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Odebrecht Engenharia e Construcao Downgraded To #B+# From #BB-#, On Watch Negative On Weakening Financial Flexibility

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SAO PAULO--3 May--Standard & Poor's

SAO PAULO (S&P Global Ratings) May 2, 2016--S&P Global Ratings lowered its global scale corporate credit rating on Odebrecht Engenharia e Construção S.A. (OEC) to 'B+' from 'BB-' and its national scale long-term rating to 'brBBB-' from 'brA-'. We also lowered our short-term corporate credit rating on the company to 'brA-3' from 'brA-2'. We also placed the corporate credit ratings on CreditWatch negative.

We also lowered our issue-level ratings on Odebrecht Finance Ltd. (OFL) to 'B+' from 'BB-'. The recovery rating on this debt remains at '4', indicating our expectation that lenders would receive average (30%-50%; the lower range of the band) recovery of their principal in the event of a payment default.

The downgrade reflects our view of the company's weaker financial flexibility following the announcement that it will delay the release of its annual audited financial statements for the fiscal year ended Dec. 31, 2015, given the ongoing requests from independent auditors concerning issues related to the corruption investigations under the Lava-Jato operation.

In most of its bonds agreements, OEC is exposed to information covenants related to the availability of audited financial statements of up to 120 days after the end of the fiscal period. This period has finished at the end of April, and in such a scenario we understand the creditors have now the right to ask for a notice of default. They could send such notice if they account for more than 25% of each notes, and debt acceleration could occur after 60-day cure period if the audited financial statements are not released. Although we understand OEC is working to release these financial statements as soon as possible, and we're not incorporating acceleration events in our base-case scenario (even though actual timing remains uncertain), we now see even lesser financial flexibility and further liquidity risks to the company.

We also changed our management and governance assessment on the company to weak from fair. Although OEC is trying to improve its corporate governance and compliance, we view the corruption investigations of the company as indicative of its weak risk tolerances, with a direct impact on its reputation. We also view the failure to release timely financial statements as evidence of a deficient control that result in a weaker liquidity.

Even though OEC has no financial covenants under its debt agreements, its standing in credit markets has weakened and the company is exposed to the information covenants related to the release of audited annual financial statements. In our view, the lack of timely financial statements is weighing on OEC's ability to absorb low-probability adversities. A covenant breach on any related credit facilities would likely have a significant impact because the debt containing the covenants in question can't be easily repaid. Even though our base-case scenario excludes debt acceleration, we don't view a company exposure to these types of risks as consistent with an adequate liquidity. Therefore, we're changing the liquidity score on OEC to less than adequate from adequate, despite a projected sources-to-uses ratio above 1.5x in the absence of any debt acceleration.


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