Grupo Aval’s Sarmiento says Odebrecht fallout in Colombia is limited

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Rob Dwyer
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Subsidiary Corficolombiana minority shareholder in cancelled toll road PPP; Sarmiento says impairment charge already taken and losses manageable.

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The Ruta del Sol. Photo: Odebrecht collection

Luis Carlos Sarmiento, president of Grupo Aval, says the financial impact from the cancellation of the Ruta del Sol 2 (CRDS) toll road public-private partnership (PPP) will be limited to around $33 million, or 2% of the company’s yearly net income, and that an impairment has already been taken.

Grupo Aval’s merchant banking subsidiary Corficolombiana is a minority (33%) equity owner in the CRDS project through a special-purpose vehicle called Episol, in partnership with Brazil’s Odebrecht, which owns 62% and the Solarte Group that owns 5%.

The $2 billion deal to build and operate 1,100km of toll roads – part of the ambitious 4G package – in the north west of the country was cancelled by the Colombian National Infrastructure Agency (ANI) in February after Odebrecht allegedly paid $6.5 million to former transportation vice-minister Gabriel Garcia.

The Colombian president Juan Manuel Santos has also been implicated in the scandal and ANI acted swiftly to cancel the toll road PPP after Peru announced it was cancelling a $7 billion pipeline project led by Odebrecht.

In total, Odebrecht, which has already paid $3.5 billion in fines in the region, is accused of paying around $800 million in bribes connected to more than 100 projects in 12 countries. 


“I surely hope that after this incident we will continue building the infrastructure projects in play; projects that Colombia desperately needs 
 - Luis Carlos Sarmiento

Grupo Aval directly owns 10% of Corficolombiana and indirectly a further 48% through three of the four banks that Aval controls. Aval receives 44% of the economics of Corficolombiana on its own financial statement.

In a wide-ranging interview about the Colombian economic outlook and the prospects for the banking industry, to be published in the April issue of Euromoney, Sarmiento confirmed that the CRDS 2 project is the Group’s only partnership with Odebrecht.

Through Corficolombiana, the bank has a large portfolio of current infrastructure developments and the investment in CRDS is the company’s only minority-owned project.

“To clarify, Ruta del Sol was only one of around 15 infrastructure projects in which Corficolombiana is involved, and it is not the most important investment in the company’s portfolio and it represents about 8% of Corficolombiana’s equity portfolio,” says Sarmiento.

“Yes, it was an important net income contributor in the last couple of years, but investments in other road concessions and in other segments are much larger contributors of returns.”

He adds: “The unfortunate situation with Odebrecht will probably generate some delays in the financing of the projects as the banks, particularly the ones exposed to Ruta del Sol, get reassurance that their loans will be paid back in full.

“I surely hope that after this incident we will continue building the infrastructure projects in play; projects that Colombia desperately needs.”

According to Grupo Aval, the financial obligations of CRDS were about $800 million at the end of 2016 – with 50% of those loans being granted by banks within Grupo Aval in both a revolving credit facility – which funded working capital requirements – and a long-term facility which funded part of the construction.

Liquidation

The contract stipulates a liquidation amount and Grupo Aval expects that Episol will receive around 70% of the investment in the concession.

“With regards to Ruta del Sol, we are awaiting for final approval of the agreement to terminate early the contract with the government,” says Sarmiento. “After such approval is achieved, the contract will be liquidated, the liabilities with third parties paid and the remaining funds will go back to the shareholders.

“As the initial calculation of the liquidation value suggests that only 70% of the investment in the concession would be recovered, we made an impairment on the investment equal to that percentage. It accounted for $33 million at the Corficolombiana level, impacting Aval with $15 million approximately, which is about 2% of the company’s yearly net income.”

Sarmiento confirmed that after calculating the likely recovery of Episol’s investment in CRDS, a $33 million impairment charge was made on 2H2016 results – equal to 30% of the investment. This amount represented between 20% and 25% of the expected result of Corficolombiana for 2016 and – at a loss of $15 million at the level of Grupo Aval – equal to 2.0% of 2016 net income.

Sarmiento is confident that any penalties applied to the corrupt bid will be levied at Odebrecht and won’t have any financial impact on Corficolombiana.

Sebastian Gallego, analyst with Credicorp Capital in Bogotá, says CRDS 2 “is not an ideal scenario for Corficolombiana”, which has seen its shares fall by 20% since the corruption was revealed in December, and models the potential impact at a higher level, but still one that is containable.

“We estimate that the valuation impact is limited for Corficolombiana as Ruta del sol, including its contract extension, is equivalent to 3.5% of the total company’s valuation,” he says.