On Monday, June 17, 2019, the 48,000 employees working at the Odebrecht group received a memo in their inboxes. It said the parent company was filing for court-supervised reorganization, one step before bankruptcy. The document also explained the size of the group’s debts, roughly BRL 98 billion—which makes this the biggest administration case in Brazilian history. The text, signed by CEO Luciano Guidolin, tries to keep spirits high, saying the companies will continue to “perform their duties normally.”

But nothing is normal about Odebrecht anymore.

One of Brazil’s most emblematic companies, Odebrecht S.A. was founded in Bahia by the late Norberto Odebrecht in 1944, after </span><a href="https://www.valor.com.br/empresas/6310659/gigante-da-construcao-vai-ao-fundo-do-poco-apos-75-anos"><span style="font-weight: 400;">taking over his father’s business</span></a><span style="font-weight: 400;">. By then, it was called Construtora Norberto Odebrecht—and it focused only on the construction sector. As it grew, the company built an empire, thanks to its role in some of Brazil&#8217;s most iconic infrastructure projects—such as Rio&#8217;s Galeão airport, or the Angra dos Reis nuclear power plant.</span></p> <p><span style="font-weight: 400;">The Odebrecht empire was only possible because of its proximity with power. The strategy of cozying up to governments—no matter the ideology—was there from the very beginning and reached its peak during the Luiz Inácio Lula da Silva administration, when the third-generation family member Marcelo Odebrecht was at the helm. The company was omnipresent in major projects across the country—and even in <a href="https://brazilian.report/power/2018/04/13/operation-car-wash-latin-america/">Latin America</a>.</span></p> <p><span style="font-weight: 400;">We now know that the company managed to remain in the good graces of parties—from both the right and left—thanks to an institutionalized policy of bribes. </span></p> <p><span style="font-weight: 400;">Once Latin America&#8217;s biggest construction firm, Odebrecht has now become synonymous with corruption. Since being dragged through the mud by Operation Car Wash—which unveiled the dishonest relationship the group nurtured with Brazil&#8217;s political parties or all ideological affiliations—the group has reduced its number of employees by 80 percent. </span></p> <p><span style="font-weight: 400;">In many countries, the Odebrecht name has been disgraced. In Peru, where the group admitted to paying USD 29 million in bribes, its scandals are tied to the ousting of a president, and the </span><a href="https://www.bbc.com/portuguese/internacional-47968498"><span style="font-weight: 400;">suicide of a former president who didn&#8217;t want to go to jail</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">After anti-corruption investigations exposed Odebrecht&#8217;s misdeeds, the company&#8217;s huge debts—amassed through cheap credit offered by banks both public and private—showed that the giant construction group had clay feet.</span></p> <h2>The Odebrecht downfall</h2> <p><span style="font-weight: 400;">Operation Car Wash revealed the company&#8217;s department of bribery. Federal investigators found more than </span><a href="https://politica.estadao.com.br/noticias/geral,peritos-acham-2-mil-codinomes-em-sistema-de-propina-da-odebrecht,70002327141"><span style="font-weight: 400;">2,000 names of politicians</span></a><span style="font-weight: 400;"> from ten countries who received money from the company—whether through hidden ways or formal campaign donations. The relationship was always on a quid-pro-quo basis: in exchange for the money, lawmakers committed to voting bills of the group&#8217;s interest.</span></p> <p><span style="font-weight: 400;">In June 2015, then-CEO Marcelo Odebrecht was arrested, and the following year, roughly 80 executives signed a plea deal. Its potential to wreck the reputations of most political parties earned it the nickname &#8220;end of the world plea&#8221;—and remains the largest of its kind, having generated 89 separate follow-up probes.</span></p> <p><span style="font-weight: 400;">The Workers Party was hit the hardest. According to Mr. Odebrecht, his company donated BRL 300 million to the party between 2008 (when he inherited the empire) and 2014. </span><a href="https://g1.globo.com/politica/operacao-lava-jato/noticia/departamento-de-propina-da-odebrecht-origem-destino-e-finalidade-do-dinheiro-segundo-as-delacoes.ghtml"><span style="font-weight: 400;">According to G1</span></a><span style="font-weight: 400;">, half of that money was destined to former President Dilma Rousseff&#8217;s re-election campaign. </span></p> <p><span style="font-weight: 400;">Former President Luiz Inácio Lula da Silva—currently in jail for a corruption charge involving construction company OAS—was also implicated and is now a defendant, accused of benefiting from renovation works on a country house in Atibaia, allegedly paid by Odebrecht. He denies any wrongdoing. Other cases against politicians, such as senator and former presidential candidate Aécio Neves (PSDB), </span><a href="https://g1.globo.com/politica/noticia/2019/06/17/pgr-recorre-contra-decisao-que-enviou-investigacao-sobre-aecio-a-justica-eleitoral-de-mg.ghtml"><span style="font-weight: 400;">are still ongoing</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">On the other hand, as UOL reports, only Marcelo and two other executives were arrested; many of the company top brass opened new businesses, left for their families business, or even remain in Odebrecht. The company’s workforce wasn’t so lucky, though. From almost 180,000 employees, the group now has just 48,000.    </span></p> <h2>Collateral effects</h2> <p><span style="font-weight: 400;">As the company&#8217;s reputation went down the drain, business suffered. Odebrecht was forbidden from signing government deals in Ecuador, Panama, </span><a href="http://agenciabrasil.ebc.com.br/internacional/noticia/2017-12/mexico-proibe-odebrecht-de-obter-contratos-publicos-no-pais-por-quatro"><span style="font-weight: 400;">Mexico</span></a><span style="font-weight: 400;">, and Peru &#8211; which were also involved in the bribing scandal. </span></p> <p><span style="font-weight: 400;">As time went by, Odebrecht tried to get back on its feet, signing a leniency agreement with the Brazilian authorities,</span><a href="http://agenciabrasil.ebc.com.br/justica/noticia/2019-03/trf4-confirma-que-odebrecht-nao-pode-ter-contas-bloqeuadas"><span style="font-weight: 400;"> committing to pay BRL 2.7 billion in a 22 year period,</span></a><span style="font-weight: 400;"> due to irregularities in 49 contracts—in exchange for the authorization to take part in public auctions. They also sold plenty of assets and tried to renegotiate debts.</span></p> <p><span style="font-weight: 400;">Meanwhile, Brazil was also hit by the largest economic crisis of its history, denting the demand for infrastructure works. As a result, the company&#8217;s finances started to sink: from BRL 1.8 billion profit in 2014 to a BRL 534 million loss in 2017, according to data gathered by Valor Econômico newspaper. </span></p> <p><span style="font-weight: 400;">Debts were piling up. Odebrecht currently has liabilities with every major Brazilian bank, including the BNDES. The case is another example of how the bank—which was supposed to foster Brazil’s economic development and provide credit for those who wouldn’t be able to get in the market—ended up directing resources to benefit huge conglomerates with their own agenda. Examples include JBS and the “</span><a href="https://www12.senado.leg.br/noticias/materias/2017/11/29/emprestimos-para-grupo-ebx-tiveram-garantia-de-bancos-privados-diz-eike-batista"><span style="font-weight: 400;">X Group</span></a><span style="font-weight: 400;">”, a conglomerate owned by the mogul Eike Batista.</span></p> <p><span style="font-weight: 400;">As UOL reports, Odebrecht’s uncovered debts with the BNDES amount to BRL 7 billion, while there’s another BRL 3 billion sheltered by collateral. Among the list of creditors, there is Banco do Brasil, Itaú Unibanco, Santander Brasil, Bradesco and Caixa Econômica Federal—the latter, unlike the others, does not hold Braskem shares as collateral for the debts and has started to press Odebrecht. The state-owned bank&#8217;s decision to sue Odebrecht due to loans made for building the Arena Corinthians football stadium is being considered the major trigger for it to file the administration request. </span></p> <h2>What about Braskem?</h2> <p><span style="font-weight: 400;">While Odebrecht is a private company, its most prized asset, Braskem, is messing with investors’ nerves. The petrochemical company, which nearly holds a monopoly in the sector in Brazil, was affected by the controller’s issues and, so far, saw its shares (BRKM5) lose nearly 30 percent at B3. The downfall got steeper three weeks ago, after LyondellBasel took back its offer for Odebrecht’s stake.</span></p> <p><a href="https://g1.globo.com/economia/noticia/2019/06/17/odebrecht-formaliza-pedido-de-recuperacao-judicial.ghtml"><span style="font-weight: 400;">Among Odebrecht’s BRL 98.5 billion in debts</span></a><span style="font-weight: 400;">, BRL 33 billion are related to loans inside the group, from one company to another; BRL 51 billion are financial debts, the most critical part, while BRL 14.5 billion are related to Braskem’s shares given as collateral to the banks, so they are not included in the court-supervised process. Other assets, such as Atvos, the group’s sugar and ethanol company, which is already on administration, and operational assets, such as Odebrecht Engenharia, the contractor company, are not involved either.</span></p> <p><span style="font-weight: 400;">In the early afternoon, Braskem shares jumped 5 percent and were among the best performers on Ibovespa, Brazil’s benchmark stocks index. Pablo Syper, director at Mirae Asset brokerage, explained that, as creditors cannot claim Braskem’s shares, it avoids a massive sell-off in the market. </span></p> <p><span style="font-weight: 400;">“One of the biggest fears concerning Odebrecht’s situation was that the creditors could take Braskem’s stocks, which is a very good asset, and sell it all at once to make cash, causing huge pressure on prices. The fact that they are out of the process, avoiding a massive influx of selling, is very positive,” he told </span><b>The Brazilian Report</b>.<span style="font-weight: 400;">

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BY Natália Tomé Scalzaretto

Natália Tomé Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.