OREANDA-NEWS. Fitch Ratings has downgraded the foreign and local currency long-term Issuer Default Ratings (IDRs) for Odebrecht Engenharia e Construcao S.A. (OEC) to 'BB' from 'BBB-', and its long-term National Scale Rating to 'AA-(bra)' from 'AA+(bra)'. These rating actions affect approximately USD3 billion of issued debt by Odebrecht Financial Limited (OFL), which OEC unconditionally and irrevocably guarantees. The Rating Outlook remains Negative. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

The downgrade reflects Fitch's perception of OEC's continued business profile deterioration, influenced by the challenging macroeconomic environment in Brazil, maintenance of low oil prices and potential consequences of the Lava-Jato investigation. These events are likely to pressure the company's backlog, revenues and cash flow generation during the next years.

Fitch believes the reputational damage from the Lava-Jato scandal and maintenance of low oil prices will erode OEC's capacity to replace backlog. In addition, it has reduced Odebrecht group's ability to access debt and capital markets; despite no debt rollover until 2018 for the heavy construction company. OEC's credit profile is further affected by the intrinsic volatility of the construction business and high exposure to government clients combined with the weakness of oil prices, as an important part of OEC's clients depend on the commodity exports to fund their infrastructure projects.

OEC's ratings remain supported by its scale as the largest Latin American Engineering and Construction (E&C) company, strong liquidity, and low to moderate leverage. Company's diversified and robust backlog adds a degree of visibility to revenues and EBITDA, which is positive for its credit profile. It was also taken into account OEC's financial discipline in not overpaying dividends to Odebrecht S.A. (ODB) and its strategy to not support its more leveraged sister companies.

The Rating Outlook is Negative due to the uncertainties regarding the potential outcomes from the Lava-Jato investigation and the performance of the Brazilian economy in 2016 and 2017, along with the maintenance of oil prices at historical lows.

Cash Flow Generation to Reduce

Fitch expects a challenging business environment for OEC to negatively impact cash flow generation over the next years. The restricted launches of infrastructure project in Brazil due to the deteriorated macroeconomic environment and political crisis should result in OEC's domestic backlog consumption. The daunting scenario in Brazil influences 22% of the backlog, while another 44% is affected by low oil prices, resulting in backlog consumption that reduced to USD30 billion from USD34 billion in the first nine months of 2015.

Fitch foresees a positive but low free cash flow (FCF) in the next three years. Positively, EBITDA margin of 9% - 10% should compare adequately for the industry. During the LTM ended Sept. 2015, OEC's EBITDA generation of BRL4.2 billion and EBITDA margin of 9.7% were favorably influenced by the company's efficient execution and discipline in the bidding process. Cash flow from operations (CFFO) of BRL6.7 billion was robust and sufficient to cover capital expenditures of BRL817 million and dividends of BRL396 million, delivering a FCF of BRL5.5 billion.

Robust but Concentrated Backlog

OEC's robust backlog presents certain degrees of concentration. By the end of September 2015, 63.7% of OEC's backlog of BRL119 billion (USD30 billion) came from public clients with the ten largest projects responsible for 56.5% of the company's total backlog. Oil export countries such as Venezuela and Angola have represented 43.6% of the portfolio of contracts, which further adds concentration risks and concerns related to the pace of projects execution due to low oil prices.

Low to Moderate Leverage

Fitch believes OEC will maintain moderate to low leverage over the next three years, with total adjusted debt around 3.0x-3.5x. As of the LTM ended Sept. 30, 2015, the company's total adjusted leverage reached 3.2x, from 2.6x in December 2014, influenced by the real devaluation on the company's FX debt exposure. By the end of September 2015, OEC's total adjusted debt was BRL13.7 billion, with 87% composed of USD bonds. In the same period, OEC's net adjusted leverage was 0.5x, as per Fitch's metrics.

No Direct Affiliate Support
Fitch assumed no direct support from OEC to its sister-companies during the next five years. The agency also expects minimum dividend payments from OEC to ODB. Fitch understands that if one of the ODB's subsidiaries requires financial support all possibilities would be exhausted, such as downsizing, restructuring, debt renegotiations, before ODB is called to inject money. The agency believes that only in a very unlikely scenario, OEC would be used to cover any losses of the group. The company contribution to the group should continue to be through dividends to the holding company and the debt service of OFL's issuances.

KEY ASSUMPTIONS

--Backlog in Brazil declining 10% in 2015, 10% in 2016, and 2% in 2017. Abroad, the portfolio of contracts in USD falls 2% in 2015, 3% in 2016, and recovers to a 2% growth in 2017;
--Revenues in BRL growing 34% in 2015 and flat in 2016 despite the FX depreciation;
--EBITDA margins of 9.6% in 2015, 8.8% in 2016 and 9.4% in 2017.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:
--More severe backlog reductions than Fitch's initial expectations, further affecting its cash flow generation;
--Unexpected support to sister companies or higher dividend payments to ODB causing significant liquidity decrease;
--Heavy fines and suspensions from the Lava-Jato investigation.

An upgrade is unlikely in the short term.

LIQUIDITY

Fitch expects OEC to maintain a strong liquidity over the next three years. The company's financial flexibility is favored by the USD1.0 billion standby committed credit facility with unrestricted access until November 2019. As of Sept. 30, 2015, OEC's sound cash position of BRL11.5 billion covered short term debt of BRL1.6 billion 7.3x. The agency forecasts OEC to report cash coverage ratios of 18x-22x from 2015 until 2019. The company benefits from lengthened debt amortization schedule being the next relevant principal amortization is the BRL500 million due April 2018.

FULL LIST OF RATING ACTIONS

Fitch downgrades the following:

Odebrecht Engenharia e Construcao S.A. (OEC)
--Foreign and local currency IDRs to 'BB' from 'BBB-';
--National scale rating to 'AA-(bra)' from 'AA+(bra)'.

Odebrecht Finance Limited (OFL)
--BRL500 million senior unsecured notes due 2018 to 'BB' from 'BBB-';
--USD500 million senior unsecured notes due 2020 to 'BB' from 'BBB-';
--USD600 million senior unsecured noted due 2022 to 'BB' from 'BBB-';
--USD800 million senior unsecured notes due 2023 to 'BB' from 'BBB-';
--USD550 million senior unsecured notes due 2025 to 'BB' from 'BBB-';
--USD500 million senior unsecured notes due 2029 to 'BB' from 'BBB-';
--USD850 million senior unsecured notes due 2042 to 'BB' from 'BBB-';
--USD750 million perpetual bonds to 'BB' from 'BBB-'.