Unigel Debt Sinks Into Distressed Amid Covenant Breach Concerns

Bonds of Unigel slipped into distressed territory on concern that poor results may put the chemical maker at risk of covenant violations.

(Bloomberg) — Bonds of Unigel slipped into distressed territory on concern that poor results may put the chemical maker at risk of covenant violations. 

Dollar notes due in 2026 are down 34 cents since the firm posted its first-quarter earnings earlier this month, seen as weak by analysts. The plunge — the worst among Latin America’s corporate borrowers this quarter, according to data compiled by Bloomberg — sent yields jumping to more than 35%, from around 8% in January. 

The company, Brazil’s largest nitrogen fertilizer producer, saw adjusted Ebitda plunge 82% in the first three months of 2023 from a year earlier. That sent its leverage ratio to 2.2 times, closer to a threshold of 3.5 times that, if surpassed, gives holders of local notes issued just last year the option of declaring the early maturity of debt obligations. 

In a conference call with analysts earlier this month, executives announced a reduction in investment plans to safeguard the company’s financial strength. 

“Unigel signaled it expects equally weak operating performance in the second quarter, and showed less conviction on a cyclical recovery by the end of the year,” said Sebastian Hofmeister, a senior credit analyst at Lucror Analytics. 

The company’s “cash-preservation mode” added to concerns around earnings, and management suggested some leverage covenants may require waivers, he added. 

Unigel declined to comment. 

Brazil’s local-debt market had a bumpy start to the year after retailer Americanas SA and utility Light SA filed for bankruptcy protection. The turmoil led to scrapped issuances of local bonds, known as debentures, as well as several firms hiring financial advisers to restructure debt amid a high-rate environment. 

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“Given the earnings profile over the cycle, we think the logical next step would be a covenant waiver,” said Ben Hough, director of corporate research at BCP Securities in Greenwich, Connecticut. “We think the company will likely engage with debenture holders to achieve a constructive outcome.”

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