the head of Latin America corporate strategy at Jefferies, said in a July 7 report. “We believe further downgrade risk is high both on headlines and fundamentals.”

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