Over the previous decade, Brazil's ruling Workers Party had built national champions using cheap state credit and contracts with state firms.

Those policies transformed OAS into Brazil's fourth-largest builder and made founder Cesar Mata Pires a billionaire.

But OAS’ chief executive José Aldemário Pinheiro had been arrested weeks before the meeting as part of a wide-ranging judicial investigation into millions of dollars paid by engineering and building firms to politicians in return for contracts with state companies.

Cut off from bank lending and new state deals once it was named in the "Operation Car Wash" investigation, OAS decided on Christmas Day to default on a $16 million interest payment, according to a person at the meeting.

A request for bankruptcy protection ensued, and OAS became the first of Brazil's major engineering groups to launch a major downsizing plan. So far, the company has cut 30,000 jobs as it shed assets and reorganized its business to become less reliant on state money, executives say.

The saga of OAS’ restructuring highlights the way some of Brazil's engineering groups are having to reinvent the way they do business in the aftermath of Operation Car Wash, which laid bare a system of illegal favors between politicians and business elites.

"We can't afford any mistakes," OAS' chief financial officer, Josedir Barreto, said in an interview in May. "We have to prove that we can do infrastructure work in a transparent and correct way."

The probe has led to the jailing of several top politicians and business leaders, and accelerated President Dilma Rousseff's suspension from office.

Rousseff, who has denied any wrongdoing, will stand trial in the Senate in August on charges of breaking budget rules. A new interim government has vowed to cut back state enterprises and subsidized loans to private companies.

Brazil Inc's corporate fabric has also been radically changed by the investigation amid growing investor distrust and the worst recession in decades. Analysts say the fallout from the investigation accounted for about half the 3.8 percent economic contraction in Latin America's largest economy last year.

More than 100 people, many from the companies built up as national champions and including Brazil's most powerful building tycoon, Marcelo Bahia Odebrecht, have been sentenced on corruption charges linked to kickback schemes, racketeering and money-laundering.

Prosecutors say $1.65 billion worth of bribe money has been recovered from offshore accounts in 36 countries. The Workers Party has since lost its grip on power and seen its popularity collapse.

Most of the 31 building and engineering companies involved in the scandal have sought respite from creditors, dismissed workers or exited market segments as contracts dried up in the past 18 months.

OAS is a case in point. Its court-approved recovery plan has involved a slew of divestments, including the sale of sanitation firm Samar SA and the transfer of a 24.4 percent stake in concessions operator Invepar SA to creditors.

Yet the reputational cost of the scandal has also put the brakes on other asset sales, according to bankers, lawyers and executives involved in the plan. OAS is seeking to sell assets including oil services firm OAS Óleo e Gas SA, a stake in shipbuilder Enseada Industria Naval SA and three sports arenas.

Bidders have turned increasingly wary of the legal consequences of a deal with OAS because of possible fines if the assets are found to be part of a corrupt deal, according to three advisors directly involved in the sale processes.

Some of the deals OAS had with the government appeared to make more political than economic sense, and are haunting it now. For example: OAS is having trouble selling the three sports arenas, including one that it built for the 2014 World Cup soccer championship in a city that does not even have a first-tier soccer team.

As OAS seeks to get back to basics, a company source told Reuters it has won its first contract since Pinheiro's arrest - a small road project in the northeastern state of Bahia, where the company started 40 years ago.

"The expertise that these groups accumulated for years is their only way to rebuild their reputation once the dust settles," said Mauricio Canedo, a research fellow who specializes in industrial policy at Fundação Getulio Vargas in Rio de Janeiro.

GOVERNMENT PARTNER

The son of a wealthy cattle rancher in Bahia, Mata Pires' links to politicians were central to the growth of his company.

Trained as an engineer, he founded OAS with two colleagues in 1976 to do sub-contracting work for larger rival Odebrecht SA - the biggest of the builders involved in the probe.

His big break came when he befriended Bahia's then-governor Antonio Carlos Magalhães, marrying his daughter Tereza. Brazilians joked back then that OAS stood for "Obras Arranjadas pelo Sogro" - or "Work Arranged by the Father-In-Law."

Following the Workers Party's victory in the 2002 presidential election, OAS capitalized on then-President Luiz Inácio Lula da Silva's dream of transforming Brazil into an emerging market powerhouse.

During Lula's and his successor Rousseff's stints in power, the Workers Party threw the weight of the state behind a group of handpicked conglomerates.

OAS teamed up with three state-led pension funds to create Invepar, tapping workers' savings and state loans to win airport and subway contracts. At the same time, OAS became one of Brazil's largest political campaign donors, alongside other building and engineering firms competing for state contracts.

Grupo OAS reported donations of 83 million reais to politicians in the 2014 election, an 11-fold increase from 2006, official data showed.

Prosecutors involved in the Car Wash probe say that part of those donations were kickbacks from inflated contracts with state firms, alongside an undetermined amount of undeclared funds that, under Brazilian law, are considered illegal campaign funding. OAS has denied the allegations.

UNRAVELLING

Things began to unravel rapidly for OAS soon after Rousseff won re-election in October 2014.

The following month, federal police raided the company's headquarters, arresting CEO Pinheiro - the owner of 10 percent of OAS - on suspicion of bribery and money-laundering.

Investigators say Pinheiro ordered OAS to pay for the renovation of two leisure properties, one in the mountains near São Paulo and another in a beach resort, that Lula secretly owned.

Pinheiro and Lula have repeatedly denied the allegations and formal charges have not yet been filed.

But Pinheiro was found guilty on separate charges of corrupting Petrobras executives, racketeering and money laundering, as were five other OAS directors.

Pinheiro was sentenced last year by judge Sergio Moro to serve 16 years in prison. He and four directors appealed the sentences and are under house arrest. The other director has since died.

By the time of Pinheiro's arrest in late 2014, OAS' fortunes were already declining as legal and financial problems multiplied.

Revenue growth slowed and the company lost a net 3.5 billion reais that year as banks - scared off by the Car Wash probe - choked off access to credit. The Brazilian currency slumped, raising the cost of servicing dollar debts.

Before filing for bankruptcy protection, OAS's debt reached the equivalent of 47 times annual operating earnings, the highest among Brazil's construction and engineering firms, Fitch Ratings data showed.

At the Christmas Day meeting, executives Fabio Yonamine, Nathaniel Wendling, Elmar Varjão and Barreto agreed that missing the upcoming dollar debt payment and launching creditor talks would speed up an orderly reorganization, said the source present.

According to the source, Yonamine said that without a plan to shed assets, OAS was done. Once they ended the meeting, they rang Mata Pires to inform him of the plan, the source said.

Despite owning 90 percent of the company, Mata Pires had not made day-to-day management decisions at OAS for years and he does not face criminal charges under the Car Wash investigation.

But his role was further eroded under the company's restructuring, bankers and lawyers familiar with the process said. He stayed on as chairman but creditors barred him and his sons, Cesar and Antonio Carlos, from having management posts in the company and from earning dividends.

Mata Pires and his sons declined to comment.

In early 2014, at the height of his success, Mata Pires was worth $1.6 billion, according to Forbes Magazine. Last year, he was dropped from the magazine's list of billionaires.

OBSTACLES

The group of executives now running OAS - which includes Varjão, Wendling and Barreto - faces key challenges. Among them: finding buyers for "white elephant" assets acquired during the boom years, and fixing the company's reputation.

When Brazil won the right to host the 2014 World Cup, Lula pushed for the construction of 12 arenas across Brazil to increase the grandeur of the event and spread the economic benefits.

OAS agreed to build the Arena das Dunas stadium in the coastal city of Natal even though executives knew the project would take years to generate adequate returns, said an executive who worked alongside OAS on the sport arena projects.

Another decision to expand into shipbuilding, designed to help OAS pick up more contracts with Petróleo Brasileiro SA, went wrong when oil prices crashed and the state company became the center of the Car Wash probe. OAS has been unable to find investors interested in buying the stake in the shipbuilding firm, Enseada Industria Naval SA.

OAS remains saddled with as many as 19 lawsuits from creditors, such as suppliers and local noteholders, questioning the company’s recovery plan.

(Editing by Daniel Flynn and Kieran Murray)

By Guillermo Parra-Bernal and Tatiana Bautzer