Odebrecht Bonds Are Brazil's Best and Worst as Units Diverge

(Bloomberg) -- Odebrecht SA is rewarding some bondholders while others get burned.

Notes issued by the holding company and backed by the construction arm plunged Wednesday after newspaper Valor Economico reported executives had told creditors that it will inevitably file for bankruptcy. The bonds are the worst performers in Brazil this year, losing more than a third of their value, as speculation mounted the scandal-tainted builder would struggle to meet its obligations.

At the same time, defaulted securities issued by Odebrecht's oil and gas unit are soaring -- racking up some of the best returns in emerging markets -- as bondholders negotiate with the driller on easing payment terms to avoid a bankruptcy filing for Odebrecht Oleo & Gas.

The divergence shows that bonds from the same parent company have wildly different outlooks. While all of them are trading at deeply distressed levels, investors are wagering that the notes from the energy unit backed by drilling rigs are a safer bet given that the construction unit -- which has lost out on billions of dollars in contracts since becoming embroiled in a bribery scandal in 2014 -- seems to be burning through cash. Odebrecht told Valor that it continues to make good progress on efforts to restructure its business.

"Odebrecht's construction company is very asset-light," said Ray Zucaro, the chief investment officer of Miami-based RVX Asset Management. "Before they had a reputation, but now it's gone. Meanwhile, Odebrecht Oil & Gas bonds due 2022 have actual drill rigs which are all working and have contracts."

Odebrecht's oil and gas unit said on March 31 it expects to pay the interest on the 2022 notes by April 7, more than 30 days after it was due, while it negotiates a debt restructuring. Bloomberg reported last month that an ad-hoc committee of holders was in talks with the company on a deal that would avoid writing down the principal owed on the bonds.

The company declined to comment on bond performance in an emailed response to questions.

The group, which has businesses ranging from sugar and ethanol to construction, has been selling assets to manage its large debt load as it seeks to rebuild its reputation after agreeing to pay a record graft fine related to Brazil's Carwash probe. More than 75 of the company's executives and former executives have signed plea deals with Brazilian prosecutors on the case, and scion Marcelo Odebrecht has been jailed for almost two years.

With credit markets still all but shut to the group, it has been forced it to borrow from or sell assets to its most profitable units as some subsidiaries struggle to pay debt. But even as the company tried to turn the page on the corruption scandal, business continues to dwindle. Newspaper Folha de S. Paulo reported Monday that the builder's backlog shrunk 20 percent in the last three months of 2016, or $4.3 billion in projects. 

Last week, Exotix Partners recommended selling Odebrecht notes amid "worrying" business trends, saying the current pace of decline in cash isn't sustainable and could lead the company to default on debt this year if the trend holds and no significant projects are added. Odebrecht Finance notes backed by the building unit due 2042 fell about 8 cents to 28 cents on the dollar on Thursday.

Odebrecht's building arm said in an emailed response to questions that the company is doing "all that's needed to turn the page" and is negotiating deals with several of the countries it operates in. "The company keeps an active channel of communication with its bondholders" to keep them informed and avoid volatility in the notes, it said.

--With assistance from Paula Sambo

To contact the reporter on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net.

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Julia Leite, Brendan Walsh