Fixed Income Analysis /

Bad news continues for Odebrecht and subsidiaries; reiterate Sell on ODBR bonds

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    4 June 2019
    Published by

    LyondellBasell Industries NV has ended talks with Braskem SA (a subsidiary of Odebrecht SA) over acquiring the company. We see this as a lost opportunity for Odebrecht to monetise its most valuable asset at a time when the holding company’s liquidity is very tight.

    This is just the latest in a string of negative news items over the past few days for Odebrecht and its subsidiaries. On 29 May, creditors of Atvos SA, Odebrecht’s ethanol unit, filed for bankruptcy protection asking the holding company to guarantee Atvos debt (Odebrecht guarantees cUS$2.7bn in Atvos bank debt). According to Bloomberg at the time, Odebrecht was weighing up whether it would take the same measure in a few weeks’ time, potentially seeking protection even earlier if banks had demanded guarantees right away. No other unit had immediate plans to follow suit. 

    However, in the latest report from Bloomberg citing a local newspaper Estado, Caixa Económica Federal – one of Brazil’s largest banks – and Banco Votorantim “have signalled to Odebrecht that they will hold a meeting to discuss loans to Odebrecht that might lead to the banks seeking to collect loans granted to the builder instead (Odebrecht Engenharía e Construção or OEC)”. The banks might seek action against OEC due to the fact that neither have loans backed by Braskem shares, like other creditors do.

    The combination of these events (the termination of the Braskem-LyondellBasell talks, Atvos’s bankruptcy and the potential actions against OEC by Caixa and Votorantim) are worrying signals for Odebrecht’s liquidity situation. More of its subsidiaries could seek court protection from creditors.

    Bond investors will be concerned about recovery levels from the Odebrecht Finance Ltd Family of bonds, guaranteed by OEC (which we rate a Sell). As we have stated in previous reports, we would not be surprised if there is, in fact, no recovery, as has been the case with other construction companies with no major assets to liquidate or monetise.

    To make matters worse, the bonds rank junior to the bank loans, and these in turn rank junior to the fines related to the agreements that Odebrecht has had to sign with the government as a result of the Lava Jato corruption scandal.