Braskem volatility likely continues

Declan Hanlon | August 8, 2025

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.

Volatility in Braskem’s bond prices probably continues. Recent trading sessions have seen renewed price weakness as the curve bear flattens, with the long end outperforming the front.  And August liquidity has not helped. The coming days are unlikely to offer much respite.  As the bonds likely continue to widen, relative value should improve particularly in the bonds trading at lower prices and in the hybrids.

Braskem reported a second quarter recurring EBITDA that was lower than consensus expectations as operating metrics were weak across the global platform. Revenues were weak on continued low pricing in the Brazil and the US/European business while in Mexico the turnaround capex initiative dropped utilization to 44% and drove EBITDA negative in the process.  Further, inventory impacts drove a sequential increase in cost of goods sold, placing further pressure on margins. In Brazil, EBITDA fell by 24% sequentially to $152 million, while in US/European segment, EBITDA was also negative, at $8 million. As a result, free cash flow was another cash burn of about $254 million, due to the working capital cash consumption, Alagoas payments and a higher capex. Thus, net debt/recurring increased to 10.6x (vs. 7.9x at 1Q25 and 6.8x in the year ago period).

On the latest conference call, a lot of the time was taken up by strategic discussions about the corporate “transformation” of switching from naphtha as a feedstock (old world and more expensive) to more green feedstocks like gas, which is more economical and drives higher margins. However, the substance of the financial discussion was lighter than expected, other than to offer some insights into a sequentially better second half: first half 2025 cash burn was more than $700 million, while the second half should still be a burn, but much less on the typical cyclicality and the incremental benefit that the company will realize from a significant increase in utilization in the Mexican operation as the terminal ramps up. Further, Braskem may realize the potential for support from a variety of government initiatives in antidumping and tax credits reorganization, which remain under discussion and should convert to some level of cash flow support, starting mainly next year.

The evolving REIQ/Presiq tax credit discussion that would impact project expenses and opex continue to make its way through the labyrinthine processes in Brasilia.  For this, management suggests the upside potential of as much as 8.5% of Brazilian opex, which we calculate could be a cash impact of $400 million to $500 million using an estimate of Brazilian cost of goods sold in the denominator. These initiatives would help reframe balance sheet metrics for the company by projecting mid-cycle EBITDA in 2026 and 2027, thus lessening liquidity pressure in the process and giving the company additional time to execute on the operational transformation. At this point however, projecting a 90% lift to recurring EBITDA in 2026 falls in the ‘upside scenario’ tab, given the lack of visible legislative traction momentum.

Additionally, there are some press articles speculating on asset sales in the US this week also. Though management deftly avoided direct answers or outright denials, a detailed discussion on the strategic importance of the US business to the broader platform, particularly as relates to Braskem’s green initiatives, did imply that the articles lack substance.  However, we would posit that the opportunity for immediate liquidity to Braskem through a reported $1 billion valuation for a business that generated around $60 million in EBITDA over the last 12 months would be seriously considered.  Nonetheless, management did clearly state that asset sales are not the targeted or ideal ways to amortize debt.  Nor is a there a plan to “re-profile debt” as the problem according to management is an EBITDA issue not a debt issue—culminating with an adamant statement that “EBITDA in 2028 will be much higher than today” and hence the company expects leverage to decrease based on cash flow growth.  The 2028 EBITDA reference is an outgrowth of expectations for an eventual industry rebound, though we note that this rebound was originally to have started this year.

Overall, the call failed to tap into the very negative view of valuations implicit in the bonds and the failure of management to quantify a near-term way forward and instead rely upon more amorphous outlook of the company and the market is not likely to provide support in the near term. Simultaneously, the Tanure process remains in the background and the next catalyst is likely the resolution of the existing exclusivity agreement that Tanure presently has in place with Braskem’s controlling owner, Novonor.  The 90-term expires on Aug 25, and the market awaits clarification on an extension or a termination. The latter would be positive for the bonds, despite the ongoing fundamental overhang.

Aside from the fundamental backdrop, the Tanure acquisition overhang continues as a volatility driver in the market, with risk managers choosing to decrease Braskem exposure on the back of a scenario analysis that includes an expectation that a Tanure-led bid could eventually lead to a restructuring of the Braskem balance sheet.  This has been based on the premise that equity value creation would require significant deleveraging, which is logical. However, there are a number of steps between here and a Braskem RJ or out-of-court restructuring.  There are three key milestones that need to be achieved in order for Tanure to complete this transaction.

• Successful negotiation with the Novonor-level bank group that hold the pledge of Braskem shares against more than R$15 billion in debt to Novonor. The Novonor stake is worth less than R$3 billion currently, requiring a more than 80% haircut to mark-to-market.  We expect that the banks will have already taken write downs in a lending facility that is now more than a decade old and generally speaking, realizing some value is preferable to writing the asset down to zero.  However, given that Braskem is presently operating at the bottom of the cycle, the option value in Braskem shares and in turn the bank’s share pledge, is potentially substantial.  So why would the group sell now?  It also seems that each of the 5-member group has veto power, further fragmenting the valuation discussion.
• The Tanure led group has indicated that a firm bid for Braskem is contingent upon ring-fencing the contingent liability of Alagoas. While the provisioning exercise to cure the day-to-day expenses has provided visibility to the balance sheet impacts, Alagoas state has yet to complete its process to levy penalties on the Company.  While I expect the eventual decree for renumeration will be spread over many years, this clarity does not seem imminent, particularly considering that there is a gubernatorial election in Alagoas in 2026 and the Braskem event is likely to be again be intertwined in the political process, rendering a near-term state liability resolution unlikely in our view and thus Tenure’s current ‘firm bid’ requirement.

If Tenure were to achieve the first two milestones above, a Petrobras sign-off would presumably be a final process step (under the shareholder agreement right-of-first-refusal).  Recent co millionents by Petrobras management have fueled conjecture that the oil company is supportive of the Tanure bid, or at a minimum unsupportive of Braskem’s current corporate governance. I have been unable to substantiate the fact patterns underlying these headlines, given that Petrobras’ board membership in Braskem—four of the 11 members—signed off on the 5-year Braskem business plan in February. As such, Petrobras’ position remains unclear. Further, the worst-case scenarios that include an eventual “forced restructuring” of Braskem debt would require Petrobras complicity and given the Petrobras/Braskem operational linkages together with the political sensitivity of such complicity, achieving this ‘milestone’ seems unlikely, under the current scenario matrix.