Fitch Downgrades Several Brazilian Construction Companies
The agency has removed the ratings of CAG, AGI's issuance, and CQG from Rating Watch Negative and assigned a Negative Outlook for their corporate ratings. These changes reflect Fitch's perception that any cash flow implications from the Lava-Jato scandal are not likely to materialize in the next six months. The Negative Outlook is a result of the ongoing nature of the Lava-Jato investigation and the deterioration of the domestic macroeconomic scenario.
In conjunction with these rating actions, Fitch has affirmed the ratings of Camargo Correa S.A. and CCSA Finance Limited issuances and removed the Rating Watch Negative and assigned an Outlook Negative. A full list of ratings actions follows at the end of this press release.
KEY RATING DRIVERS
The downgrade of OEC's foreign and local currency Issuer Default Ratings (IDR) to 'BBB-' from 'BBB' and its national scale rating to 'AA+(bra)' from 'AAA(bra)' was a results of the deterioration of the business environment for the company due to the incarceration of Mr. Marcelo Odebrecht, CEO of Odebrecht S.A. parent company of OEC, as a result of the latest phase of the Lava-Jato investigation. Fitch remains concerned with the reputational damage it may cause in the medium term to OEC in signing new contracts and obtaining funds.
The downgrade of CAG foreign and local currency IDR to 'BB+' from 'BBB-' and the national scale to 'AA-(bra)' from 'AA(bra)' was also a results of the most recent phase of the Lava-Jato investigation that resulted in the arrest of Mr. Otavio Azevedo, the CEO of CAG's ultimate parent company, Andrade Gutierrez S.A. Similar to OEC, Fitch is concerned with the reputational damage it may cause for the group and the construction unit as they seek to sign new contracts and obtaining funds.
In the case of CQG, the downgrade of its national scale rating to 'A-(bra)' from 'A(bra)' was a consequence of its the weak balance sheet and the deterioration of the business environment in Brazil. Although there are no executives from the Queiroz Galvao group currently incarcerated, the construction company and the group have been forced to prioritize projects in an effort to preserve cash. Due to the fallout from the scandal, CQG has now had to provide BRL863 million in guarantees to the debt of sister company, Queiroz Galvao Desenvolvimento de Negocios S.A. (QGDN).
The affirmation of Camargo's IDRs at 'BB', its national long term rating at 'AA-(bra)' ratings and its national short-term rating at 'F1(bra)' are due to its broad portfolio of business units. These assets provide the company with a stable dividend stream that mitigate cash flow volatility at the holding company level. The backbone of Camargo's ratings remains its cement company, InterCement ('BB', Outlook Negative), which accounts for about 42% of its EBITDA during 2014. The company's energy concession Companhia Paulista de Forca e Luz S.A. (CPFL; 'AA(bra)', Outlook Stable) and its toll road concession CCR S.A. (CCR;: 'AA+(bra)', Outlook Stable) also provide a significant and steady stream of dividends to the holding company. During 2014, Camargo's engineering and construction division accounted for less than 15% of its consolidated EBITDA.
The Rating Watch Negative removal from Camargo reflects Fitch's perception that any cash flow implications from the Lava Jato scandal are not likely to materialize in the next six months. The Negative Outlook is a result of the challenging conditions its cement business will face during the next 12-24 months due to the recession in Brazil.
RATING SENSITIVITIES
Ratings could be further downgraded if companies' liquidity deteriorates and the Lava-Jato investigation evolves to prosecutions, fines, and suspensions. Upgrades are unlikely in the short term.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following companies:
Odebrecht Engenharia e Construcao S.A. (OEC)
--Foreign and local currency IDRs to 'BBB-' from 'BBB';
--National scale rating to 'AA+(bra)' from 'AAA(bra)'.
Odebrecht Finance Limited (OFL)
--BRL500 million senior unsecured notes due 2018 to 'BBB-' from 'BBB';
--USD500 million senior unsecured notes due 2020 to 'BBB-' from 'BBB';
--USD600 million senior unsecured noted due 2022 to 'BBB-' from 'BBB';
--USD800 million senior unsecured notes due 2023 to 'BBB-' from 'BBB';
--USD550 million senior unsecured notes due 2025 to 'BBB-' from 'BBB';
--USD500 million senior unsecured notes due 2029 to 'BBB-' from 'BBB';
--USD850 million senior unsecured notes due 2042 to 'BBB-' from 'BBB';
--USD750 million perpetual bonds to 'BBB-' from 'BBB'.
Construtora Andrade Gutierrez S.A. (CAG)
--Foreign and local currency IDRs to 'BB+' from 'BBB-';
--National scale rating to 'AA-(bra)' from 'AA(bra)'.
Andrade Gutierrez International S.A. (AGI)
--US$500 million senior unsecured bonds due 2018 to 'BB+' from 'BBB-'.
Construtora Queiroz Galvao S.A.(CQG)
--National scale rating to 'A-(bra)'from 'A(bra)'.
Fitch affirmed the following ratings:
Camargo Correa S.A.:
--Foreign and local currency IDRs at 'BB';
--National long-term rating at 'AA-(bra)';
--National short-term rating at 'F1(bra)'.
CCSA Finance Limited:
--US$250 million senior unsecured bonds due 2016 at 'BB'.
All corporate ratings were assigned a Negative Rating Outlook.
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