Odebrecht's Angola-to-Venezuela push signals buy

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

NEW YORK — As Brazil's infrastructure boom flounders, construction and engineering conglomerate Odebrecht's success abroad is helping to win over JPMorgan Chase & Co. and CRT Capital Group.

While Brazil struggles to fund $240 billion in highways, ports and railroads needed to ease bottlenecks that are damping growth in Latin America's largest economy, Odebrecht has insulated itself by boosting the share of its $33 billion contract portfolio tied to projects outside Brazil. The company's international backlog increased to 72 percent in the third quarter, from 59 percent less than two years earlier, according to its most recent earnings statement.

"Their international diversification, that's a distinct positive," Peter Lannigan, a managing director at CRT in Stamford, Conn., said in a telephone interview. "They have a strong competitive position, a huge backlog and I'm comfortable enough with Brazil in the longer term to do the bottom-up work and look for good companies in the country."

Yields on Odebrecht's $600 million of notes due 2022, which rose almost twice as much this year as the average for emerging- market corporate debt rated BBB by Fitch Ratings and Standard & Poor's, stood at 5.56 percent as of Dec. 27.

That's a premium of 0.83 percentage points to similarly- rated emerging-market corporate bonds, making them attractive to CRT and JPMorgan. Fitch raised Odebrecht's credit grade to BBB in September and S&P has the company's BBB- rating on review for an upgrade.

Construtora Norberto Odebrecht SA, the engineering and construction unit of the family-owned holding company that also controls Latin America's largest petrochemicals maker, has about $3.2 billion in outstanding overseas bonds, according to data compiled by Bloomberg.

Even as Brazil has increased spending on infrastructure before next year's World Cup and 2016 Summer Olympics, efforts to attract private investment came up against repeated delays and revisions. The first of several proposed road auctions in September attracted no investors for one route and a group of small companies for another, leading authorities to say they may rewrite terms for future bids.

The government has since held auctions for several roads and two airports, including one in Rio de Janeiro. Regulators on Dec. 16 approved the first railroad auction, planned for the first half of 2014.

Odebrecht's press office didn't respond to telephone and e- mailed requests seeking comment. "Delays on the bidding process in Brazil" helped contribute to a 5.4 percent decline in its domestic backlog in the third quarter, made up for largely with an increase in international projects, the company said in its third-quarter earnings release.

Odebrecht, along with Lima-based Grana & Montero SA, won a $591 million contract to expand irrigation on Peru's north coast after beating five other bidders, the country's private investment promotion agency said Dec. 19.

The Salvador, Brazil-based company signed its first project in Guatemala in the third quarter for the construction of a $384 million highway, adding to contracts overseas that include a $2.8 billion hydroelectric dam in Angola and a $1.1 billion bridge in Venezuela. The company mitigates backlog risk by demanding advance payments of about 10 percent from clients abroad and selecting projects backed with funding from multilateral development agencies, according to Fitch.

Revenue increased 1 percent to $14.8 billion in the 12 months ended September, a figure in line with the annual sales of Seattle-based Starbucks Corp.

"We really like CNO's credit profile and remain overweight the issuer," Marcela Nagib, an analyst at JPMorgan, wrote earlier this month in the bank's 2014 outlook for Latin America corporate debt. Odebrecht is "a very strong credit, in our view, with a $33 billion backlog spread throughout several segments of infrastructure in Brazil and abroad."

The company's ratio of net debt, including guarantees, relative to earnings before interest, taxes, depreciation and amortization fell to 0.8 times at the end of September, from 1.0 times three months earlier.

Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said Odebrecht's bonds are fairly priced and unlikely to gain even as the company benefits from its backlog.

"It doesn't have much of an upside," Zeolla said in a telephone interview from New York.

Odebrecht's 2022 notes have lost 5.9 percent this year as President Dilma Rousseff failed to boost growth above the Latin American average for a third straight year. The economic slump, combined with a widening deficit, prompted Moody's Investors Service and Standard & Poor's to reduce their outlooks on the country's credit rating this year.

A pick-up in investment and new concessions, including those won by unit Odebrecht Transport to run Rio de Janeiro's airport, will fuel increasing backlog growth in the first half of 2014, according Thomas Tenyi and Alexandre Muller, analysts at Banco BTG Pactual SA, who have a hold rating on the bonds.

"We continue to see a positive trend for Latin America infrastructure," Tenyi and Muller wrote in a Dec. 9 report.

_ With assistance from Denyse Godoy in Sao Paulo and David Biller in Rio de Janeiro.