The Undoing of a Brazil Giant, Told by Bankers Fearing the Worst

  • Odebrecht, once the ‘best kind’ of borrower, is now cut off
  • Credit squeeze intensifies amid $32.4 billion gross debt

When Odebrecht SA sought to raise cash at the turn of the decade for an oil and gas venture, a top financier predicted the project would be pitched by “every single banker worth his mettle.” These days, when the Brazilian conglomerate seeks new funding, the answer is almost always the same: No.

Interviews with six bankers with direct knowledge of Odebrecht’s credit paint the picture of a once-powerful construction conglomerate with 110 billion reais ($32.4 billion) in debt that’s slowly unraveling, unable to bid for new work and struggling to find the cash to pay for all the projects already in its pipeline. Lenders are calling off previously agreed-upon loans, balking at new funding requests and demanding collateral for rolling over or restructuring old debt, said the people, who asked not to be identified discussing a confidential matter.

And the bonds of that oil and gas venture? The unit missed a $9.6 million coupon payment in March, and the securities are trading at about 8 cents on the dollar.

It’s a stark reversal of fortune for a firm that was once viewed as one of Brazil’s safest borrowers and illustrates the price companies pay after being swept up in the same corruption scandal that helped topple President Dilma Rousseff. Marcelo Odebrecht, the conglomerate’s former chief executive officer and a controlling shareholder, is serving a 19-year prison sentence on charges he colluded with other builders to pay kickbacks in exchange for lucrative public works contracts.

“Banks used to see them as the best kind of client -- now they talk about the company and say ‘let’s manage this problem,’” said Carlos Gribel, the head of fixed income at Andbanc Brokerage in Miami, who used to recommend Odebrecht group bonds to his clients. “At the end of the day, the biggest problem for a company like Odebrecht is the whole damage to its image that a situation like this brings.”

Chief among creditors’ concerns is that a nonpayment at some units or at the holding company could be contagious, toppling other firms or the entire group, said the people. A $2 billion fine claimed by Brazilian prosecutors in March heightened concern over cash shortages, while compliance departments from banks forbid lending to companies that may be involved in corruption, the people said.

Odebrecht isn’t the only firm in Brazil facing a credit squeeze and has prepared for the situation, the group said in an e-mailed response to questions. The firm has been prioritizing liquidity and has 25.7 billion reais in cash, it said.

“In moments of crisis like the current one for Brazil, it is very normal for creditors to ask for more collateral in order to extend debt maturities," the company said, adding that most of the debt is ring-fenced in the form of project finance structures and that there are no cross-default clauses among its many units. The company declined to comment on the corruption probe.

Odebrecht’s growing troubles forced Construtora Norberto Odebrecht SA, the biggest construction company in Latin America, to terminate in April two revolving credit lines because “recent developments may have caused difficulties in withdrawing funds under the facilities in the near future,” according to its financial statements released Friday. One of the lines is a $565 million loan that was approved in 2014.

The company said in an e-mail that it never tried to withdraw the funds for the loans.

Banks don’t see all of debt from Odebrecht’s projects as ring-fenced: A $4.1 billion syndicated loan for a natural-gas pipeline in Peru from a group of 20 creditors has been delayed by almost a year, two people said. Odebrecht, which controls the group building the pipeline, has said it’s trying to sell its stake.

The company said it hasn’t started any new projects since 2014 and all the ones in the financing phase are being sold.

The holding company also said it has hired Lazard Ltd. to “review its financial strategy and improve the management of its investments." The Salvador, Bahia-based firm is aiming to raise as much as 12 billion reais through divestments to pay debt. The group generated earnings before interest, taxes, depreciation and amortization of 20.8 billion reais in 2015.

One of the assets for sale is Odebrecht Ambiental, a utility company that provides water and sewage services throughout Brazil, and Brookfield Asset Management Inc., Canada’s largest alternative asset manager, is among the firms weighing a bid, said two people with direct knowledge of the matter. The Toronto-based firm is in talks to buy up to the 70 percent stake owned by Odebrecht SA for as much as 4.2 billion reais, one of the people said. A deal could be closed in four months, the person said. Odebrecht declined to comment on this sale process.

The oil and gas unit isn’t the only one restructuring debt. Sugar and ethanol firm Odebrecht Agroindustrial hired Rothschild & Co. and Virtus BR Partners Assessoria Corporativa SA to extend the maturity of its 13 billion reais in debt, according to one person. As part of the plan, the holding company will provide an injection of 4 billion reais into the unit and give part of its shares in petrochemical producer Braskem SA as collateral, the person said.

An additional 2 billion reais in energy assets may also be given as collateral to allow Odebrecht Agroindustrial maturities to be extended without any haircut for banks, said the person.

Odebrecht confirmed the capital injection plans and said the shares from Braskem “may be used as collateral” in short term loans to the holding company, such as bridge-loans or mezzanines, declining to provide more details.

Working in Odebrecht’s favor is the fact that most of its debt load isn’t maturing anytime soon and there is speculation its former CEO Marcelo Odebrecht may have started talks for a leniency accord with authorities, said Gribel of Andbanc. The bonds of fellow builder Andrade Gutierrez SA surged after it reached such a deal, which allowed it to bid on government contracts again in exchange for paying a fine and issuing an apology.

Odebrecht declined to comment on the possibility of a plea bargain agreement.

“While there aren’t strong pressures in the short term, getting credit has become a problem for them,” Gribel said. “Their biggest problem is if we see a deepening of the whole credit squeeze and the only solution is a bankruptcy filing. That would be the worst-case scenario.”

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