As far as corporate scandals go, it is hard to top Odebrecht. The Brazilian construction firm admitted in December 2016 to paying some $788 million in bribes in 12 countries over 15 years. As more details have come to light, many current and former government officials in Latin America have been brought down by corruption charges.

Since admitting guilt, Odebrecht has sought to sell assets, even if the company is not likely to pocket all the proceeds as punishment for its misdeeds.

For example, Odebrecht agreed in August 2017 to sell the Chaglla hydro power facility in Peru to a consortium led by China Three Gorges (CTG). But the $1.4 billion transaction has not closed because the Peruvian government has to determine how much money Odebrecht keeps and how much the government gets.

“It is beyond bizarre,” says an M&A banker familiar with the transaction. “If Peru plays hardball, and Odebrecht plays hardball, then the person with the checkbook will walk away.”

CTG’s checking account may run deep, but the banker is not so sure its patience does too, considering the Chaglla sale was expected to close in February.

A law passed last year already prevents companies implicated in illegal business from moving proceeds from asset sales abroad. The latest revisions will determine the split. The government wants 50% of the proceeds, but Odebrecht and CTG want to part with only 30%.

According to another M&A banker, CTG still wants to close the transaction. He expects the recent change of presidents in Peru will help the deal cross the finish line.

Eye of the storm
The Odebrecht scandal has cast a shadow beyond Brazil and over much of Latin America, especially in Peru and Colombia. Odebrecht and other Brazilian firms — OAS, Invepar and Andrade Gutierrez — have been major developers in Peru’s infrastructure sector. But after canceling the projects where Odebrecht was involved, the government shaved an entire percentage point off projected GDP growth last year. Peru’s GDP grew 2.5% in 2017, well below the 4% GDP jump in 2016.

Then in March, the main opposition party released recordings that implicated then President Pedro Pablo Kuczynski, commonly referred to as PPK, in a vote-buying scheme. PPK’s predecessors, Ollanta Humala and Alejandro Toledo, also face accusations of taking illegal payments from Odebrecht.

New President Martín Vizcarra knows that Peru’s economy needs a jolt, according to Laura Sharkey, a principal analyst at Control Risks in Peru. But she questions whether the opposition parties will agree to an anti-corruption law, claiming that most of Peru’s political parties are implicated in the Odebrecht affair. “Corruption is the buzzword and talk of introducing anti-corruption reform is all well and good, but will Congress let him get there?” she asks.

Sharkey also worries that Vizcarra, who served as PPK’s vice president, “lacks the legitimacy that an elected official has. It is a question of how much he can get done in the early stages, until the honeymoon period ends.”

The Vizcarra administration faces an enormous challenge to reestablish trust among financiers and investors, not to mention voters. Large-scale developments like Chaglla had secured bank loans years ago, only to leave lenders skeptical of repayment.

But the project finance market rarely moves any slower than the ambitious Gasoducto Sur Peruano (GSP) natural gas pipeline. Tainted by Odebrecht’s involvement, the GSP has been a candidate to restart the procurement process since the PPK administration cancelled the contract in January 2017.

Banks had supplied $600 million in bridge financing back in August 2014. But after Odebrecht failed to sell its 55% stake in the GSP consortium, each sponsor had to individually refinance their portion of the debt and wait for possible reimbursement from the government.

“Several infrastructure projects have stalled or have been cancelled, and it is more difficult to finance and complete these projects or transactions because of the issues affecting the local construction companies,” says Udi Margulies, a managing director and head of Latin American investment banking at Scotiabank.

Now any new greenfield infrastructure developments have come to a halt.

Margulies says he wants to see construction companies from outside Brazil fill the Odebrecht vacuum but admits it is not so easy to bring them in. “They need to sub-contract workers and machinery, and they do that with second-tier construction companies,” some of which were impacted by or implicated in the scandal, he says.

Ripple effect
Odebrecht’s transgressions have also slowed Colombia’s infrastructure plans, particularly the Ruta del Sol II toll road and the Magdalena River waterway public-private partnership (PPP).

The government chose a consortium led by Odebrecht to develop the waterway in 2014, but it scrapped the original PPP contract in March 2017. It has since approved a revised financing structure, allowing the regional waterway authority Cormagdalena to restart the procurement process.

Like Peru, the Colombian government has made efforts to get Odebrecht out of the country, but Clemente del Valle, CEO of the Colombian development bank Financiera de Desarollo Nacional, or FDN, reckons the measures may prove to be too drastic.

“Colombia was more radical with Odebrecht, saying, ‘You are persona non-grata here,’” del Valle says. “Individuals were punished, and I feel Colombia has been a bit too hard [on them].”

While Brazilian construction firms were less involved in Colombia’s infrastructure program than they were in Peru, del Valle says the knock-on effect of the scandal has disrupted other companies’ investment plans.

“We are being very hard on some of these local companies that had partnerships with Odebrecht,” del Valle says. “I feel we are coming to the end of the Odebrecht effect, but the issue is the contamination that has hit other companies.”

For Colombia’s fourth generation of toll road concessions, for example, eight projects reached financial close in 2016, raising $4.2 billion in debt, according to del Valle. In 2017, however, as the consequences of the Odebrecht scandal spread across the region, only two 4G toll road projects received financing with $1.03 billion in debt.

Colombia’s banks have also asked the government how it will resolve the issue of the Ruta del Sol II toll road. In February last year, after former Senator Otto Bula was accused of accepting a $4.6 million bribe in 2013 to help Odebrecht win the contract, a Colombian court suspended the concession contract.

The reaction of domestic lenders was to limit their participation in the entire 4G program until details are forthcoming. “For me, this is not the correct way to do it,” del Valle says of the local banks’ decision to sit out the latest round of 4G financing. “If the projects are good, then you cannot prohibit your participation. But the three main [local] banks feel they can pressure the government.”

Getting back on track
Still, del Valle expects at least seven 4G projects can reach financial close this year. On the M&A front, he says that one of the tainted projects will be scooped up by a “very good international firm,” although he declines to name the potential buyer or identify the asset for sale.

In Peru, the appetite still exists to get deals done, even with the lingering concerns of Odebrecht’s foul play.

Juan Pedro Hernández, a director in Credit Suisse’s Latin America investment banking division cites as examples Rutas de Lima, which the Canadian investor Brookfield bought from Odebrecht for $450 million, and Línea Amarilla, which France’s Vinci acquired from Brazil’s Invepar.

“For assets with a good, stable cash flow, a big pool of capital is available,” Hernández says.

Both the Rutas de Lima and Línea Amarilla agreements were signed in 2016, and Scotiabank’s Margulies says commercial lenders remain willing to participate in projects with worthy sponsors.

“Some banks lost money on GSP, for example, but if there is a new project with strong sponsors and attractive returns, there is going to be competition,” he says. “And if the project is well structured and risks are shared among stakeholders between development, construction and operation, then banks and the debt capital markets will want to lend.”

Available liquidity, either from sponsors or infrastructure funds, props up asset valuations, whether for greenfield developments or the sales of operating projects.

As Margulies puts it, many infrastructure assets in Peru and Colombia already have “hair around them,” and with several funding sources available, infrastructure-related M&A will likely get up to speed again.

“There is currently a period of uncertainty,” Margulies says. “There is still plenty of financing and equity funding for quality infrastructure assets, but it depends on the project and its characteristics.” LF