The Long and Short
Braskem SA volatility subsides, value improves
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
A lot of recent discussion about Braskem SA has centered on the potential for a bid for the Brazilian petrochemical from a group led by investor Nelson Tanure. The bid presumably would lead to a forced restructuring of the Braskem balance sheet, with equity value created from significant deleveraging. This or similar scenarios could materialize with different likelihoods. It is worth looking at a couple of scenarios and the related impact on valuations.
In a first scenario, Tanure successfully renegotiates the shareholder pledge with the Brazilian bank group holding Braskem shares as collateral, enabling the acquisition of the majority of the stake held by Novonor:
- The preferable outcome for the acquirer in this scenario would be to maintain Petrobras’ presence in the shareholder group, incenting Petrobras to not trigger its right of first refusal and to continue, broadly, under the existing shareholder agreement.
- I’d expect Petrobras would seek to have a more influential position in the indirect governance at the Braskem management level, given recent Petrobras comments on its level of current dissatisfaction with the existing Braskem management group.
- To that end, potential changes in the Braskem C-suite level could drive incremental volatility in Braskem bold valuations; however, this scenario would likely imply less risk to the existing capital stack.
- This scenario would thus be in line with a less violent outcome for bond holders—no downgrade and thus change-of-control trigger—though I would anticipate than minority shareholders would probably see legal recourse against an attempt to avoid the tag-along rights trigger.
In a second scenario, the Tanure group follows the same pathway as above for keeping Petrobras involved though in addition:
- Seeks longer-term equity value appreciation through layering in structurally senior debt (leveraging existing liens test capacity to manage debt service levels) and in tandem pursues a strategy to amortize the existing capital stack through discounted tenders for the debt issues.
- This strategy would surely drive ratings downgrades for the existing paper and trigger the change-in-control covenants.
- The subsequent process would logically take place through an in-court or out-of-court restructuring and result in market recovery analyses driving existing bond prices lower from present levels.
- This scenario, or some gradient thereof, would include cooperation by all existing shareholders, including Petrobras, so as a result this probability appears lower at present. However, in the absence of a material recovery in petrochemical spreads in the coming year or at least the strong expectation of such, this scenario may be viewed as inevitable given the eventual need for Braskem to amortize its existing bonds in an environment of substantially higher yields.
- Incidentally, an in-court process could potentially result in a practical avenue to ring-fence the Alagoas contingent liability that has heretofore complicated previous attempts to acquire the Company.
In the nearer term, Braskem continues to face weak fundamentals that may lead to additional headline-sensitive bond price volatility given that commodity prices remain tepid while weak industrial demand pressures capacity utilization in the refineries. In the next earnings release, last year’s second quarter 2024 relatively solid recurring EBITDA print (R$320 million) falls out of the last-12-month calculation in second quarter 2025, likely resulting in an increase in the net leverage calculation, from the 7.9x metric at the end of the first quarter 2025.
Furthermore, the conventional logic has been that Braskem is not a liquidity problem; however, free cash flow generation is very likely to remain negative and with sectoral strength not envisioned until 2027 or 2028, the current $1.9 billion in cash is expected to steadily dwindle in the coming quarters. Moreover, with the 2081 hybrid bond callable in October, the potential for call execution may place additionally pressure on liquidity – though clearly also offer potential substantial upside for holders of the stub bond, if this small group can withstand the volatility and recent price collapse. A plausible scenario here will be that Braskem draws on its $1 billion credit line to avoid the interest rate step up to T+822 bps in January 2026 by calling or tendering the bonds at the first call window (October 24th). Conversely, if Braskem chooses to prioritize liquidity over an interest cost increase, investors will be left with a 12% or higher coupon for a bond trading around $77.
Beyond that, the next material debt maturity is not until 2028 where Braskem’s $1.25 billion bond matures in April of that year. Aside from the M&A backdrop, this is likely to increasingly become the focus of discussion as market participants speculate on how the company will address the amortization, with notions of ‘restructuring’ seeping into the headlines, as referenced above.
In the meantime, the market continues to lack clarity on deal structure as well as transaction directionality from the main players—Novonor, the bank group and Petrobras—so bond price volatility probability continues. The credit-negative complicity by Petrobras is less likely as the transaction evolves and, to that end, Braskem bonds offer value, particularly in the front end, together with the aforementioned take-out risk inherent in the hybrids. Finally, the 2041 bond issue offers some incremental protection under its relatively tighter liens test language (15% of CTA versus 20% in the remainder of the USD bonds).
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