Out-of-consensus calls in Latin American credit in 2026

Declan Hanlon | November 21, 2025

This material is a Marketing Communication and does not constitute Independent Investment Research.

With spreads tight across almost all sectors of Latin American credit, the best opportunities for excess return next year show up in a few special situations. Put Braskem and Raizen from Brazil on that list along with Ecopetrol from Colombia. That does not rule out impact from broader trends. Tariffs pose limited risk with the US not the leading destination for commodity-centric Latin American exports. Some fundamentals could prove challenging, most notably weaker pricing in oil and gas. And there is event risk next year from renegotiation of the US-Mexico-Canada Agreement. But a few uncorrelated names look the most promising.

Braskem

One of the notable special situation credits in 2025 has been Braskem, a Brazilian petrochemical company that has witnessed a steady decline in global demand and pricing for its industrial commodities in recent years. This cyclical downtown has been compounded by an environmental event in the northern state of Alagoas that has incurred about R$12 billion in expenses so far for the company, adding further pressure to the balance sheet. In recent third quarter earnings, while the company’s EBITDA of $150 million was a sequential improvement, the $360 million cash burn highlighted the ongoing petrochemical downcycle, exacerbated by the fact that the third quarter is normally a high coupon period. Net leverage consequently increased to 14.75x, though admittedly the market stopped focusing on the leverage metric some time ago. In the quarter, the operating cash burn resulted in cash decreasing to $1.3 billion, which was a key driver in the company’s decision to fully draw its $1 billion revolver after the quarter end.

The recent positive news on the potential introduction of tax credits for the sector (so called REIQ and PRESIQ) suggests that once fully approved, they will drive stronger EBITDA generation in the coming years, despite continued low resin prices globally. However, the Company will likely continue to burn cash in the near term, necessitating incremental liquidity, which is likely be on a secured basis. The higher REIQ benefit (from 0.7% to 6.25% of feedstock purchases in Brazil) could have a $300 million impact on EBITDA in 2026, while the PRESIQ (which would contribute from 2027 onwards) could ‘add’ around $235 million to the EBITDA calculation (50% of the industry-wide R$2.5 billion would be attributed to Braskem).

In the quarter, liabilities related to the Alagoas situation increased by $110 million given the recently announced R$1.2 billion agreement with the state, of which R$467 million had already been provisioned and R$139 million paid. This a very positive event given the company has progressed with a key public stakeholder.  This balance will be amortized in ten annual installments with the outflows concentrated after 2030. This in turn should aid in the (ongoing) process for bank lenders to foreclose on an equity pledge at the shareholder level with the bank group likely to assume control of the business from the existing controller Novonor. With an IG4 fund expected to manage the bank group stake in the future, there are potentially new avenues for liquidity enhancement, either via additional equity or lending by the banks or support by Petrobras (the second largest equity owner), which could be via working capital lines and/or a preferred equity injection, to circumvent consolidation risk.

A restructuring proposal to the board and creditor group are likely upcoming milestones in the process. Given that around $190 million in coupon payments are due in January and February, this further liquidity deterioration motivates action in advance of the year-end to initiate formal discussions. The objective will be to determine what may be possible in an extrajudicial proceeding (a Brazilian out of court restructuring or “EJ”), where a less combative proceeding could see a creditor-led equity injection and an up tiering of certain pre-existing debt. Conversely, if a recupercao judicial (a Brazilian bankruptcy or “RJ”) is ultimately required to remake the balance sheet, the more expensive process would probably drive delays and larger bond price haircuts.

Though the cyclical petrochemical market turn as been pushed forward numerous times in recent years (we are five years in to a three-year cycle so far…!), Braskem management comments on the recent earnings conference call further underlined views that the petrochemicals market is expected to remain structurally challenged through 2030, given the addition of 40 new crackers globally (mainly in China), contributing to significant oversupply and lower utilization rates across the globe. As a result, demand remains tepid while the rationalization of global capacity has proceeded more slowly than expected. We read this continuous lowering of expectations as a guide to the upcoming discussions on debt haircuts and/or extensions. Adding additional risk to the discussion, given the revolver drawdown, some of the participating banks may seek to decrease exposure to Braskem in the near term and this is most easily achievable by the nonrenewal of some letter-of-credit facilities that support about $2 billion of the company’s trade payables. To that end, a portion of the current cash balance may be deployed to working capital payments in the spot market, further pressuring cash availability and resultant restructuring discussions.

Market participants appear to be anticipating an EJ restructuring in our view, given the lack of different credit classes and the relative attractiveness of this process. Creditor group formation is progressing with the hiring of advisory and legal expertise, though the process awaits governance progress at Braskem and the preparation of said restructuring proposal. Though the January coupon schedule encourages a timeframe, the process could be delayed if the current financial advisor, Lazard, departs along with Novonor, post foreclosure by the bank group. This development would ironically improve the probability of January coupon payments, to encourage negotiation, in our view.

What would also likely be achieved by the shareholder evolution would be a more proactive approach by Petrobras. However, here too, Petrobras-involved processes are rarely fast moving and even if the foreclosure is announced this month, it may take until the New Year to properly engage the oil company as a partner in remaking the Braskem balance sheet.

The next catalyst for bond prices is the initial restructuring proposal or potentially a full approval of REIQ/PRESIQ, both of which could have December/January timeframes. If we assume current US dollar bondholders provide $1 billion of new secured debt, which up tiers about $750 million of existing unsecured debt and we program a refinancing of the existing $1 billion revolver on a secured basis while modeling a placeholder $500 million for the remaining Alagoas contingencies, the ‘secured’ debt is about $3.25 billion initially. We further assume that the REIQ/PRESIQ contributions may engender $1.1 billion in EBITDA for a 2026 jump off point in modeling the credit. Under these inputs, a 40% haircut implies a new net leverage in the low 4x area, with the initial assumptions excluding PIK/grace period componentry, for illustrative purposes. This remade balance sheet option is a potentially aggressive starting point for net leverage; however, coordinated support by bondholders and shareholders would likely tolerate the higher metric initially, particularly in the context of a conservate industry turnaround timeframe and sufficient liquidity to manage operations through to 2031. Such an initial resolution draft would provide material upside for the current bonds, which are trading in the $36 – $42 dollar price range currently.

Raizen

Next, staying in Brazil, we turn our focus to the largest sugar and ethanol producer, Raizen. The company has been the subject of significant price volatility over the last month as somewhat erroneous news flow motivated broad-based selling in October, with the investment grade rated corporate seeing a price decline of more than 20 points in its bonds in one day. The company is co-owned by Shell and Cosan and while fundamental pressures have risen over the last year, our relative value view is that the challenging operating conditions are priced in already while strategic developments in the coming months offer incremental upside to investors. In the recent fiscal second quarter (ending in September) continued weak comps in its Ethanol, Sugar and Bioenergy (ESB) business and its Argentine fuels segment resulted in a 13% decline in consolidated EBITDA for the period. The lower last-twelve-months EBITDA decline was compounded by the continued migration of working capital debt to long-term debt, driving a negative free cash flow and a resultant increase in reported net leverage to 5.1x, from 4.5x at F1Q26 and 2.6x in the corresponding period last year.

The weak operating data was generally expected after volatile climate conditions for the sugar cane crop negatively impacted crushing volumes and crop yields. Simultaneously, informal fuel sales in Brazil have impacted distribution volumes and margins in recent years, dragging down the contribution from the fuel distribution business. However, though we have begun to see some alleviation of this pressure in recent months as authorities step up attempts to curb illegal fuel sales.

October’s negative headline volatility generated a vicious cycle of de-risking as investors sought the safety of lower exposure versus doubling down late in the year, after locking in returns benchmarked to the aforementioned CEMBI index. In November, the capital structure has stabilized somewhat, rebounding from the lows. However, the structure still trades wide to lower rated and smaller corn ethanol producer FS Bioenergy, despite this Company’s intention to increase balance sheet leverage to fund capex expansion in 2026.

The near-term risk for Raizen includes additional negative ratings action as the agencies may pursue conservatism over patience. We noted in the recent Fitch ratings action (downgrade to ‘BBB-‘ with a Negative Watch, in October) that there was summary disclosure at the end of the report that indicated the one notch action was not the original agency decision, as Raizen pursued an appeal to address the initial decision. This implies that Fitch downgraded the credit by two notches to a high yield ‘BB+’ initially but amended the decision after Raizen provided new information to the process.

The logical deduction from that is that Raizen strongly suggested either the ongoing Argentine refinery sale and/or the often-discussed capital injection at the shareholder level would be completed in the near term. From follow on discussions with Fitch, it appears Raizen is operating on a short timeframe to report positive action to ward off further negative ratings decisions. With Moody’s at ‘Baa3’ (Stable) and S&P at ‘BBB’ (Negative), additional negative action would be unsurprising and could generate some technical investment-grade holder sales, though the price deck for Raizen’s bonds already reflect yields for a ‘BB’ credit, in our view.

Additionally, headlines related to restructuring, that initially created the tumult, have also abated with Cosan taking steps to stabilize the parental holding company as well as adding additional liquidity through an equity offering and labeling Raizen as a possible destination for some of the capital. This and the cross-default language in Cosan’s US dollar bonds firm up our view that the risk of a negative Cosan-driven balance sheet strategy at Raizen is of a low probability.

Aside from the Argentine M&A and potential equity injection, the standard inventory sell-down in the second half of the fiscal year will likely generate cash at the working capital line and a further R$4 billion of sugar mill sales will enable additional deleveraging by the fiscal year end in March. This would result in lower interest expense for the domestic debt in particular and thereby improve the free cash flow calculation. However, credit ratios, absent a significant equity infusion, are likely to remain elevated well into calendar 2026. We argue that investors are being compensated for these risks at current levels and that the tentative risk addition post the recent negative price action will pick up speed in the first quarter of next year, making the credit a potential outperformer in Latin American corporates in 2026.

Ecopetrol

Finally, we move to Colombia and focus on the state-owned oil and gas business, Ecopetrol. We have historically evaluated relative value in the capital structure via tracking the spread to sovereign as well as triangulating the spread/yield levels with other quasi corporates in the region. Combining the fundamental and political factors influencing the Company drives our exposure to the credit and we are particularly focused on the potential for alpha in 2026 given the recent spread widening on the back of increased political risk. Fundamentally, in the recently reported earnings report, Ecopetrol reported stable metrics on the back of better Brent prices in the quarter and stronger downstream results. The main offset was a small decline in production and a 2% quarter-on-quarter increase in lifting costs. EBITDA of Cop$12.2 trillion for the period was a sequential increase while free cash flow was also positive. However, overall, fundamentals again took a back seat to broader concerns about governance, potential tax liabilities and governmental pressure to sell the Company’s Permian basin operations in the US.

Net debt decreased by about Cop$7 trillion as the company paid down short term debt and benefitted from the US dollar depreciation in the period. Capex was $4.2 billion for the first nine months as compared to the $5.8 billion – $6.3 billion guidance for the full year. The full-year number will likely be towards the lower end of the range. Gross leverage ended the quarter at 2.4x, about in line with the 2.5x gross debt/EBITDA internal target. For the oil company only (excluding the utility (ISA) debt), leverage was 1.7x, which compares favorably with comparably rated oil companies.

Aside for the oil price volatility, as the year turns, the political backdrop has increased as the primary value driver in Ecopet bonds, with the spread differential to the sovereign widening by 20 – 40 bps across the curve. The latest headline flurry has concentrated on the potential for Ecopetrol to recognize significant tax liabilities from retroactive changes in VAT on imports of diesel and gasoline and particularly on the governmental pressure to force the Company to divest its hydraulic fracturing business in the Permian, given the business is viewed as misaligned with the environmental policies of the current administration.  The Permian joint venture with Occidental Petroleum ends in June 2026, though there is a renewal option available. Ecopetrol’s union has been forceful in resisting the presidential pressure, though the battle, which has been waged in the local press has stalled price action, leading to the spread divergence from the sovereign.

As credible presidential candidates emerge in 2026, a new administration will likely veer towards the center of the Colombian political spectrum and with it will emerge new clarity in evaluating the spread relationship between the sovereign and Ecopetrol, with a potential renewal of drilling licenses and less pressure to divest the Permian partnership large drivers in re-framing the spread relationship.  Prior to the existing administration under Gustavo Petro, Ecopetrol traded around 60 bps wide to the parent, around half of the current spread level. As the presidential campaign evolves, Ecopetrol relative value trade will likely gather momentum into the May election and we anticipate a ‘post Petro’ environment will be supportive for the Ecopetrol valuations, even when accounting for broad macro pressures within the economy and a weaker Brent in the coming twelve months.