Fixed Income Analysis /

Odebrecht: Restructuring proposal issued; upgrade to Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    9 September 2019
    Published by

    OEC, S.A., formerly Odebrecht Engenharía e Construção, has disclosed its proposal for the restructuring of the Odebrecht Finance bonds (ODBR) guaranteed by the construction company. We upgrade our recommendation on OEC bonds to Hold (from Sell), but caution that the range of outcomes is wide.

    We upgrade our recommendation on OEC bonds to Hold. This is because the implied recovery values that derive from the proposed cash flows appear attractive or fairly-valued (depending on the discount rate used), while the current trading prices for the family of bonds are not prohibitive. While we still have doubts as to whether the company will remain a going concern in the medium or long term, and the restructuring proposal is based on the company’s working expected cash flows that we believe are unrealistic, if we use conservative assumptions the obtained range of recovery values appear to provide investors with a “cheap option” to participate in the restructuring process. Even our most conservative scenarios show the bonds being fairly valued for the most part.

    The restructuring basically consists of two elements: 

    1. Exchanging each bond for a similar instrument with a 65% haircut, maintaining the coupon, and extending maturities by 4.5 years. 
    2. A “HoldCo Instrument” or “Participatory Debt Instrument” consisting of a bond due in 2058 and whose cash flows are a function of cash flow sweeps that the company expects to generate over the life of this instrument.

    The exchanged bonds also have a Pay-In-Kind (PIK) feature where the company, at its sole discretion, can make cash payments or PIK the corresponding interest of each period at a rate of the cash interest plus 50%. The principal of the exchange bonds also considers and includes Past-Due-Interest (PDI) accrued from the date of default and until the effective date when the exchange bonds are issued.

    The “HoldCo Instrument” has no principal value and its cash flows are completely dependent on the company’s ability to generate excess cash flow. The instrument consists of 50% of future distributions made by OEC – which we value according to the company’s working cash flow projections. 

    The company is suggesting robust growth in the future, and sufficient cash generation capabilities to service the new debt. This looks ambitious, but we use the company’s projections because these are the materials we have to work with, not necessarily because we believe that the company’s working documents accurately reflect what OEC might generate in the future in terms of new projects, EBITDA generation, and cash to service its new debt. 

    Our base-case scenario is that the company remains in operation for at least three years, and we see the differential between current trading prices and implied recovery values as fair-to-attractive depending on the assumed discount rate. Thus, we upgrade our recommendation to Hold.