Outside its home market, Odebrecht has adapted to newer PPP structures adeptly, most notably in Colombia, Panama, and Peru. It has a US subsidiary that bids on PPPs in Florida and Texas, among other states. Braskem, Odebrecht’s petrochemicals subsidiary, accounted for 54% of the group’s revenues in 2012, compared to its construction arm’s 35%.

Odebrecht Oil and Gas (OOG) is in the last stages of a highly ambitious $5.5 billion investment programme. It has regularly visited capital markets to refinance commercial bank and export credit agency debt on its deepwater drill-ship fleet. It has used project bonds to improve its projects’ debt profiles and free up equity for future development, and had been working to complete a roadshow for a $1.88 billion refinancing of three drill-ships when Project Finance spoke to the company.

During a bruising period for emerging markets issuers, and despite the hopes that Latin American bankers placed on the Odebrecht Offshore Drilling Finance deal, Odebrecht subsequently decided to postpone the deal. Still, OOG was already planning its next phase of investments. “Our experience has given us a pre-eminent position in ultra-deepwater rigs and we now have the seventh-largest fleet in the world,” said Roberto Ramos, the chief executive officer of OOG, which entered the ultra-deep water (UDW) market in 2007.

The postponed bond issue would have allowed OOG to take out the two bank financings for the Norbe VIII and IX drill-ships, which have been in operations for six months, and allow it to release equity from Norbe VI, with its longer track record, he said. “Releasing equity enables us to analyse other projects,” he said. The deal could still re-emerge if debt markets settle down, and as the newer vessels build up equity Odebrecht may be able to release equity from all three. “We are looking for any opportunities to free up equity and stretch out maturities,” said Ramos.

The chief financial officer of Construtora Norberto Odebrecht (CNO), Jayme Fonseca, said it has the balance sheet capacity to chase upcoming opportunities, and is angling for a ratings upgrade. “There is demand [for projects] and we have the funding in place,” he said. He believes that project finance structures will become increasingly prevalent in Odebrecht, as it works to help protect capital and keep corporate debt ratios low, allowing it to maintain or improve its triple B flat rating. Fonseca believes Odebrecht should be BBB+ or A- rated. The pressure on the rating comes because rating agencies focus on where borrowers operate, and Odebrecht has significant operations in sub-investment grade countries, he said.

Funding bonanza

Both Ramos and Fonseca recognised that they had been enjoying ideal debt market conditions. “Every time we have a transaction, the market says ‘this is the best ever’ and then rates go down further,” said Fonseca. Ramos agreed, but presciently cautioned that: “sooner rather than later part of that liquidity will be removed ... conditions are very good now, but this is likely to be the peak,” pointing to the Federal Reserve’s hints that it would curtail the QE3 programme. Those hints spotted the emerging markets sell-off that sunk the drilling bond issue.

CNO used the earlier benign conditions to improve its debt profiles through liability management. “We have done as many exercises as possible. This is very, very important for us,” said Fonseca. By June 2012, CNO was able to decrease the average yields on its debt by more than 100bp, while extending its average maturity to 32 years from 20, largely through the issuance of perpetual bonds. The financing included a $250 million perpetual bond issue in November 2011, $300 million in 2023 bonds at the start of 2012, and in June 2012, it closed on $600 million in ten-year bonds and $400 million in 30-year debt.

But both the construction and oil & gas subsidiaries are wary about adding leverage, and CNO in particular is anxious not to jeopardise its attempts to improve its rating. “We cap gross debt to EBITDA metrics and we have reached the limit that is comfortable for shareholders and rating agencies,” said Fonseca. CNO tries to decrease the amount of equity that it has to contribute to projects and emphasises the use of project finance. “It expands capacity as there is limited space on the company balance sheet,” said Fonseca. CNO double and triple checks its project finance structures as banks “tend to flatter the sponsors,” he said.

Fonseca usually looks at multiple sources of funding, combining Brazil’s national development bank BNDES, international multilaterals and debt capital markets, and prefers project finance structures where possible. Odebrecht helped developer Brazil’s non-recourse bond market when it placed R1.1 billion in bonds in 2010 for its São Paulo toll concession, Rota das Bandeiras.

For construction financing, BNDES remains the key player in Brazil and the only substantial source of cheap long-term local currency debt. Multilaterals typically lend $150 million to $200 million per project, while CNO projects in Brazil require require between $4 billion and $5 billion equivalent, said Fonseca. Ramos agreed that the BNDES remains pivotal and notes of his key client, Brazil national oil company Petrobras: “I cannot see how it will finance its investment program without sizeable participation by BNDES.”

There are signs of a more robust project finance market evolving in Brazil, as government seeks to stimulate debt capital markets. The decision to make infrastructure debentures of more than four years tax exempt for domestic and foreign investors is: “the fruit of the government speaking to investors and potential sponsors,” said Fonseca.

The long-term decrease in interest rates in Brazil is changing local investor appetite for debt linked to overnight rates, Fonseca said. Although the Central Bank increased the base Selic rate 50bp to 8% on 29 May, and its most recent survey of economists suggests that the Selic will hit 9% by year end, this is still low by historic standards – the Selic has been in double digits for most of the last five years.

Given these lower yields, Brazilian institutions are looking for higher-return investments, and infrastructure bonds are excellent targets. Fonseca said that companies running toll road projects, where Brazil has deep experience and a well-established legal framework, are testing the market. Two significant obstacles remain: liquidity and attractive conditions externally.

“There’s no liquidity in Brazilian secondary markets whatsoever,” said Fonseca. BNDES is seeking to become a market maker to encourage liquidity, he said. “BNDES has this idea but things are taking longer than we expected,” he noted. Still, he believes a structured secondary market will emerge in the next 12 months. Meanwhile, international markets continue to be attractive for big issuers: Petrobras recently raised $11 billion in international markets, pointed out Fonseca.

Fully funded, even without the bond

In oil and gas project finance there are fewer players since the crisis noted Ramos. The project finance market has passed from Europeans into the hands of Japanese and Scandinavian banks, which are “active and doing a good job,” he said. More recently, local players, including Brazilian banks such as Itaú and Bradesco have entered the markets, said Ramos. He expects that Banco do Brasil and BNDES will start to play a more active role too, though Brazilian players tend to take junior roles, he noted.

OOG has met its financing requirements for the next 12 months, but if conditions are right next year, it may invest further in floating production, storage and offloading (FPSO) units or drill rigs outside Brazil. Ramos is open to raising outside equity, and said that OOG has received interest from outside players in participating in Odebrecht-developed offshore projects. The rest of OOG’s investment programme through 2015 encompasses seven ultra-deepwater rigs and 50% of two FPSOs and 50% of two pipelay support vessels (PLSVs) as well as a 50% share in five further rigs with Sete, which holds contracts with Petrobras.

OOG is watching the progress Petrobras, by far its biggest client, makes in its deepwater investment programme. The government continues to insist that Petrobras sells petrol domestically at a discount to international prices, which has reduced its cash flow. “That is not the way it was forecast in the business plan,” said Ramos. If the government frees up local prices, Petrobras’ internal cash generation will reduce borrowing needs. If not: “Petrobras will require more third party capital and the way they manage their debt will be demanding,” said Ramos. Ramos does not see Petrobras putting additional pressure on contractors under new CEO Maria das Graças Silva Foster, despite intense speculation. “Petrobras has always been a hard client and extremely demanding,” he said.

In-country rigs will have to meet the backlog for clients such as Repsol, Total and Quieroz Galvão, said Ramos. “It would be hard to bring rigs in from abroad, as there’s no availability and won’t be through 2015,” he noted.

Ramos anticipates a new wave of work in 2017-18, in part thanks to the successful eleventh round auction of blocks that the National Petroleum Agency held in May. The twelfth round, slated for October will be concentrated on Libra in the Santos basin. It may hold 12 billion barrels of oil. However, much of the initial exploratory effort has already been undertaken, he noted. “We are talking more about appraisal and delimiting reserves,” he said.

In the FPSO market, OOG’s two vessels are tied up through 2020 and 2028. OOG is focused exclusively on mid-sized FPSOs, handling 70,000-90,000 barrels per day, as larger units entail too large a commitment in capital. Ramos is keen to expand the fleet for economies of scale. Petrobras will need to charter 10 mid-sized FPSO units through 2020 and OOG, said Ramos, wants to win a meaningful share of that business.

Ramos sees future opportunities to enlarge his fleet of two flexible pipeline installation vessels in Brazil, and is preparing for work that involves high pressure pumping and hydraulic fracturing (fracking). Brazil has no exploration of unconventional deposits, but the thirteenth round auction, slated for November, will primarily target gas deposits.

In the run-up to 2017, OOG can only grow its offshore services fleet if there are opportunities outside Brazil. Ramos points to the ultra-deepwater opportunities in west and east Africa. OOG is looking at places where Odebrecht has or is considering a presence, such as Angola. The same logic applies elsewhere in Latin America, where Venezuela, Peru and Argentina will be priorities.

Diverse geographies and financings

Today, 70% of CNO revenues come from outside Brazil. CNO’s fully funded and contracted backlog at the end of 2012 was $33.7 billion of which Brazil represents 33% and Venezuela 32%. In sub-investment grade countries such as Venezuela and Angola, funding from BNDES and multilaterals becomes indispensable. “We are extremely comfortable with our exposure to these countries,” said Fonseca. “We try to bring a full package solution that bundles engineering and funding,” he said. To mitigate risks, CNO doesn’t hold assets in country, just equipment. Fonseca also looks for upfront payments and seeks to bring the client a solidly-structured financing package.

Odebrecht stresses that many projects in such markets feature investment grade clients as counterparties. In Liberia, for instance, CNO’s client is Arcelor Mittal. Still, two-thirds of CNO’s work backlog, or $21.6 billion in exposure, has investment grade characteristics, be it clients, countries or sources of funding, said Fonseca. “We have been in Venezuela 28 years and never had problems with clients or late payments,” he said.

For investment grade markets outside Brazil, local debt markets are also promising. For the second section of the Ruta del Sol in Colombia, Odebrecht closed Ps1.5 trillion in local currency debt in 2010. That financing, led by a minority shareholder in the road, Corficolombiana, benefited from a combination of toll revenues and direct government payment obligations.

In December 2006, Odebrecht closed a $630 million 144A bond issue for the 700km IIRSA Sur toll road, again with unconditional government payment obligations as the source of repayments. In Panama, Odebrecht has closed short-term bank financings for the Balboa Avenue, Cinta Costera III and Patrimonio Historico build-finance projects, with a mixture of Panamanian and international banks. “Whenever the local market is available, we will use it,” said Fonseca.

For the largest non-Brazilian projects, international and multilateral lenders still come into play. The financing for the $1.2 billion 406MW Chaglla hydroelectric project, which is near close, features the participation of BNDES and the Inter-American Development Bank (IADB). While a commercial bank tranche may feature BBVA, Cofide, DNB, SG, Crédit Agricole and Deutsche, BNDES and IADB are taking the largest share of the long-term debt package, and intercreditor negotiations between the two are the biggest factor delaying close.

Operating outside Brazil, CNO works with local sponsors and contractors. In Latin America competitors tend to be traditional European companies that have worked in the region for years. In Africa, the scenario is quite different with newcomer China acting as the main competitor. Chinese competition is aggressive and often comes with full funding, but strings attached. Often contracts call for 100% Chinese workers and governments are often left with “a little bit of a bitter taste” as the quality is not what they expected and Chinese companies “don’t hire and train local people,” said Fonseca.

Domestic dangers

In Brazil, CNO is focused on the wave of federal concessions in roads, rail, ports and airports. The World Cup and Olympic Games have focused a spotlight on Brazil’s civil construction sector but Fonseca sees their importance as overplayed. On a recent trip to Asia, Fonseca found investors asking what comes after the World Cup and Olympic Games. “Nothing will change. Just $2.6 billion of our backlog – less than 10% – is related to the events,” he said.

Fonseca noted that the legacy of the Cup is likely to disappoint. “Brazil will end up with very good quality arenas, but the surrounding infrastructure will not be built.” The decision to spread the Cup between 12 cities has made the task even greater – South Africa chose a more modest eight locations. Rio de Janeiro is investing heavily in new infrastructure including metro lines and a mass transportation system as well as the rebuilding of the port of Rio.

It bid for the three airports – Campinas, Guarulhos and Brasília – in the first round but came up empty-handed. “The government used a model that did not lead them to the right operator and sponsor,” said Fonseca. He backs the requirement for subsequent rounds that bidders run airports handling at least 35 million passengers per year but worries that returns will be too low to attract a strong field. That is a controversial idea with government, which emphasises low costs in tenders for roads, rail and airports.

After Fonseca had spoken with Project Finance, the government of São Paulo state, responding to the wave of protests that has gripped Brazil, offered to freeze toll rates on the state's roads. The state has suggested that concessions can be rebalanced, though the uncertainty has harmed the share prices of listed operators. Even in the best of times, developers can struggle to read the actions of government clearly.

“In Brazil, we have complex legal, taxation and environmental license systems and there are not clear divisions of competence between federal, state and municipal government,” Fonseca said. That makes tenders protracted, he added. It is also much easier to get an environmental license in the US, where the procedure is clear, than in Brazil, he pointed out. The Belo Monte hydroelectric dam, of whose consortium CNO is part, has lost its environmental license four times, for instance. “This creates a huge amount of indirect costs as you operate and stop, operate and stop,” said Fonseca. It contributes to cost over-runs, delays and additional costs for constructors.