RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has assigned Odebrecht Engenharia e Construcao S.A. (OEC) a Long- Term Issuer Default Rating (IDR) of 'BBB' and a National Scale Long-Term Rating of 'AAA(bra)'. The Rating Outlook is Negative.
Concurrently, Fitch has affirmed at 'BBB' the Long-Term Issuer Default Rating (IDR) and the 'AAA (bra)' National Scale Long- Term Rating 'AAA(bra)' for Construtora Norberto Odebrecht S.A. (CNO). The ratings have been removed from Rating Watch Negative. The Rating Outlook for CNO is Negative. Fitch has simultaneously withdrawn the ratings of CNO as CNO is undergoing reorganization. Accordingly, Fitch will no longer provide ratings or analytical coverage for CNO. A full list of ratings actions follows at the end of this press release.
OEC is now the holding company and 100% direct parent of CNO and Odebrecht Global S.A. (ODBG) following Odebrecht Group's strategy to restructure its heavy construction operations. The group is to concentrate domestic activities at CNO and the operations abroad at ODBG. OEC, CNO and ODBG provide solidary guarantee on Odebrecht Finance Limited (OFL) issuances.
KEY RATING DRIVERS
OEC's 'BBB' rating reflects its consolidated robust financial profile, strong and consistent track record of operations at CNO, as well as its leading position in the engineering and construction sector in Latin America. The ratings also incorporate the resilience of CNO's margins, as demonstrated during the last quarters. OEC's credit profile benefits from CNO's successful track record in raising funds to lengthen its comfortable debt amortization profile. Fitch expects that OEC will continue to maintain a conservative capital structure and strong liquidity for the next few years. On a standalone basis OEC does not have debt outstanding.
OEC's Negative Rating Outlook reflects increasing risks associated with its backlog in countries such as Venezuela and Angola due to lower oil prices. The ongoing nature of the Lava Jato investigation, which could lead to fines and additional putative measures, continues to be a concern and reflects the Negative Outlook.
The ratings also incorporate the current financial exposure of OEC to other businesses of the Odebrecht Group (ODB Group). Key projects of sister companies include: the hydro power plant in Peru (Chaglla), the industrial treatment residue plant (Ethylene XXI - Mexico), Galeao Airport (Rio de Janeiro), Sao Paulo Metro (line 6). Risks for these projects are high as they are either pre-operational or are in the process of ramping up.
Robust Backlog and Resilient Margins
OEC benefits from CNO's successful track record in renewing its backlog which was robust at USD33.9 billion by the end of 2014, equivalent to 2.4 years of revenues. OEC's backlog has moderate concentration; its 10 largest projects have accounted for 46% of its total backlog in the same period.
Fitch expects the company to sustain its consolidated EBITDA margin in the range of 9% to 10% during the next few years. CNO's 2014 margins were robust at 10% and in line with the industry's average. The company has demonstrated a resilience to cost pressure in Brazil, as it benefits from the geographical diversification of its contracts.
Reduced Net Leverage
OEC's adjusted net leverage should remain conservative and below 1.0x in the next few years. CNO had a positive net cash position at the end of 2014 while its total adjusted leverage was 2.6x, in line with Fitch's expectations. As of Dec. 31, 2014, CNO's total adjusted debt reached BRL8.5 billion, including BRL8.0 billion of off-balance-sheet guarantees, compared with adjusted debt of BRL8 billion, including the BRL7.4 billion of off-balance-sheet guarantees, in Dec. 31, 2013. Off-balance-sheet debt increased due to the BRL depreciation in the period as most of it is USD-denominated.
Lower Risk of Exposure to Sister Companies
OEC's obligations are limited to the payment of the coupons and principal of OFL issuances. It does not directly guarantee other affiliates' commitments. 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, with no expectation of increasing guarantees to OFL's issuances.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for OEC include maintenance of EBITDA margins ranging from 9% to 10%, flat to 1% sales growth domestically, 3% to 4% growth abroad, and no short term impacts from Lava-Jato investigation.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action:
--Material fines and restrictions to participate in local public contracts;
--Substantial reduction of backlog and/or cancellation of projects, associated with an estimated negative FCF in the next years;
--A much weaker liquidity position and a net leverage above 1.5x on a sustainable basis;
--Changes in the financial strategy of the group such as using CNO to directly support its affiliates.
A near-term upgrade of the issuer's ratings is unlikely. In the long term, ratings could be upgraded by improvements in the consolidated credit metrics of the ODB Group and/or ring-fencing clauses to block OEC to directly support its affiliates.
LIQUIDITY
OEC is expected to sustain CNO's historically strong liquidity position and to benefits from a lengthened debt maturity profile. As of Dec. 31, 2014, cash and equivalents of CNO were BRL11.8 billion, enough to cover its short-term adjusted debt of BRL340 million by 35x. OEC's financial flexibility is enhanced by an unused USD1 billion standby credit facility and proven access to debt markets.
Fitch estimates OEC to sustain strong free cash flow (FCF) in the next few years, supported by the sound cash flow from operations (CFFO). In 2014, CNO's CFFO of BRL6.1 billion covered capital expenditures of BRL1 billion, and dividends of BRL743 million leading to a positive FCF of BRL4.3 billion.
FULL LIST OF RATING ACTIONS
Odebrecht Engenharia e Construcao S.A. (OEC)
--Long-term foreign currency IDR 'BBB';
--Long-term local currency IDR 'BBB';
--National scale rating 'AAA(bra)';
The Rating Outlook is Negative.
Fitch affirms the following ratings and has removed the ratings from Negative Watch:
Odebrecht Finance Limited (OFL)
--BRL500 million senior guaranteed notes due April 2018 at 'BBB';
--USD500 million senior guaranteed notes due April 2020 at 'BBB';
--USD600 million senior guaranteed notes due June 2022 at 'BBB';
--USD800 million senior guaranteed notes due April 2023 at 'BBB';
--USD550 million senior guaranteed notes due April 2025 at 'BBB';
--USD500 million senior guaranteed notes due June 2029 at 'BBB';
--USD850 million senior guaranteed notes due June 2042 at 'BBB';
--USD750 million guaranteed perpetual bonds at 'BBB'.
Fitch affirms and removes the ratings from Negative Watch and withdraws the following ratings:
Construtora Norberto Odebrecht S.A. (CNO)
--Long-term foreign currency IDR at 'BBB';
--Local currency IDR at 'BBB';
--Long-term national rating at 'AAA(bra)'.
The Rating Outlook is Negative.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985844
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.