Braskem Bonds Rally Despite $1 Billion Deal Collapse, Lawsuits
Published 19 November 2024, 15:37:12.43 GMT
By Giovanna Bellotti Azevedo
(Bloomberg) -- Braskem SA’s bonds are handing investors some of the best returns in Latin America, brushing off the collapse of a billion-dollar investment by Abu Dhabi National Oil Co. and ongoing concerns about costly environmental lawsuits.
Dollar notes due in 2030 — one of the company’s most liquid — have returned more than 18% since the beginning of the year. That’s almost triple the average return of 6.2% for Latin American corporates during that period, according to a Bloomberg gauge.
Expectations for a deal with Adnoc had driven much of the rally in Braskem’s debt this year. But the bonds have continued to climb even after the deal fell through in August. They’ve outperformed in the recent bout of volatility to hit risk assets amid the US election too, posting losses of 0.9% in the last month versus a 1.4% drop for the region’s corporates.
The bonds’ performance can be partly attributed to investors believing that “the worst is over” for the petrochemical sector, said Filipe Botelho, an analyst at Lucror Analytics.
The segment has struggled amid weak demand and oversupply since 2022. Better spreads — the difference between product prices and the cost of raw materials — boosted Braskem’s third-quarter earnings. They should moderate in the fourth quarter, and then resume a gradual recovery in 2025, Botelho said.
There is “still upside” for Braskem’s bonds “for those who are patient and can withstand short-term volatility,” he said. Botelho has maintained a buy recommendation since the beginning of the year.
Cash and clean-up costs
Investors and analysts are also optimistic that the company will have enough cash to settle lawsuits over the partial collapse of its salt mine in the state of Alagoas.
Braskem’s bonds got hammered late last year when a 1 billion reais ($173 million) civil lawsuit related to the Alagoas disaster raised concerns about potential new litigation. The mine’s partial collapse in November 2023 cost the company its investment-grade rating.
Total provisions for the company’s clean-up efforts stood at about 16.3 billion reais at the end of September, with roughly 11.5 billion reais already disbursed, according to a Nov. 7 earnings release. The situation is “dynamic,” and adjustments might be necessary, Chief Financial Officer Pedro Freitas said on an earnings call. Braskem declined to comment further.
Braskem’s cash position was $2.4 billion at the end of the quarter, down $400 million from the prior-year quarter, but sufficient to cover debt maturities in the next 52 months without considering its $1 billion revolving credit line, Investor Relations Officer Rosana Avolio said on an earnings call.
The company in October raised $850 million in dollar-denominated debt. Proceeds will be used for repaying debt and general corporate purposes.
Braskem’s ability to generate cash remains a reason for concern for some analysts. The company burned around 2 billion reais in cash during the third quarter, with Alagoas-related fines costing 830 million reais, according to estimates by XP Investimentos.
The worry isn’t widespread. Liquidity remains one of Braskem’s strengths, said Luisa Vilhena, an analyst at S&P Ratings. “Historically, they’ve always maintained a solid cash position. They don’t want to be stretched in a moment when they need to refinance,” she said.
Dealmaking
The bonds are also benefiting from potential dealmaking opportunities, even though recent attempts have hit snags. One option could be Brazilian oil giant Petroleo Brasileiro SA buying the rest of the company it doesn’t already own.
Petrobras has 47% of Braskem’s voting capital, while Novonor SA has a little over 50%. Novonor, formerly known as Odebrecht, has been trying to sell its stake for years, and Petrobras has publicly stated it would be interested in acquiring Braskem.
Braskem is also continuing conversations with PIC, a subsidiary of Kuwait Petroleum Corp., but the process is moving “slowly,” CFO Freitas said on the earnings call. Petrobras conducted due diligence in 2023 but requested additional information, Freitas said.
“The market has already accepted that a purchase of Novonor’s stake will be difficult as long as there is uncertainty regarding the review of the Alagoas fine,” Botelho said. The “general base case is that the company can absorb a potential increase in fines due to its strong cash position.”
--With assistance from Leda Alvim, Carolina Wilson and Mariana Durao.