(Adds canceled $720-million contract with Iesa Oleo e Gas, paragraph 8)
By Brad Haynes
SAO PAULO, Nov 18 (Reuters) - A graft investigation at Brazilian state-run oil company Petroleo Brasileiro SA is hurting the credit outlook for major suppliers accused of participating in the alleged bribery scheme, Moody's Investors Service said on Tuesday.
Moody's downgraded its rating of Mendes Junior Trading e Engenharia SA to B3 from B2 and put a negative outlook on the rating for both the engineering company and construction conglomerate OAS SA.
Executives at both companies were arrested on Friday after police raided their offices in search of evidence that they had skimmed billions of dollars off Petrobras contracts and into political parties' coffers.
"Although investigations are still ongoing and no conclusions have been reached, we believe that these events could strain Mendes Junior's already tight liquidity," wrote Moody's analysts led by Cristiane Spercel.
The scandal sent Petrobras shares lower for the fourth straight day, down 1 percent. It has become the biggest political crisis to date for President Dilma Rousseff, whose Workers' Party is accused of receiving the illicit funds.
The Moody's analysts said they might also downgrade OAS's rating if legal proceedings or the country's economic slowdown hurt the company's cash flow.
OAS and other conglomerates under investigation have been the biggest recipients of recent highway and airport contracts that the government is counting on to boost investments and spark an economic recovery.
Petrobras is conducting its own investigation, including a review of contracts in its $221 billion five-year capital spending program. It rescinded a $720-million contract with equipment manufacturer Iesa Oleo e Gas for the supply of 24 compression modules for subsalt oil platforms, the company said in an emailed statement.
Separately on Tuesday, Brazilian antitrust regulator Cade said it was working with police to determine whether Petrobras suppliers had formed a cartel. In a statement, Cade said it was negotiating a leniency agreement with Setal Oleo e Gas, whose executive had sought a plea bargain with police.
Rousseff was the chairwoman of Petrobras' board from 2003 to 2010, when much of the graft allegedly took place, but has denied knowledge of any crimes. (Additional reporting by Brian Winter and Aluisio Alves in Sao Paulo and Marta Nogueira in Rio de Janeiro; Editing by Lisa Von Ahn, Bernard Orr)