Sete Brasil saga “about to get very ugly”: source

Forex losses are eating away at profits.

Sete Brasil's vendors and sub-vendors are reeling from the effect of massive forex losses, a confidential source told Singapore Business Review.

The source, who worked for one of Keppel's major vendors, said that analysts are overlooking the fact that the payment rates for the contracts were locked in at rates of around 1.75 Brazilian real to 1 US dollar or lower.

The Brazilian real has weakened considerably against the greenback in recent years, dragged by a sprawling corruption scandal and weak commodity prices. The currency is now trading at around 3.9 BRL to the USD.

“Although these vendors are providing the required local content [percentage] based on current Brazil import and industrialization rules, the majority of their cost base is still actually in USD or EUR. This is especially true on the SembMarine Drill Ship and Keppel Semis,” the source said.

The source noted that many vendors have not been paid in over a year and are just waiting for their contracts to get cancelled so that they can collect fees in Brazil.

“We are just waiting for cancellations so we can walk away with our cancellation fees and the difference between our true cost incurred vs our billing milestones received. We have been forced to stop and shut down our operations with minimal staff related to these jobs,” the source noted.

With all other work in Brazil drying up, the source said that the vendors will have no choice but to pull out of the country very soon.

“Let the legal battles and collections begin it is about to get very ugly,” the source warned.