Fitch Downgrades Odebrecht Engenharia e Construcao's IDR to 'B-'
'BB-(bra)' from 'A-(bra)'. Concurrently, Fitch has downgraded to 'B-/RR4' from 'B+/RR4' approximately USD3.1 billion issuances of Odebrecht Finance Ltd. (OFL), which OEC unconditionally and irrevocably guarantees. The 'B-/RR4' rating of OFL's unsecured public debt reflects average recovery prospects in the event of a default, ranging between 31% - 50%. A complete list of ratings follows at the end of this press release.
KEY RATING DRIVERS
The downgrade reflects the difficulty OEC continues to face monetizing receivables with banks and multi-lateral agencies, which has diminished its cash position relative to historical levels. OEC's cash position stood at BRL6 billion (USD1.9 billion) as of March 31, 2016, which is a sharp decline from USD4.4 billion at the end of 2014. In order to protect its liquidity, OEC has reduced activities on projects that are facing any type of issues.
The Negative Watch incorporates the challenges imposed by the rapid cash burn during the first quarter of 2016. The depletion of cash also makes the company very vulnerable to fines from Brazilian authorities and/or countries abroad.
The business outlook for OEC remains weak both in Brazil and abroad, where large clients that rely on oil exports to fund their infrastructure agenda, such as Venezuelan and Angolan governments, face difficulties to maintain the same pace of works with low oil prices. As of the end of the first quarter, the company had a USD25 billion backlog.
OEC has a favorable debt amortization schedule. Its next bullet maturity (BRL500 million) occurs in 2018. OEC's ability to use clients' advances and reduce the pace of projects in case its clients delay payments are further considered in the 'B-'.
Fitch expects an EBITDA in the range of USD $800 million and USD $1 billion for 2016, reflecting a leverage measured by total adjusted debt/EBITDA over 3.5x from 2.0 in 2015. At the end of March 2016, OEC's reported total adjusted debt of BRL 12.3 billion (USD $3.5 billion, with 85% composed of USD bonds.
KEY ASSUMPTIONS
--Backlog in Brazil declining 10% in 2016, and 2% in 2017. Abroad, the portfolio of contracts in USD falls 3% in 2016, and recovers to a 2% growth in 2017;
--EBITDA margins pressured, ranging between 8% and 9% in 2016, recovering as of 2017 to 9%;
RATING SENSITIVITIES
OEC's and OFL's ratings could be downgraded if a lenience agreement takes a considerable time to be signed or if the company faces investigations and material fines that demands one single payment in other countries. If working capital needs continue to drain cash, or the company is forced to massively slow down its activities, ratings would likely be further downgraded.
The Rating Watch Negative will likely be removed and a Negative Rating Outlook would likely be assigned when the company starts to collect receivables at a faster pace.
A lenience agreement with Brazilian authorities would be positive if accompanied by a fine payable over a number of years, as it would reduce uncertainties linked with its capacity to replace backlog and could enhance the company's ability to collect receivables.
LIQUIDITY
As of March 31, 2016, OEC's cash position of BRL6.7 billion (USD1.9 billion) covered short term debt of BRL1.1 billion (USD296 million) 6.1x. This favorably compares to the 5.5x cash coverage ratio reported in December 2015. On top of the short term debt, next big amortization is a BRL500 million in 2018.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
Odebrecht Engenharia e Construcao S. A. (OEC)
--Long-Term Foreign and Local-Currency IDRs to 'B-' from 'B+';
--National Scale Rating to 'BB-(bra)' from 'A-(bra)'.
Odebrecht Finance Limited (OFL)
--BRL500 million senior unsecured notes due 2018 to 'B-/RR4' from 'B+/RR4';
--USD500 million senior unsecured notes due 2020 to 'B-/RR4' from 'B+/RR4';
--USD600 million senior unsecured noted due 2022 to 'B-/RR4' from 'B+/RR4';
--USD800 million senior unsecured notes due 2023 to 'B-/RR4' from 'B+/RR4';
--USD550 million senior unsecured notes due 2025 to 'B-/RR4' from 'B+/RR4';
--USD500 million senior unsecured notes due 2029 to 'B-/RR4' from 'B+/RR4';
--USD850 million senior unsecured notes due 2042 to 'B-/RR4' from 'B+/RR4';
--USD750 million perpetual bonds to 'B-/RR4' from 'B+/RR4'.
All ratings were placed on Rating Watch Negative.
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