Flash Fixed Income Report /
Brazil

Situation critical for Odebrecht

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    5 June 2019
    Published by

    A Bloomberg note citing unnamed sources familiar with the matter states that Caixa Economica Federal, one of Brazil's largest financial institutions and one of the Odebrecht group's largest lenders (owed cUS$1.56bn) is "considering taking steps that would force Odebrecht, S.A. to seek bankruptcy protection."

    The article adds that Caixa is "planning to ask the holding company to accelerate debt payments by triggering a cross-default clause after Odebrecht's ethanol unit Atvos S.A. filed for court protection from creditors last week."

    As we noted yesterday, Caixa is one of few creditors whose debt with Odebrecht is not collateralised by assets, particularly the shares of Braskem, a factor that has apparently prompted the bank to find a resolution for this disparity between its debt with the holding conglomerate and its other creditors and, thus, prevent Caixa's debt from remaining junior to debt that Odebrecht has with other financial institutions, and for which it has pledged Braskem's shares.

    The Bloomberg article also states that Odebrecht "has been seeking to restructure about BRL5bn of its own debt, is facing pressure after the collapse of talks with LyondellBasell Industries NV over ... Braskem, S.A., a deal (that) would have brought a much needed cash injection."

    Odebrecht, S.A., is believed to have cBRL100bn in debt, including cUS$3bn in bonds issued by Odebrecht Finance and guaranteed by the group's construction branch, OEC (formerly Odebrecht Engenharia e Construcao, with ticker ODBR).

    Yesterday, local newspaper Estado reported that both Caixa and Banco Votorantim said that they "may demand the guarantees for loans granted to the company," as we stated yesterday.

    In our opinion, Odebrecht's financial situation has reached a critical level. Recent events suggest the group's liquidity problem is very serious and, in our view, its survival is in doubt given the company and its subsidiaries could become insolvent.

    This, in our view, is particularly true for ODBR, given it is a construction company with almost no assets to monetise and with bonds that, as we have stated before, could end up having zero residual value for holders if things do not improve quickly and dramatically, which is not a scenario that we regard as plausible.

    We have a Sell recommendation on ODBR bonds.