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  • PROFILE: ODEBRECHT FAMILY BRAZIL 19 OCT 2016 | ODEBRECHT ENGENHARIA E CONSTRUÇÃO, ODEBRECHT ÓLEO E GÁS, BRASKEM

    Page 1

     The Odebrecht family controls Latin America’s largest con- struction company, Odebrecht Engenharia & Construção (OEC), its largest petrochemical producer, Braskem and offshore driller Odebrecht Óleo e Gás (OOG).

     Marcelo Odebrecht was sentenced in March to 19 years in prison for bribery, money laundering, and organized crime in connection to his role in a bid-rigging cartel for contracts with Petrobras.

     OOG is in talks with holders of its bonds due 2021 and 2022, and missed a March coupon on its perpetual bond; ethanol producer Odebrecht Agroindustrial concluded a BRL 11bn restructuring in July.

     Odebrecht’s entire 38% controlling stake in Braskem has been pledged as collateral for restructured bank loans, including at the holding-company level.

    INTRODUCTION The fortunes of the Odebrecht Group, which includes Latin America’s largest contractor, reflect the rewards and risks of a business model that embraces corruption as a necessity. In a country where bribery and kickbacks are commonplace, the group – controlled by the Odebrecht family – has been accused of engineering a system for doling out bribes to government officials that formed the basis of an industry- wide graft network. Its privileged spot at the convergence of Brazilian business and government helped Odebrecht grow into one of Latin America’s largest conglomerates, but may also be its undoing.

    Odebrecht has been the most prominent corporate target of Brazil’s Lava Jato (“Car Wash”) investigation, which has exposed a bribery and money-laundering cartel involving contractors and state-owned oil company Petrobras. The group’s head, Marcelo Odebrecht, was sen- tenced in March to 19 years in prison, while its companies struggle to win enough new contracts to service their debt. An expected plea bargain by Marcelo – known to be close to the investigation’s ultimate targets, ex-Presidents Dilma Rousseff and Luiz Inácio Lula da Silva – failed to materialize before his conviction, although there have been reports of a pending deal that could allow his early release.

    This is not the first time that the Odebrecht family has been implicated in a corruption cartel. In 1993, the group was investigated for allegedly orchestrating kickbacks among companies and government officials.

    Under Odebrecht SA, the group’s main constituents are Odebrecht Engenharia e Construção, Odebrecht Óleo e Gás, Odebrecht Transport, Odebrecht Agroindustrial, Odebrecht Ambiental (which is in the process of being sold), Enseada Indústria Naval, and Braskem, a petrochemical JV with Petrobras. In 2015 the group had BRL 124.1bn in revenue, BRL 109.9bn in debt and BRL 24.8bn in cash, according to Moody’s. OEC provided 46% of revenue, Braskem 38%, and other subsidiaries a total of 16%. CONTINUES

    Shareholder-related risk

    Succession Risk Risk associated with generational transfer of wealth and management

    Moderate

    While the family is relatively large, the business has been led by one person in each generation. With Marcelo Ode- brecht jailed, the family’s management resources are uncertain due to a lack of other leaders in his generation.

    Political Risk Political exposure due to government relationships

    High

    The group’s close ties with politicians and executives of state-owned companies, most notably Petrobras, have contributed to its legal and financial problems.

    Legal and Regulatory Risk Risk associated with lawsuits, prosecution and regulatory sanctions

    High

    Odebrecht companies have been hob- bled by prosecutions and sanctions, with its former CEO imprisoned, numerous prosecutions ongoing, and its companies banned from public contracts.

    Transparency Risk Risk due to opaque corporate ownership and offshore holding structures

    Moderate

    The family’s main companies are held in a transparent fashion, but the group has been accused by prosecutors of using networks of offshore shell companies for laundering bribe money.

    Governance Risk Risk associated with corporate governance, fraud and corruption

    Moderate

    Despite being exposed as the leader of a bribery cartel, the group has a generally good reputation for corporate govern- ance with respect to its treatment of minority shareholders and creditors.

    Expansion Risk Risk from growth and diversification

    Moderate

    While the Odebrecht Group is diversi- fied and global, its main focus remains on engineering-related industries.

    Credit History Risk Bankruptcy or default risk related to shareholder history

    Low

    Multiple Odebrecht companies are at risk of default due to business disruptions stemming from corruption investigations. However, the family’s companies do not appear to have a history of bank- ruptcy or contentious relations with creditors.

    Ratings indicate the probability of business disruption or loss of investment value. High = over 50% or already occurring; Low = minimal concern in the foreseeable future.

    CONTENTS PAGE

    Family Structure 3

    Corporate Structure (Part 1) 4

    Corporate Structure (Part 2) 5

    Affiliations 6

    Risk factors 8

    News 10

  • PROFILE: ODEBRECHT FAMILY BRAZIL 19 OCT 2016 | ODEBRECHT ENGENHARIA E CONSTRUÇÃO, ODEBRECHT ÓLEO E GÁS, BRASKEM

    Page 2

    GROUP HISTORY The Odebrecht family is descended from German immigrant Emil Odebrecht, who arrived in Brazil in the 1850s, and has been involved in construction and infrastructure since the mid-19th century. The group credits Norberto Odebrecht (1920-2014) with founding its modern incarnation in 1944 after taking over an established, though indebted, family business that already had ties with government officials and banks. The Bahia-based company, which Norberto renamed after him- self, grew rapidly in the post-war period thanks to what the company’s website calls “a healthy, interdependent relationship” with politicians and lenders during a period of rapid development in the mostly poor and rural northeastern state. A key landmark for Odebrecht was the founding in 1953 of Petrobras, with which the contractor immediately developed a close relationship, according to Odebrecht Informa Online, an in-house publication.

    Acquisitions and JVs played a key role in Odebrecht’s expansion. In the 1980s, Odebrecht acquired two major Brazilian contractors: Companhia Brasileira de Projetos e Obras (CBPO) and Técnica Nacional de Engenharia (Tenenge). Expansion into new sectors has been facilitated by collaboration with Japanese companies, including a petrochemical JV in the 1970s with Marubeni and Ishikawajima (now IHI Corp) and cur- rent JVs with Mitsui (in urban rail transit) and Kawasaki Heavy Industries (in shipbuilding). Overseas business has accounted for a significant part of Odebrecht’s revenues since the 1980s, when domestic business diminished as Brazil suffered from recession and hyperinflation.

    While the Odebrecht family is relatively large, the business has been led by a single dominant individual in each generation, with other family members maintaining low profiles. Norberto Odebrecht ran the group from 1944 to 1991, when his eldest son Emilio took over as president. From 2002 to 2009, non-family executive Pedro Novis held the top management job. Marcelo, the eldest son of Emilio, took over in 2009 and was the group’s dominant figure until he was arrested and jailed in 2015. Emilio no longer holds an executive position, and the only family member on group company boards is his daughter Mônica, who has not played a prominent public role. While the company emphasizes the decentralized management system and “entrepreneurial technology” developed by Norberto, it has never been without strong family guidance. With Marcelo imprisoned and Emilio in his 70s, the group faces a potential leadership vacuum.

    IMPACT ON BUSINESS

    Although the depth of Odebrecht’s involvement in bribery and money laundering has been exposed, the ultimate impact of the scandal on its business is still unclear. Corruption investigations – which despite ex- posing massive wrongdoing, also have a partisan and populist element – have continued to expand, raising the possibility of further allegations against Odebrecht companies. In addition to Marcelo, over 50 non-fam- ily executives have been implicated in the scandal. The damage will depend to a large extent on how severely authorities choose to penalize the group, and how long it takes to reach a settlement. Valor Econom- ico reported on 5 October, without citing sources, that Odebrecht was close to finalizing a leniency agreement with the Attorney General’s Office requiring the group to pay a fine of BRL 7bn over 15 years.

    Debtwire reported on 4 October that OEC expected to secure a leni- ency deal by year-end. Such a deal would not only allow Odebrecht to resume bidding on government contracts in Brazil, but also reduce uncertainties that have made it difficult for the group to win private and overseas contracts. A majority of group’s revenues are generated abroad, and public works in Brazil last year represented only about 6%.

    Estado de S. Paulo reported on 8 October that Emilio Odebrecht was personally leading negotiations with prosecutors. Meanwhile, the group has been negotiati