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Stocks

Keppel, Sembcorp Marine shares fall on Brazil woes

Keppel fined $422 million to settle corruption probe involving Petrobras, Sete Brasil

SINGAPORE (Nikkei Markets) -- Shares of Singapore rig builders Keppel Corp. and Sembcorp Marine slid on Tuesday after Keppel's offshore and marine unit was fined $422 million following a corruption probe involving illicit payments to politicians and officials in Brazil.

Although Sembcorp Marine has not been indicted on any charges, investors fear the world's second-largest maker of offshore oil rigs after Keppel could also face penalties as it too had clinched contracts worth billions from Brazil over the past decade.

Around 3:30 pm Singapore time, shares of Keppel were down 3.3% at 7.22 Singapore dollars ($5.37) a share, while Sembcorp Marine shares were 3.1% lower at S$1.88. Sembcorp Industries, which owns around 61% of Sembcorp Marine, fell 1.3% to S$3.00.

The $422 million fine, described by the local Business Times as the largest ever for a cross-border corruption probe involving a Singapore-listed entity, is the latest setback for the city-state's struggling offshore sector. The extended downturn in oil prices and weakened demand for rigs and related equipment has hurt many companies and exacerbated debt.

Keppel's 2017 earnings could be 70-75% lower because of the fines, although it would still report a net profit thanks to its large property and infrastructure arms, KGI Securities said in a report.

The penalty could also set a precedent, the brokerage said. Should Sembcorp Marine be drawn into the scandal and face a similar fine, the result could potentially increase its net gearing by 20% to around 1.3 times equity, KGI said.

Sembcorp Marine has so far denied allegations linking it to illicit payments made to politicians in Brazil through contracts awarded by state-owned oil company Petrobras and Sete Brasil, which leases rigs to the former.

The Singapore companies are not the only ones caught up in the massive corruption scandal at Petrobras, which has implicated many senior politicians in Brazil.

Dutch offshore oil industry services company SBM Offshore, for example, reportedly paid hundreds of millions of dollars in recent years to Dutch and Brazilian authorities to settle corruption allegations.

According to documents on the U.S. Department of Justice website, an agent working for Keppel Offshore & Marine, or KOM, facilitated bribe payments to officials of Brazil and the Workers' Party with the knowledge and support of several former Keppel officials.

The payments, made between 2001 and 2014, amounted to approximately $55 million, while KOM and its related entities earned profits totaling some $351.8 million from business in Brazil that had been obtained through the bribery scheme.

Late on Friday, the DOJ said KOM, and its wholly owned U.S. subsidiary, Keppel Offshore & Marine USA Inc., had agreed to pay a $422 million penalty to resolve charges brought by authorities in the U.S., Brazil and Singapore.

Keppel had previously denied any knowledge of the illicit payments.

KOM has entered into a deferred prosecution agreement with the DOJ, while KOM USA pleaded guilty as part of the settlement. In addition, an unidentified former senior member of KOM's legal department has entered a guilty plea and is currently awaiting sentencing, the DOJ said.

In its report on Keppel, KGI slashed its target price for the stock to S$8.04 from S$8.67 but maintained its buy recommendation citing the company's relatively low net gearing ratio, which would rise to 0.55 times its equity from 0.5 times due to the fine. In contrast, smaller rival Sembcorp Marine's debt level is similar to the value of its equity.

KGI said the fines may not affect dividends since Keppel had indicated it would "ring fence" the financial penalties when considering the final dividend for the current year.

--Kevin Lim

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