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Brazil’s Unigel Closer to Bankruptcy Proceedings, Debt Ratings Cut to Lowest Notches

Unigel would be a step away from filing for bankruptcy and both credit agencies rating its debt obligations, Fitch and S&PL Global, have downgraded the company to the bottom notches of their rating scales.

On 2 October, Unigel failed to pay a coupon on a bond due in 2026, entering a 30-day grace period to negotiate with bondholders. The company said at the end of the grace period its talks with creditors were continuing, although fears about it filing for bankruptcy kept growing.

Unigel’s operating conditions have sharply deteriorated over the course of 2023 as high input costs – mostly in its fertilizers division due to high natural gas prices – and low selling prices dragged its finances down.

Late on Monday, Fitch downgraded Unigel’s debt obligations to restrictive default (RD), only a step away from the default (D) notch.

According to Fitch’s rating scale (see it here), RD indicates a company has “experienced an uncured payment default or distressed debt exchange on a bond, loan or other material” financial obligation but has not yet entered bankruptcy proceedings.

“Unigel is still considering a potential debt restructuring in the midst of challenging market conditions. Without additional funds, the company will need some combination of asset sales, an equity injection from its shareholder, or a renegotiation of its natural gas supply contracts,” said Fitch.

The latter option seems now also closed, after the company announced it was shutting down its Camacari, state of Bahia, nitrogen fertilizers plant while charging against Brazil’s state-owned energy major Petrobras who, in Unigel’s view, would have not facilitate the continuation of operations with its “unbearable” natural gas prices.

Moreover, Fitch said the hiring of financial advisors Moelis & Company in June which, according to Unigel, would help it “improve” its capital structure, could end up having been counterproductive.

“Fitch believes that the engagement of Moelis, which has been an advisor for several companies that have restructured debt in Brazil, materially reduces the creditors’ willingness to provide new financing to the group to cover its 2023 and 2024 funding needs,” it said.

Last week, S&P Global Ratings also downgraded Unigel. On this occasion, the agency placed a D on the firm’s debt commitments, taking the bankruptcy practically as a given.

According to S&P rating scale (see page 9 here): “[A D rating shows] Payment default on a financial commitment or breach of an imputed promise; also used when a bankruptcy petition has been filed or similar action taken.”

Source: Icis