Surging interest rates combined with a decline in agricultural commodity prices have prompted an increasing number of sector companies to seek renegotiations with creditors
03/08/2024
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Douglas Bassi — Foto: Fernando Martinho/Valor
Agribusiness, heavily leveraged, has emerged as a key player in the country’s debt restructuring processes, with numerous producers facing the dual challenges of high costs and price pressures on certain commodities. With the yellow light on, ways to alleviate the problem are being studied, including capital market mechanisms. The imminent need for cash by the companies most burdened by the cost of debt is already drawing the attention of funds specializing in alternative investments, the “special sits,” which are already analyzing opportunities in the area.
The challenging outlook contrasts with the country’s sector’s progress last year. The Gross Domestic Product (GDP) of agriculture grew by 15.1% and was the main driver of the 2.9% expansion of Brazil’s GDP.
A study by Virtus, a company specializing in corporate restructuring, reveals the situation. Using only companies listed on the stock exchange, the snapshot shows a drop in cash generation and an increase in the level of indebtedness, sounding alarm bells.
The earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, an important profitability indicator that shows the ratio between a company’s cash generation and its net revenue, decreased from an average of 14.4% at the end of 2021 to 7.4% last year. Leverage, which represents the extent to which a company’s debt exceeds its annual cash generation, however, moved in the opposite direction, with an increase of 87%, to 3.1 times in the same period, according to the survey conducted at Valor’s request.
Of the companies analyzed in the study, 60% now have leverage above three times, which is generally one of the metrics observed for breaching covenants (financial obligations determined in a contract).
Douglas Bassi, a partner at Virtus, highlights that the price of commodities is a key factor in the financial health of agribusiness. Faced with the current scenario, Virtus has seen an increase in inquiries from producers who are experiencing financial difficulties. “The trend continues,” he noted.
The situation for non-listed companies is even more challenging. “Listed companies have easier access to capital, currently at an average cost of CDI plus 2%. But across the sector as a whole, the spread is much wider,” he explained. According to sources consulted by Valor, many rural producers have become indebted in recent years, investing the funds in expanding their land holdings during a period of high commodity prices. A significant number utilized Fiagro, investment funds that focus on the agricultural sector. However, a portion of these producers are now struggling to meet their payment obligations under their contracts.
The rising number of requests for court-supervised reorganization in agriculture underscores the issue. Data from Serasa Experian released on Thursday (7) shows that last year, requests for court-supervised reorganization from rural producers surged by 535%. Experts consulted by Valor indicate that the situation is deteriorating.
Consequently, some Fiagros have had to notify their shareholders of the non-payment. Galapagos Capital, for instance, had to report on the court-supervised reorganization of Grupo Elisa, owned by the Mitre family, involving an Agribusiness Receivables Certificate (CRA). The asset manager informed shareholders that it was “collaborating with the other creditors of the CRA to protect the fund’s interests.”
Elisa Agro stated that “court-supervised reorganization was deemed the best course of action in light of the macroeconomic challenges that have affected the company’s operations in recent years.”
“The company is confident that, in collaboration with its advisors and creditors, it will formulate a viable restructuring plan that aligns financial obligations with cash flow, ensuring the sustainable continuation of operations and the preservation of thousands of jobs,” it announced.
Another example is the Vectis Datagro Crédito do Agronegócio fund, which has declared it will call for the early maturity of Brasil Bio Fuels’ CRAs, as the latter sought judicial protection against debt collection. Brasil Bio Fuels explained that its application was for an emergency injunction “aimed at securing a 60-day window to negotiate a mutually agreeable resolution with its principal creditors.”
Mr. Bassi from Virtus recalled that many Fiagros were initiated during a period of lower interest rates and higher commodity prices in Brazil, a scenario that has since shifted on both accounts. According to January data from ANBIMA, there are now 98 active Fiagros, with net assets totaling R$36.4 billion—up from nine funds in August 2021.
In some instances of court-supervised reorganization in Mato Grosso, for example, trial court judges have rejected land as collateral for loans, supporting the argument that the asset is indispensable. This issue is being closely monitored by asset managers, who have started to anticipate problems.
Roberto Zarour, a partner at Lefosse’s Restructuring & Insolvency practice, notes that the agribusiness sector’s demand for judicial recoveries and restructurings has increased this year, marked by significant cases, indicating a strong trend. “The Selic rate is decreasing, yet it remains quite high. That has affected the more vulnerable companies, particularly those with bank debt in the capital markets,” he noted. He also highlights that many of these renegotiations have occurred outside the judicial realm.
In the financial market, various structures are under consideration to both capitalize and prolong the maturities of these producers. One method being discussed involves utilizing Fiagro itself to consolidate current debts and repackage them with different terms, extending the duration. Another approach, considered by special sits, involves leasing land; the fund purchases the land and establishes a long-term lease with the producer.
Rodrigo Aguiar, from Íntegra, a firm specializing in corporate restructuring, describes the most critical situations among soybean and corn producers who incurred debt for investments and were subsequently walloped by increasing interest rates and declining commodity prices. Ethanol producers with minimal sugar exposure are also facing difficult times.
Mr. Aguiar mentions that many creditors, initially lenient during the pandemic, are showing patience. Another challenge, according to him, involves negotiations with capital market creditors, who, as dispersed debt holders, are less familiar with the agricultural sector’s volatility. “Many producers were caught at an inopportune moment, at the height of their investments, before seeing the outcomes of these investments,” he explained.
Identifying opportunities in the market, ARC Capital is exploring lending to agribusiness under the Debtor-in-Possession (DIP) modality, within a court-supervised reorganization framework, shares partner Sérgio Firmeza Machado. “We’re examining some cases involving producers of soybeans, cotton, corn, and ethanol,” he said.
*Por Fernanda Guimarães — São Paulo
Source: Valor International