Odebrecht Bankruptcy to Hurt Brazilian State-Owned Banks

Luis F. Spinelli
Wall Street Journal
19/06/2019

BRASÍLIA—Brazil’s state-controlled banks are bracing for potentially heavy losses after Odebrecht SA, the construction conglomerate at the center of a regionwide corruption scandal,
filed for the largest-ever bankruptcy in Latin America.

Brazil’s development bank, BNDES, holds nearly a 10th of Odebrecht’s total $25.3 billion of debt, followed by two other state lenders, Banco do Brasil SA and Caixa Econômica Federal, the construction group said on Tuesday.

“This is terrible for Brazil,” said Pedro Galdi, a stock analyst at Mirae Asset investment firm. “Creditors will be hit and the biggest ones are controlled by the government.”

Odebrecht’s holding company filed for bankruptcy protection at a São Paulo court on Monday night, marking a dramatic fall from grace for the 75-year-old family-owned company that was once considered a shining example of Brazilian engineering prowess across the world.

Known in the U.S. for building the Miami Heat’s arena and part of Miami International Airport, Odebrecht admitted in 2016 to paying almost $800 million in bribes during more than a decade
to win contracts, mainly in Latin America, as part of the so-called Car Wash corruption scandal. Tens of thousands of Odebrecht workers have since lost their jobs.

Now, Odebrecht’s bankruptcy could deliver yet another blow to ordinary Brazilians, analysts say. After politicians and businessmen pocketed much-needed public funds as part of the graft scheme, Brazilian taxpayers are set to lose out again as the country’s public banks struggle to recoup their loans.

“Taxpayers are the ones who’ll be affected, they’re the ones who, indirectly, will be paying for a lot of this,” said Luis Felipe Spinelli, an expert on bankruptcy proceedings for the Porto Alegrebased Souto Correa firm and a professor of business law at the Federal University of Rio Grando do Sul.

In the filing, Odebrecht left some of its main assets out of the restructuring process, including its construction business and Braskem SA, its petrochemical unit. However, Braskem will likely
be dragged into the process, as some of its shares were already promised as collateral to creditors, and a judge may decide to include other assets, analysts said.

In a judicial battle that could last years, the banks are likely to fight to lay claim to whatever they can, said Luciano Godoy, a corporate law professor at Brazil’s Getulio Vargas Foundation
law school in São Paulo. “All creditors will get less than what is due, over a longer period than originally contracted,” he said.

Rubem Novaes, chief executive of Banco do Brasil, told reporters this month that the banking sector was worried about Odebrecht’s potential bankruptcy. But he said that his institution had
already made provisions for expected losses. Odebrecht owes the bank about $2 billion.

Caixa Econômica Federal declined to comment.

BNDES, the development bank, said all its loans to Odebrecht are secured by “real and personal” guarantees. “The bank will present its case…in order to obtain the correct value.”

The Odebrecht bankruptcy compounds BNDES’s problems, coming a day after Joaquim Levy, the bank’s chief, resigned after months of conflict with President Jair Bolsonaro, who has criticized the lender for what he said was its slowness to reverse the policies of former leftwing administrations.

In an interview with The Wall Street Journal in 2017, the then-recently appointed chief executive of Odebrecht, Luciano Guidolin, said that “Car Wash was not the end and it will not be
the end of Odebrecht.” But since then, the company has continued to be shut out of lucrative government contracts. Odebrecht struggled to raise cash after a crucial deal to sell its Braskem
stake to the petrochemicals giant LyondellBasell Industries fell through earlier this month.

Odebrecht has blamed Brazil’s brutal 2014-2016 recession for much of the company’s problems over the past five years. Its workforce has shrunk from more than 180,000 people to just 48,000 today.

Since Brazilian authorities began the Car Wash investigation five years ago, it has incriminated scores of the country’s political and business elite, as well as ravaging the construction industry here. Former Brazilian President Luiz Inácio Lula da Silva, who is already in jail for corruption, was sentenced this year in another graft case involving Odebrecht.

Many Brazilians viewed the bankruptcy—and the at least $2.6 billion anticorruption settlement it paid U.S., Brazilian and Swiss authorities in 2016—as a sort of cleansing of corporate Brazil.

“We need a change in paradigm,” said Uiller Martins, 28, an engineering graduate in Brasília who works as an administrative analyst after failing to find work in his field. “We’re going
through a moment of extreme turbulence that is damaging for these companies and the nation itself,” he said. “But this turbulence is necessary for these companies to change for the better.”

Alexandre Schwartsman, a former central banker, said that he saw Odebrecht’s bankruptcy filing as a form of just punishment for a company that has openly admitted to wrongdoing. “To not punish these companies, would be like giving them the green light to continue as they were,” said Mr. Schwartsman

Odebrecht’s former chief executive Marcelo Odebrecht, whose family arrived in Brazil from Germany in the mid-nineteenth century and founded the company, was jailed in 2015 and is
now serving out his sentence under house arrest after cooperating with authorities. The family is no longer managing the company.

The scandal has now spread across the region to other countries where the company admitted to paying bribes to secure lucrative contracts that helped turn Odebrecht into Latin America’s
largest construction group.

From Argentina to Peru, Colombia to Mexico, prosecutors have been unraveling how the company worked with corrupt high officials, including presidents, to win multibillion-dollar
contracts. In Mexico, authorities have issued an arrest warrant for the former CEO of state oil firm Pemex in connection with a bribery case involving Odebrecht. Emilio Lozoya, the CEO,
went into hiding, and denies the allegations. Meanwhile, in Peru, three former presidents are currently under investigation.

In one of the most dramatic episodes of the scandal so far, another former Peruvian president, Alan Garcia, died in April after shooting himself in the head as police arrived at his home to detain him for alleged bribes he received.