Fitch Affirms CNO's IDR at 'BBB'/'AAA(bra)'; Outlook Stable

SAO PAULO--()--Fitch Ratings has affirmed the foreign and local currency Issuer Default Rating (IDRs) of Construtora Norberto Odebrecht S.A. (CNO) at 'BBB' and its national long-term rating at 'AAA(bra)'. Fitch has also affirmed the foreign currency Issuer Default Rating (IDR) of Odebrecht Finance Ltd. (OFL) and its associated debt issuances guaranteed by CNO at 'BBB'. The Rating Outlook remains Stable. A complete list of rating actions follows at the end of this press release.

Key Rating Drivers

CNO's investment-grade rating reflects its robust financial profile, good and consistent track record of operations, and its leading position in the engineering and construction sector in Latin America. The ratings also incorporate the company's margin resilience, as demonstrated during the last quarters, within an operating environment of increasing costs. CNO has also been successful in raising funds to lengthen its comfortable debt amortization profile. Fitch expects that CNO will continue to maintain a conservative capital structure and strong liquidity for the next few years.

Fitch's rating analysis considers CNO's business risk associated with potential volatility in backlog and some revenue concentration in its main projects. The ratings also incorporate the current financial exposure of CNO to other businesses of the Odebrecht Group (ODB Group), with projects carrying risks associated with the pre-operational or recent operational phase. These risks are expected to lessen as projects develop under schedule.

Robust Backlog and Resilient Margins

CNO has been successful in renewing its firmed contracts portfolio and maintaining it at a robust level of USD33.7 billion by the end of June 2014, equivalent to 27 months of revenues. The company's backlog presents moderate concentration as the 10 largest projects have accounted for 46.9% of its total firmed contracts in the same period.

The company's margins remain robust and in line with the industry's average. CNO has also demonstrated resilient performance to support pressure from cost increases, as it benefits from the geographical diversification of its contracts. Fitch expects the company to sustain its EBITDA margin in the range of 9% to 10% during the next few years.

Sound Liquidity and CFFO

CNO has historically maintained a strong liquidity position and benefits from a lengthened debt maturity profile. As of June 30, 2014, cash and equivalents were BRL5.3 billion, enough to cover CNO's short-term adjusted debt of BRL402 million by 13x. CNO's financial flexibility is enhanced by an unused USD1,045 million standby credit facility and proven access to debt markets.

Fitch expects CNO's to sustain its strong free cash flow (FCF) in the next few years, supported by its sound cash flow from operations (CFFO). In the last 12 months (LTM) ended June 30, 2014, CFFO of BRL3.7 billion covered capital expenditures of BRL1.2 billion, and dividends of BRL387 million leading to FCF of BRL2 billion.

Reduced Net Leverage

Fitch expects adjusted net leverage to remain conservative, below 1.0x in the next few years. As of June 30, 2014, CNO's net leverage as measured by net adjusted debt/EBITDA, was 0.7x, while total adjusted leverage was 2.3x, in line with Fitch's expectations. These two leverage ratios were, respectively, -0.3x and 2.5x by the end of 2013. Leverage increased due to a season effect, in which the company consumes part of the client advances in the first half of the year and receives the invoices from most of the governmental clients in the fourth quarter.

As of June 30, 2014, the company's total adjusted debt reached BRL7.5 billion, including BRL6.8 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 reduced due to the BRL appreciation in the period as most of it is USD-denominated.

Lower Risk of Exposure to Sister Companies

CNO 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, CNO would be used to cover any losses of the group. CNO contribution to the group should continue to be through dividends to the holding company, with no expectation of increasing guarantees to OFL's issuances.

Efficient Strategy Mitigates Backlog Risks

CNO has reported a positive track record of maintaining relevant backlog balance and a reduced level of project rescheduling/cancelation. The company benefits from its efficient management strategy, which is based on selecting strategic projects with relevant sponsors, backed with funding from multilateral development agencies. The company also mitigates backlog risk by requesting advanced payments from 10% to 40% from clients abroad.

Rating Sensitivities

Future developments that may, individually or collectively, lead to a negative rating action:

--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 CNO to directly support its affiliates.

Fitch has affirmed CNO and OFL's ratings as follows:

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)'.

Odebrecht Financial Limited (OFL)

--Long-term foreign currency IDR at 'BBB';

--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'.

The Rating Outlook for CNO and OFL's corporate ratings is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Scale Ratings Criteria' (Oct. 30, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=869314

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.

Contacts

Fitch Ratings
Primary Analyst
Alexandre Garcia
Associate Director
+55-11-4504-2616
Fitch Ratings Brasil Ltda
Alameda Santos, 700, 7 andar
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Gustavo Mueller
Associate Director
+55-21-4503-2632
or
Committee Chairperson
Mauro Storino
Senior Director
+55-21-4503-2625
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alexandre Garcia
Associate Director
+55-11-4504-2616
Fitch Ratings Brasil Ltda
Alameda Santos, 700, 7 andar
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Gustavo Mueller
Associate Director
+55-21-4503-2632
or
Committee Chairperson
Mauro Storino
Senior Director
+55-21-4503-2625
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com