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Brazilian highway contractor defaults on debt payment

Howai: It can complete project despite money woes
Sunday, January 11, 2015

Finance Minister Larry Howai says the Government has received assurances that the financial troubles being experienced by the lead contractor on the highway to Point Fortin, Construtora OAS of Brazil, will not impact the company’s ability to complete the project that has been beset by controversy, including a hunger strike by environmental campaigner, Wayne Kublalsingh.

On Wednesday, the parent company of the contractor on the $7.5 billion highway project from San Fernando to Point Fortin was swiftly downgraded by two of the world's leading rating agencies after the company could not pay US$16 million interest on US$400 million bonds maturing in 2021. 

Speaking in Parliament on Friday, Howai said: “There has been a preliminary meeting between NIDCO and the contractor in connection with that. I am told that NIDCO has received certain assurance as far as that is concerned.” NIDCO is the National Infrastructure Development Company Ltd, the state enterprise that is the executing agent for the Government, which reports to the Ministry of Works and Infrastructure.

The Finance Minister said that he has not been able to go into the matter with the line minister for the project, Works and Infrastructure Minister, Suruj Rambachan. But he said that Rambachan has not signalled to him that “there is any immediate issue that we need to attend to.”

Asked whether the slow pace of Government payments to Construtora OAS had contributed to the financial problems that the parent company now finds itself in, Howai said: “I can’t answer that question. I am not really up to date in terms of where we are on the status of the payments to OAS. As far as I am aware, we have made all of the funding available to NIDCO that they need.”

Howai added: “Certainly nothing has come to me, since the beginning of December to now, that would suggest that we are very far in arrears of payments to OAS,” Only on Wednesday, Howai told the Finance Standing Committee meeting in the Parliament Chamber that the Government may have to borrow money to fund the completion of the highway project.

“Given what is happening now with oil prices, we may need now to consider going into the market to borrow the funds and if we need to do so, we will do so,” Howai said, responding to a question from Point Fortin MP Paula Gopee-Scoon.  He told Parliament on Wednesday that “up to the time when we did this particular transaction, we were able to fund it out of our existing cash flows,” as the Government’s treasury deposits had been sufficient to meet the required costs.

Howai said when the Government started the project “there was no need to increase government’s borrowing, given the fact that through our treasury deposits we had funding that would have been sufficient to meet the required costs.” In the interview on Friday, Howai said that the Government had tapped the local capital market for a $1.5 billion bond, which would have closed on December 24, in order to make payments to the construction company.

Questioned on why the Government would be seeking to borrow money to complete the project now, when it started funding the project from the Treasury, Howai said: “With the fall in oil and natural gas prices and potentially what could happen with cashflows, I want to be careful in terms of running down our cash now. It is important for us to ensure that we have good cash reserves going into this particular period of time.

“Also, I inherited the whole issue of the treasury deposits when I came in. For last year, I said we would go ahead with it, but we have been looking at all of the options available to us in the last 18 months or so. Towards the end of last year, I decided that we should not use treasury deposits at all, but that we go out and get the funding for it separately.”

The Finance Minister explained that a treasury deposit is a subset of the Consolidated Fund, which is a seperate short-term account into which funds that the Government collects goes into. He said in Government accounting terms, withdrawals from the Treasury Deposit Account are treated like a loan, which accounted for the shifting of monies from other ministries to repay the treasury deposit.

Howai said he would need to check with the Ministry of Finance’s budget director before answering a question on the amount of money that is in the Treasury Deposit Account. In response to an emailed Guardian query, OAS spokesperson Milton Pazzi Jr said: "OAS S.A. informs that the recent downgrade of its ratings is not connected to the T&T highway project, which is performed by Construtora OAS. 

“Additionally, Construtora OAS informs that the event does not impact the performance of the company's duties on the project, since it is self-sufficient in terms of cash-flow. “Construtora OAS has been assured that NIDCO is committed to make all payments within the due dates, and according to the contract terms." 

Following OAS' announcement that it did not pay its bond interest, Fitch Ratings was the first to downgrade Construtora OAS to 'RD' from 'C,' which means the rating agency considers the company to be lower than "junk" or "non-investment grade," and technically "in default" of its debt payments.

Fitch said: “These downgrades follow the announcement by OAS that it did not pay the principal and interest on its 9th debentures issuance, in the amount of 103 million Brazilian reals, due January 5. 

“On January 2, 2015, Fitch downgraded of the group's ratings to 'C'/'C(bra) following the announcement by OAS that it did not pay the interest on its US$400 million senior unsecured notes due 2021 in the amount of US$16 million, issued by OAS Finance Ltd, thus entering the 30-day cure period. This issuance is guaranteed by OAS SA, Construtora OAS SA and OAS Investimentos SA." 

The rating agency added: "Absent a material new event, OAS SA and its subsidiaries are likely to default on their debt in the near future. Fitch considers the agreement of all creditors to renegotiate their debt as unlikely," . 

About an hour after Fitch, Standard & Poor's—citing the same failure "to make a principal and interest payment, this time on its ninth debenture issuance" - said: "As a result, we are lowering the global scale corporate credit rating on OAS to 'D' (for default) from 'CC'. At the same time, we are lowering the national scale ratings on the company to 'D' from 'brCC/brC'."

S&P added: "We are affirming all other issue-level ratings and keeping them on CreditWatch with negative implications where we placed them on January 2, 2015, reflecting our expectation that, although the company has not yet missed any payment nor has it declared a formal default as a result of acceleration clauses on this debt, default is almost certain."

S&P said: "It's highly likely the company will face a general default, therefore, all outstanding debt would likely be subject to an ongoing restructuring process. Additionally, we don't expect the company to make the missed interest payment on the 2021 notes (due January 2, 2015) within the 30-day cure period.”

OAS SA, the parent company of the firm building the Point Fortin Highway, is one of several Brazilian construction companies that are embroiled in a corruption scandal involving Brazil’s state-operated oil producer Petrobras. Brazilian officials allege that the construction companies used bribery to obtain contracts from the oil producer. 


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