Brazil’s Unigel rating lowered on ‘sharp, simultaneous’ downturn in petchems, ferts

Jonathan Lopez


SAO PAULO (ICIS)–Brazilian producer Unigel’s debt rating was downgraded over the weekend by two credit rating agencies on the back of a “sharp and simultaneous” downturn in both its petrochemicals and fertilizers divisions, according to Fitch Ratings.

Moreover, Fitch said Unigel’s new projects on green hydrogen and sulphuric acid may not come to completion within the planned dates due to cash flow constraints.

The US credit rating agency was joined by its peer S&P Global, who also downgraded its rating on Unigel’s debt arguing that, after a poor set of financial results in the first quarter, uncertainties about Unigel and the wider chemicals industry’s rebound “remain high”.

Earlier in May, Unigel posted sharply lower Q1 sales and earnings, year on year, and its CEO conceded the recovery may not occur until 2024 as high interest rates globally and a slower-than-expected upturn in China post-pandemic take their toll.

The company is mostly a producer of styrenics and acrylics, and their derivatives, as well as fertilizers.

Also in May, the company said it was idling its large fertilizers production plant in Laranjeiras, Brazil, for 90 days from 1 June on the back of high natural gas costs, the main feedstock for the plant.

In a written response to ICIS on Monday, Unigel declined to comment on the credit rating agencies’ downgrades.

On Friday (26 May), Fitch Ratings downgraded all its ratings on Unigel’s bonds from BB- to B, or from “speculative” to “highly speculative”, respectively.

According to the agency, B ratings would indicate that material default risk “is present, but a limited margin of safety remains” to repay debt commitments.

However, the capacity to do that in the future may be flawed if a deterioration in business conditions were to occur. See Fitch’s ratings scale here.

Precisely, a deterioration in business conditions is on the cards, with Unigel being hit by poor petrochemicals and fertilizers margins and its main market, Brazil, going through an economic slowdown.

“The downgrades reflect sharp and simultaneous downturns in both of Unigel’s business chemical and fertilizer (agro) segments, while Brazilian lending conditions have tightened following the default of Americanas,” said Fitch.

Americanas is a Brazilian major retailer which filed for bankruptcy protection in January; it holds creditor debts of around Brazilian reais (R) 43.0bn ($8.6bn).

“The timing for a recovery by either or both segments [petrochemicals and fertilizers] remains highly uncertain … Proactive measures may be required for Unigel to shore up liquidity including some combination of shareholder support or asset sales, in the absence of additional funding being supplied by lenders or a sharp recovery of one of its business divisions,” Fitch added.

Moreover, the pressure on cash flow could prompt Unigel to halt one of its star projects, a green hydrogen facility in Brazil, according to Fitch, which also called into question whether Unigel could complete its new sulphuric acid plant currently under construction.

Fitch spreads forecasts

(in $/tonne) 2023 2024
Styrenics 125 160
Acrylics 335 430
Fertilizers 27 25

Meanwhile, S&P Global also downgraded from BB- to B+ its rating on Unigel’s debt, also justified on pressured cash flows and poor performance at the company’s divisions.

According to S&P’s methodology, both BB and B belong to the “speculative grade”. See the agency’s ratings scale here.

“The company will continue to face challenges in the next few quarters to revert this trend, resulting in poor credit metrics this year … Uncertainties about the industry’s rebound remain high,” said S&P.

This credit rating agency was particularly sanguine about the myriad of problems Unigel is to face in coming quarters.

For Unigel’s chemicals divisions, S&P is also forecasting a “significant” drop in spreads in 2023, compared with 2022, which would be more severe in styrene and polystyrene (PS) than in acrylonitrile (ACN), and a fall in sales volumes of 5-10%.

For the beleaguered fertilizers division, there is also more pain ahead: the agency expects spreads to decline around 70% in 2023, compared with 2022, and bounce back by 30% in 2024; it said it had already considered the Laranjeiras stoppage “for some months” this year.

Because of that stoppage and poor market conditions, S&P is expecting fertilizers sales volumes to fall around 35% in 2023, year on year.

Unigel sold 1.14m tonnes of fertilizers products in 2022; for 2023, S&P expects that figure to be between 700,000-800,000 tonnes.

According to the agency, Unigel would not recover those levels until 2025 at least. For 2024, S&P expects fertilizers sales volumes to stand at “close to” 1m tonnes.

S&P concluded arguing it is assuming “a large rebound” in both the chemicals and fertilizers industries as they return to mid-cycle growth levels.

However, while that much-hoped-for rebound arrives, Unigel could face further pain when it comes to its debt commitments.

“We could lower the ratings [on Unigel’s bonds] in the next six to 12 months if we don’t see the gradual rebound that we expect in profitability over the next few months, resulting in higher cash burn for the year,” said S&P.

“In this scenario, we would see the company potentially facing increased difficulties to get waivers for breaching the covenants and to refinance its bank debt. Revenue and EBITDA [earnings] recovering slower than we expect would also lead to debt to EBTIDA remaining above 5.0x [ratio of five times net debt to earnings] next year as well, likely leading to a further rating downgrade.”

The net debt to earnings ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and earnings are held constant.

Unigel’s current ratio stands at 10.0x. Anything below 3.0x is normally considered financially sound; ratios higher than 4.0x or 5.0x typically set off alarm bells because this indicates a company could struggle to repay its debt burden.

($1 = R5.00)

Front page picture: An Unigel production facility in Brazil
Source: Unigel

Focus article by Jonathan Lopez


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