More company defaults are likely in Brazil’s sugar and ethanol sector, with banks remaining reluctant to lend despite the recovery in the price of sugar, according to ratings agency Fitch Ratings.
According to data from MBF Agribusiness, a consultancy specializing in sugar and ethanol companies, 87 mills have filed for bankruptcy as of January 2017, while Fitch’s special report said not a single company in the sugar sector has emerged from bankruptcy protection since 2005.
Fitch said disagreements between debtors and creditors are mostly to blame for the absence of recoveries. “The legal instability discourages the employment of some instruments available in other jurisdictions, such as debtor-in-possession financing, which could fill the void left by banks,” it noted.
According to the report, many of the companies in the sector were hit by a confluence of factors, and had financed extensive investment programs, largely with debt, before the global financial crisis.
“Other contributing economic factors were consecutive global surpluses; a steady increase in the stocks-to-use ratio, which led to declining sugar prices in the past five crop seasons; reduced and more expensive financing for sugar and ethanol companies by Brazilian banks, most notably in 2014, 2015 and part of 2016; and the effects of the Brazilian real depreciation in sugar and ethanol issuers’ leverage metrics,” Fitch stated.
Companies also have to contend with government control over gasoline prices and harsh weather conditions over the past five crop seasons that have affected agricultural yields in Brazil’s central south.
Small mills with crushing capacity of up to 1.3 million tons are more susceptible to default, since it is more difficult for them to attract bank financing, Fitch says, citing data from MBF Agribusiness.
Mills without the flexibility to switch production from one product to another are also more vulnerable, says Fitch, as are those that rely on producing their own cane. While a higher percentage of company-made cane enhances supply security, the high cost of agricultural management can strain less capitalized companies’ balance sheets.