Fitch Ratings has assigned a 'BBB-' rating for the USD1.0 billion of proposed notes issued by Odebrecht Finance Limited (OFL) with maturity in 2022 and 2042. OFL is a wholly owned subsidiary of Odebrecht S.A. (Odebrecht), the holding company of Construtora Norberto Odebrecht S.A. (CNO). The proceeds of the issue will finance general corporate purposes, equity investments in OPI and Odebrecht Energia between 2012 and 2014 and the repurchase of all 2017 outstanding notes.
The notes are unconditionally guaranteed by CNO and the guarantee is ranked pari passu with other senior guaranteed notes of OFL.
Fitch currently rates CNO and OFL and related issuances as follows:
CNO
--Long-term foreign currency Issuer Default Rating (IDR) 'BBB-';
--Local currency IDR 'BBB-';
--Long-term national scale rating 'AA+(bra)'.
OFL
--Long-term foreign currency IDR 'BBB-';
--USD800 million senior guaranteed notes due April 2023 'BBB-';
--USD750 million guaranteed Perpetual Bonds 'BBB-';
--USD500 million senior guaranteed notes due April 2020 'BBB-';
--USD200 million senior guaranteed notes due April 2014 'BBB-';
--Two senior guaranteed notes of USD200 million each due October 2017 'BBB-'.
The Rating Outlooks for CNO and OFL are Stable.
CNO's investment-grade ratings reflect its conservative financial profile, excellent track record of operations, and leading position in the engineering and construction sector in Latin America. The ratings incorporate the growth of its cash flow and backlog of projects along with the company's continued strong credit metrics. The ratings build in an expectation that CNO will continue to maintain a conservative capital structure and strong liquidity as it develops these projects. The leverage increase due to equity investments in OPI and Odebrecht Energia is already incorporated in current ratings.
The 'BBB-' foreign currency IDR of OFL has been directly linked to that of CNO. Also, the debt issued by OFL has been unconditionally joint and severally guaranteed by CNO.
Leading Position in Engineering and Construction Sector in Latin America
CNO is a leading engineering and construction company in Latin America and is part of the Odebrecht Group, which is one of the four largest Brazilian private groups. The company's backlog has been solid and resilient to the global economic crisis. These projects benefit from their social and economic relevance to the respective countries. As of March 31, 2012, CNO's backlog was USD33.7 billion, a 34% increase from March 31, 2011. Approximately 47% of the backlog is related to projects in countries rated investment grade.
Robust Liquidity
CNO has a conservative financial strategy and has historically maintained a strong liquidity position. As of March 31, 2012, the company had BRL4.9 billion of cash and marketable securities and total adjusted debt of BRL5.3 billion, including BRL4 billion of off-balance-sheet debt guarantees. CNO's cash position covers its short-term debt obligations of BRL764 million by 6.5 times (x). CNO's financial flexibility is enhanced by an un-utilized USD500 million standby credit facility that matures in February 2013. CNO's liquidity also benefits from the company's strong access to debt markets.
Leverage Should Remain Manageable in the Next Few Years:
CNO has also historically maintained low leverage. As of March 31, 2012, leverage, as measured by total adjusted debt-to-EBITDA, was 2.2x, while net leverage was 0.2x. This low level of leverage is considered appropriate for highly cyclical and volatile industries such as heavy construction. The debt increase due to the proposed issuance is within Fitch's expectation for CNO's leverage which is forecasted to remain low and around 1.0x on net basis.
OPI and Odebrecht Energia Investments:
CNO should continue to support OPI's and Odebrecht Energia's activities. These companies' main investments include an indirect 27.6% participation of Odebrecht Energia in the concessionaire Santo Antonio Energia, which is responsible for the construction and operation of UHE Santo Antonio. OPI is responsible for the growth and operations of toll roads in Colombia (Ruta Del Sol S.A.S.; 37%), Peru (IIRSA Norte - 83% and IIRSA Sul - 70%) and Panama (Madden Collon S.A.; 100%).
OPI is also developing two arena projects in Brazil for the World Cup in 2014. The ODB Group intends to increase OPI's and Odebrecht Energia's capital in the amount of BRL2 billion between 2012-2014. During the first quarter of 2012, almost BRL600 million was injected in these two group subsidiaries and the proceeds of the proposed issue will complete the funding for these investments up to 2014. In the near- to medium-term, CNO will benefit from new projects originated by OPI and Odebrecht Energia activities.
Resilient Backlog and Increased Operations in Brazil to Sustain Revenue Growth:
CNO's net revenues were BRL23.2 billion during the LTM ended March 2012, which compares with the BRL16.2 billion in revenue generated in 2010. CNO's EBITDA grew to BRL2.5 billion from BRL1.9 billion during this time period. Fitch expects the company to maintain EBITDA margins of about 11%, which is higher than the Brazilian industry average. The company is facing some cost-increase pressure due to rising inflation and the shortage of skilled labor in Brazil.
Potential Ratings and Outlook Drivers
The ratings could be affected positively by an expansion of CNO's business in investment-grade countries. CNO and OFL's ratings could be negatively affected by a substantial reduction of backlog and/or the cancellation of key projects. A weaker liquidity position or higher leverage level could also result in a negative rating action.
Additional information is available at 'www.fitchratings.com' or 'www.fitchratings.com.br'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings Criteria (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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