The Long and Short
Appealing spread in Raizen relative to comparable credits
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After a tumultuous year that saw weaker crop productivity and lower margins in its fuels business along with capital expenses that drove cash flow burn, the balance sheet at Raizen has been under pressure. Net leverage reached 3.2x and credit rating agencies took action with S&P changing the outlook on its ‘BBB’ rating to ‘Negative.’ New management has proactively sketched out initiatives to arrest the trend. And there is a rational case for improvement over the next 12 to 18 months, with potential for M&A capable of expediting the timeframe somewhat.
Though crop output is likely to be lower in the current 2025/2026 crop year, the cane quality is expected to be better, improving productivity and together with better average sugar prices should drive year-on-year improvements in cash generation. On the fuels side, small volume increases together with flat margins projects stable to slightly better performance at the EBITDA line also.
Dropping to the free cash flow calculation, and adding a couple of billion in BRL to the unadjusted EBITDA calculation from 2024/2025, with about R$9.5 billion in capital expenditure and R$6.6 billion in interest expense (with each 100 bp in CDI accounting from about R$600 million in interest expense), offset in part by a small working capital release, cash burn sustains in the current crop year. It should turn positive in 2026/2027 atop a lower CDI rate amidst stable operating conditions. The higher last-12-month EBITDA this year should reverse the recent credit metrics increase with our expectation that net debt-to-EBITDA comes in at about 3.0x or a little lower, suppressing ratings risk in the process.
At the same time, Raizen is actively looking at divesting some assets from its portfolio, though we expect that these initiatives—that target between R$10 billion and R$15 billion in proceeds from sugar mills, power generation assets and substantially all of its Argentina business, which would account for about 50% of the total—will largely serve to decrease gross debt, while the ‘sold’ EBITDA results in small improvements to credit metrics. The asset sales would shrink the asset portfolio though potentially enable better productivity in ESB and a return to a core focus in Brazilian fuels. Additionally, initiatives at the shareholder level may add further theses to the trade with the potential for a Cosan partial sell down shoring up metrics at the parent level. Positive event risk there could materialize if equity partner Shell emerged as a buyer.
The Raizen bonds have widened to ratings peers year-to-date and at around 230 bp in the 10-year area of the curve are around 90 bps wide to Brazilian investment grade comparables, with the credit not meaningfully participating in the recent investment grade risk addition in Latam. There is execution risk for calendar 2025; however, the corporate strategy at Raizen over the next few quarters seems sufficiently credible to point to cheapness in the credit versus Brazilian/Latam investment grade comparables.
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