Odebrecht collapses with repercussions throughout Latin America

Under pressure from its creditors, Brazilian holding Odebrecht initiated a process that could become the largest corporate bankruptcy in the region's history.

Corporate bankruptcy for one of the most powerful companies in Latin America. Stock image
Corporate bankruptcy for one of the most powerful companies in Latin America. Stock image

Five years after the investigation into the Lava Jato case began, the holding Odebrecht SA requested the bankruptcy in Brazil. In recent months, the company has been under increasing pressure from its creditors, who see how it can not recover from the corruption scandal involving several countries in Latin America.

In a statement, the company claimed that bankruptcy protection was the best way to conclude its debt restructuring when creditors seek to seize the assets pledged as collateral for unpaid loans.

The debt restructuring does not include the petrochemical producer Braskem SA, the sugar and ethanol subsidiary Atvos Agroindustrial Participacoes SA, the Odebrecht Engenharia e Construcao (OEC) construction unit, the Ocyan oil company, the Enseada shipping company, Odebrecht Transport or Homebuilder Incorporator OR.

The main creditors of the conglomerate are the state lenders Banco do Brasil, Caixa EconÃ'mica Federal and BNDES, as well as the private banks Banco Bradesco SA, Itaú Unibanco Holding SA, and Banco Santander Brasil SA. The group was advised by the financial restructuring company RK Partners and the E. Munhoz Advogados law firm.

Thus, the company will try to protect part of the $ 20.5 billion of debt, guarantees, and loans between companies of a group of creditors, which includes Brazilian banks and holders of foreign bonds.

This will be the largest corporate bankruptcy in Latin America, above the $ 19 billion of debt that the telecommunications company Oi SA had in 2016.

The holding, which sought to restructure close to 5 billion reais (the US $ 1.3 billion) of its own debt. However, earlier this month the group's ethanol unit filed for bankruptcy protection, which led to talks with LyondellBasell Industries NV over the Braskem petrochemical unit.

According to the Brazilian economic newspaper Valor, the company was still working with its financial and legal advisors in the format of the judicial presentation.

Odebrecht has been struggling to recover from the consequences of the corruption investigation in the Lava Jato scandal in Brazil, the judicial investigation led by the then judge and now Brazilian Minister of Justice, Sergio Moro.

The network of corruption had the company as the protagonist not only in Brazil but in practically all countries of the region. Since the case began in 2014, Odebrecht's access to large infrastructure projects financed by the different States was cut off and its main executives were imprisoned.

In the last five years, Odebrecht paid millions in fines in other Latin American countries and saw drastically the number of projects in which it worked. This only aggravated the company's cash crisis and increased the risk to its creditors. Thus, the price of the bonds issued by Odebrecht began to fall. Some of them today are trading at around 6 cents on the dollar.

In February, the Caixa Economica Federal executed the tenure guarantees at the Arena Corinthians football stadium, which caused a payment default. In total, the conglomerate owes around 6 billion reais to Caixa, as well as to a fund managed by the bank, and this debt has no guarantee.

On June 4, talks were closed for the sale of Odebrecht's controlling stake in Braskem, considered a relic for the conglomerate. The agreement would have brought a much-needed cash injection for the group.

By Agencies

Impact on work in progress and employment

The arrest of Marcelo Odebrecht on June 19, 2015, anticipated the chronicle of an announced fall. The then president of the largest construction company in Latin America was being investigated for alleged involvement in the Petrobras case.

The Brazilian construction company Odebrecht acknowledged having paid bribes in Brazil, Mexico, Argentina, Angola, Colombia, the Dominican Republic, Ecuador, Guatemala, Mozambique, Panama, Peru, and Venezuela.

According to the document distributed by the Department of Justice of the United States, with these payments the company obtained worldwide contracts of 12 billion dollars between 2001 and 2016.

The consequences will not only hit the South American giant Brazil but several countries in the region, including Colombia, Venezuela, Peru or Panama, will continue to be concerned about the development of the process and evaluate the consequences it will entail.

The first to react was the vice president of Colombia. Germán Vargas Llera said that "any international condemnation of bribery" would disable the hiring and execution of construction work in the Andean country for 20 years. 

Odebrecht was the seventh construction company in Colombia with an income of about 150 million dollars and was in charge of five works, two of the most important ones that were developed in the country: the navigability of the Magdalena River, between Barranquilla and Puerto Salgar, It covers 908 kilometers of river and the construction of a sector of the Ruta del Sol. For both projects, a little more than 2 billion 200 million dollars were budgeted.

In the case of Venezuela, the relationship with Odebrecht comes from afar. Since it started work in the State of Zulia 23 years ago, the company, which had 12,000 employees in the country, was growing steadily. Chávez distrusted the Venezuelan businessmen and preferred to favor foreigners. Frequently, the late president mentioned Brazilians as model entrepreneurs of autonomous national development.

In Venezuela, the following projects were in charge of Odebrech: the Nigale Bridge or the second bridge over Lake Maracaibo; line 5 of the Caracas metro; the Mercosur bridge or third bridge over the Orinoco river; the subway between Caracas and Guatira and the metro Caracas-Los Teques. The works had budgets that together amounted to 5 billion dollars.

With the change of presidential management, Ecuador developed the audits of Odebrecht contracts and shortly after the general prosecutor of Peru, Pablo Sánchez, assured that a delegation of prosecutors from the Andean country will travel to Brazil to conduct a series of investigations and collect data on possible illicit concessions. The question ended with a deposed president and the suicide of a former president (Alan García).

The focus was on alleged bribes from Odebrecht executives to inflate the cost of a highway linking the Brazilian Amazon with the Peruvian Pacific ports that was built between 2005 and 2011, under the governments of Alejandro Toledo and Alan García. 

The relationship between García and Odebrecht was marked by the Christ of the Pacific, a replica of the Corcovado of Rio de Janeiro valued at $ 830,000 that was donated by the Odebrecht Association. From the company, they assure that the donation went to the country, not to the president, and defend that this was done through a public act and with knowledge of the authorities.

Odebrecht has developed multiple projects in Peru for 35 years, where it has 15,000 workers, 99% of the Peruvian. According to the construction company, the projects in which it has participated have led, in the last 10 years, 13 billion 257 million of private investment and concessions for an equivalent of 1 billion 819 million dollars of public investment.

The Odebrecht subsidiary in Argentina has eight works in progress in different areas, awarded between 2005 and 2013, most of them integrating consortiums in different transitory unions of companies (UTE) with other firms. Odebrecht Argentina has been present in the country since 1987.

The company of Brazilian origin works or worked in numerous projects: laying gas pipelines, purifying water, obtaining potassium and burying the Sarmiento railroad, among other projects, many of them tied to the financing obtained by the company in the BNDES, the Brazilian Development Bank. In Argentina, the bribes reported for the works amounted to 278 million dollars.

Where the interests of Odebrecht seem to be safe is in Panama. Despite widespread allegations of corruption and overpricing, the Brazilian construction company led the consortium in charge of building the second subway line of the Panamanian capital, worth 1 billion 857 million dollars. The Spanish company Fomento, Contratas y Construcciones (FCC) participates with the Brazilian company.