Unigel, a Brazilian Company, Initiates 'Grace Period' for Credit Rating Following Missed Bond Coupon Payment

06 Oct, 2023

Unigel, a Brazilian Company, Initiates 'Grace Period' for Credit Rating Following Missed Bond Coupon Payment

Brazilian petrochemicals and fertilizers producer Unigel is at risk of another credit rating downgrade following its failure to make a bond coupon payment on October 2nd.

The missed payment led US credit agency Fitch to further downgrade Unigel's debt rating into junk territory. Specifically, Unigel failed to pay a coupon on its $420 million bond due in 2026.

As a consequence of the missed coupon payment, Unigel has now entered a "grace period." During this period, the company has the opportunity to pay the interest on the bond without triggering a default.

Unigel's financial difficulties in 2023 are primarily attributed to high input costs, particularly in its fertilizers division, coupled with low selling prices.

Fitch had previously downgraded Unigel's debt rating to CCC category in June. This week, Fitch downgraded it further to C, which is the third lowest notch in its debt rating scale.

In response to inquiries, a spokesperson for Unigel declined to comment.

Unigel is involved in the production of petrochemicals within the acrylics and styrenics chain, in addition to its fertilizers business.

Fitch has expressed doubts about Unigel's ability to receive support from its owners or swiftly sell assets to meet the coupon payment within the 30-day grace period. The "C" rating indicates an issuer in a grace period following non-payment of a significant financial obligation, and Fitch believes that Unigel is unlikely to receive the necessary support within the specified timeframe.

Fitch noted that Unigel is still considering potential debt restructuring due to challenging market conditions. Without additional funds, the company may need a combination of asset sales, equity injections from its shareholders, or renegotiation of its natural gas supply contracts. Natural gas is a crucial feedstock for fertilizer production.

In June, Unigel enlisted the services of financial advisor Moelis to enhance its capital structure. This move, coupled with the delay in publishing its Q2 results, has raised concerns among creditors.

Fitch concluded that if Unigel fails to pay the coupon within the grace period, its debt obligations would be rated as 'RD,' indicating an uncured payment default or distressed debt exchange. Actual bankruptcy proceedings would result in a 'D' rating, the lowest notch.

Unigel's financial difficulties have intensified since the publication of its Q2 financial results. Plants have been idled to cut costs, and discussions with creditors are in full swing. In August, the company suspended ammonia production at its Laranjeiras plant due to high input costs associated with natural gas prices. This plant has significant production capacities for urea, ammonia, and ammonium sulphate.

Additionally, Unigel suspended production at various chemical plants, including a styrene production plant and a polystyrene (PS) plant, citing poor economic conditions. In June, the company announced a partnership with Brazil's energy major Petrobras to maintain fertilizer production in Brazil, although details of the partnership remain undisclosed.

The challenging operating environment and poor Q1 results have prompted credit agencies like S&P to lower Unigel's debt commitments rating due to the existing "restructuring risk."