Sinking City Sparks Braskem Bond Rout and Ratings Warnings

Published 6 December 2023, 17:41:17.686 GMT

(Bloomberg) -- Bonds in Latin America’s largest petrochemical company Braskem SA are getting hammered as the collapse of a salt mine it operated in northeastern Brazil sinks parts of a city of one million people into the sands.

The company was notified on Nov. 30 of a 1 billion reais ($205 million) civil lawsuit for potential damages in Maceio, Alagoas state, as entire neighborhoods collapse into the cluster of mines built deep under the city. And that could be just the beginning of the charges.

Days after the lawsuit was announced, one section of the town that is wedged between the sea and a lake was sinking as much as 5 centimeters (2 inches) an hour, according to a statement by the Civil Defense. The movement and the threat of sinkholes appearing at any time forced Maceio to call a state of emergency and order the evacuation of thousands of people, many of whom sought shelter in empty schools. Others simply refused to leave their homes.

“None of the potential outcomes seem positive for the company in the near-term,” said Filipe Botelho, a senior credit analyst at Lucror Analytics. For bondholders, “it’s just not the time to pile-on risk.”

Braskem bonds are the worst performers among Latin America corporate debt over the past week, extending losses Wednesday, according to a Bloomberg index.

“We can’t see investors wanting to come in and buy bonds before the dust settles,” said Botelho. “A lot of people are spooked, so there should be pressure to sell until the situation improves.”

Preferred shares fell 12% last week, their biggest such drop since June 2022, and have continued to slide. Brazil’s sole stock operator B3 on Tuesday excluded the shares from its Corporate Sustainability Index, effective Dec. 8.

Sale Threat

Last week’s lawsuit not only threatens Braskem’s balance sheet but could also derail plans by troubled industrial conglomerate Novonor SA to sell its 38.3% stake in the petrochemicals producer to Abu Dhabi National Oil Co., known as Adnoc.

Adnoc is offering $2.1 billion, or 37.29 reais a share, to buy most of the stake held by Novonor, according to a statement in early November. The stock leaped as much as 23% on the announcement, but has since given up most of those gains.

Chemicals Push

Novonor and some of its bank creditors are not satisfied with Adnoc’s new proposal and are trying to encourage bids from companies such as Unipar Carbocloro SA and J&F Investimentos SA, which had made offers earlier this year, people familiar with the matter said, asking not to be identified because the discussions are private. Novonor declined to comment.

The disaster in Maceio will only make it harder to get a better price, a disappointment to investors who were hoping the sale would be a catalyst for stocks and bonds.

Rating Pressure

The rock salt mine now at risk of collapsing has been inactive since 2019, when Braskem shut 35 of its shafts.

The company had been mining in Maceio for five decades and the first cracks appeared in 2018. Since then, the petrochemical company has committed to paying 14 billion reais in compensation and relocation costs.

Last week’s civil action prompted Fitch Ratings to issue a statement saying the potential mine collapse could materially impact Braskem’s cash flows and pressure its rating. The company is one of only five Brazilian firms to be rated investment grade, according to data compiled by Bloomberg.

“The company doesn’t have any cushion to deal with new claims,” Fitch analyst Marcelo Pappiani said in an interview.

His forecast considers a total payment of approximately 7.5 billion reais in disbursements related to the Alagoas crisis until 2025. Fitch’s base case doesn’t account for any additional payments over this amount.

“Having to pay any more claims than they had accounted for would turn cash flows negative for 2024, and that level wouldn’t be in line with investment grade,” Pappiani said.

It all comes on top of a difficult year for the cyclical and volatile global petrochemical industry, which is facing a prolonged downturn after producers expanded capacity.  

Moody’s, the only ratings firm that does not rate Braskem investment grade, said the risks associated with the Alagoas crisis and a worsening cash burn could be triggers for a downgrade.

On Tuesday, Braskem announced it was canceling its corporate credit rating issued by Moody’s, citing cost-cutting measures. In a statement to Bloomberg News, Moody’s said it will continue to cover the credit through an “unsolicited” rating.

Moody’s had projected that Braskem will burn cash in 2023 and break even in 2024, said senior analyst Carolina Chimenti, without providing any additional details.

“While 1 billion reais on a standalone basis might not seem material when you look at Braskem’s cash position, if you put this in the context of cash burn, it is,” said Chimenti.

By Giovanna Bellotti Azevedo and Leda Alvim

--With assistance from Cristiane Lucchesi and Ezra Fieser.