Ratings firm Moody’s has changed its outlook for Latin America’s largest construction firm, Brazil’s Construtora Norberto Odebrecht, to negative on the back of the Petrobras corruption scandal and increased macroeconomic uncertainties.
Moody’s says the change reflects the deterioration in the industry fundamentals for engineering and construction in Brazil and that Odebrecht could face weaker growth rates, higher execution risks and unexpected cash flow pressures.
Moody’s acknowledged in its note on 21 January that Odebrecht had no executives indicted for corruption, but said that it had been temporarily banned from taking part in future bids with Petrobras along with 22 other construction firms on the back of cartel allegations.
The company now has a low exposure to Petrobras – only 1% of its current backlog is related to the Brazilian state oil firm, down from about 8% in 2011 – but Moody’s believes the group has additional exposure to Petrobras through subsidiaries of its parent, Odebrecht SA, and that, as the investigations continue, Odebrecht could face suspensions, restructurings, or payment delays under the existing contracts with Petrobras, or financial penalties.
In the biggest corruption investigation in Brazil’s recent history, police arrested 35 people at the end of last year who are believed to have taken part in an extensive bribery scheme in which construction companies are alleged to have paid bribes to Petrobras in return for contracts. Among them was José Adelmário Pinheiro Filho, the president of another Brazilian construction giant, OAS, plus executives from construction and civil engineering firms Camargo Correa, Engevix, Galvao Engineering, Mendes Jr and UTC Engenharia.
Earlier this month OAS, a privately-owned multinational, failed to meet a $16m interest payment on a $400m unsecured debt.
On the plus side for Odebrecht, Moody’s has affirmed its "Baa3" rating for the company. This "reflects its position as the largest construction company in Latin America, benefiting from a leading position in its major markets and strong expertise in the engineering and construction businesses," Moody’s said. "The company has conservative financial policies that translate into strong debt protection metrics and excellent liquidity profile relative to higher rated global peers."
The rating also takes into account Odebrecht’s "solid track record of execution of complex projects" and its large backlog of about $33.7bn, which Moody’s said provides "adequate revenue visibility for the next two years".Â
Holding the rating back, however, is Odebrecht’s "considerable exposure to countries with high political risk and economic volatility", Moody’s said, "as well as the risk of potential increase in dividends outflow to the shareholder and limited financial disclosures as compared to publicly listed companies and other investment grade peers."
Photograph: Odebrecht’s Lobito Refinery construction site in Angola (Odebrecht)