March 3, 2017 / 6:30 PM / 3 years ago

Odebrecht bonds slump as scandal spillover fans investor skepticism

SAO PAULO (Reuters) - Bonds of Odebrecht SA [ODBES.UL] hit their lowest level in over six months on Friday as investors feared the spillover of the Brazilian engineering group’s involvement in a bribery scandal could hamper planned asset sales and the procurement of new contracts across Latin America.

FILE PHOTO - A sign of the Odebrecht SA construction conglomerate is pictured in Lima, Peru, June 28, 2016. REUTERS/Janine Costa/File Picture

Investors have grown concerned about Odebrecht since Feb. 22, when Reuters reported that the company wants to settle graft-related fines with several Latin American countries before June to prevent a flurry of upcoming elections across the region from putting the brakes on a recovery plan.

The price of Odebrecht Finance Ltd’s 7.5 percent dollar-denominated perpetual bond KY054172443= shed as much as 5 cents on the dollar to 37.5 cents, the biggest intraday drop in 11 months. The bond slightly recovered in late afternoon trading to about 39 cents.

Bonds guaranteed by construction unit Odebrecht Construção & Engenharia OEC SA have also suffered in the past week, along with those from the group’s oil drilling unit. Odebrecht’s 4.375 percent bond due in April 2025 BR092217396= fell 5 cents on Friday, before slightly recouping part of those losses.

In a client note, strategists at Cantor Fitzgerald LP said such concerns, coupled with investor disappointment following a meeting with OEC executives this week in Miami, could be behind the recent bond price declines.

“Further, among the many things that investors are telling us - and which we wholeheartedly agree - is that at this point, the company needs more than just new lines of credits and a couple of major projects to be added to its backlog,” the note said.

Odebrecht declined to comment.

At this point, some Odebrecht bondholders are increasingly believing that the fate of pending asset sales and refinancing efforts is more dependent than ever on how quickly Latin American governments decide on penalties for the firm, which admitted to paying bribes to win projects in recent years.

Still, a person familiar with the company’s strategy said executives made efforts to respond to investor queries at the Miami conference, noting that “not all answers to their questions were available, because the whole process remains underway.”

The OEC construction unit forecast revenue close to $6 billion this year, and a backlog slightly below the $19 billion-mark reached last September. The person said a widespread economic downturn across Latin America has done more to hinder Odebrecht’s backlog build-up than the scandal itself.


People with knowledge of Odebrecht’s strategy told Reuters last week that the company has 6.5 billion reais ($2.1 billion) worth of project stakes and operating licenses in the region and Angola for sale by year-end. So far, it has sold about 5 billion reais in assets out of a total goal of 12 billion reais.

Odebrecht is the largest of the Brazilian engineering companies accused of colluding to overcharge Petróleo Brasileiro SA and other state firms for contracts, then using part of that to channel donations and bribes into Brazil’s former ruling Workers Party and domestic and international allies.

The bribes also reached other Latin American countries where Odebrecht sought to expand, as part of a strategy to reduce exposure to home turf Brazil. Prosecutors from 10 Latin American countries last month formed a task force to share evidence on how the scheme operated.

Settling plea deals in those countries rapidly is key to help Odebrecht mitigate reputational and political risks for the asset plan as elections loom across the region. Of the 10 countries investigating Odebrecht, eight will hold at least one congressional, regional or presidential ballot in the 18 months through December 2018.

The scandal has sparked an upheaval in countries like Peru, where authorities are seeking the arrest of a former president, or in Colombia, where the company is being accused of financing President Juan Manuel Santos’s campaign.

Argentina, Chile, Ecuador, Mexico, the Dominican Republic, Venezuela and Panama are investigating the Odebrecht scheme, as are prosecutors from Portugal.

Additional reporting by Tatiana Bautzer in São Paulo; editing by Jonathan Oatis, Bernard Orr

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