The Big Idea
Lessons learned in LatAm credit in 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.
Latin American corporate credit this year had to navigate Liberation Day and its aftermath. I expected the US trade surplus with all the main LatAm economies to cushion potential tariffs. Not true, at least initially. Surprisingly, it also turned out to be a buying opportunity. Then, one company, Raizen, offered a tutorial in trading action for credits impinged by weak fundamentals, ratings risk, weak trading technicals and a declining appetite for risk.
#1: US trade surplus: not a safe zone after all
With the exception of Mexico, the US manages a trade surplus with all of main Latin American economies. This well-known fact provided comfort to investors on Liberation Day this year. However, the market, including me, were surprised by the initial punitive tariff levels and resultant security price action for large corporate structures in the region.
The initial tariffs didn’t discriminate based on actual trading relationships and instead added incremental layers of political punishment to large debt markets, like Brazil. Many of the country’s exports to the USA were subsequently levied with a 50% tariff, generating price volatility for the meat packers, pulp producers, steel manufacturers, agricultural operators and aerospace players.
In the series of amendments that followed the initial decrees, the market attempted to look through the price volatility and with Congressional rebukes to the president’s executive orders, investors formed a relatively broad consensus on the potential benefits for Latin operators, particularly the natural-resource exporters, that were deemed likely to benefit from both higher demand as large markets sought to circumvent the US as well as the global inflation injected into the supply chain by the aggressive US trade actions.
Protein operators benefitted from animal shortages in key markets, most notably the US, where food prices initially spiked before the (mostly Brazilian) producers benefitted from tariff modifications that exempted much of the exported meat to the US. Pulp and paper producers also benefitted from joining the exemptions list after the initial volatility while aerospace operators, like Embraer, also saw initial margin downside before lobbying for and gaining more preferential positioning on the list of targeted goods. Oil and petrochemicals were largely exempted from the start of the process, while base metal exporters of copper or zinc as well as iron ore, were given broad exemptions, based on the large US demand.
#2: Buying on the tariff dip
What was an unprecedented, exogenous shock to value in Latin American corporates turned out to be short-term buying opportunity for investors in the month of April. What followed was steady demand for paper as commodity prices increased, rates decreased and fund flows into the asset class began to turn positive after a few years of leakage, incentivizing the asset class to ramp up primary issuance, which it did throughout the year. As of mid-December, we estimate total issuance in Latin America was about $183 billion, about 50% higher than 2024.
#3: Raizen was the embodiment of market fear, late in the year
Following the tariff volatility, a large investment grade Brazilian corporate, Raizen SA, offered instruction on price action for large bond complexes that are simultaneously impacted by weak fundamentals, ratings risk, weak market trading technicals and very weak risk sentiment. Investors appeared more content to lock in year-to-date returns (in October) than pivot into a complicated credit scenario. This event came on the heels of other credit explosions in the Brazilian market, with serial bond issuer Braskem collapsing in the face of weak global Petrochem demand and pricing and Ambipar, a Brazilian waste management and emergency response business experiencing a sudden collapse in valuations as fraud accusations were levied on the company.
Resultantly, Raizen experienced a one-day 20-point market reaction, which is very unusual for an investment grade complex that was not accused of fraud or any criminality. The negative price action beget additional price volatility as investors sought the safety of the sidelines. Though the technicals were initially daunting, we remained of the view that the fundamental profile was being severely mispriced and rather than de-risking, this was an opportunity to add exposure.
- Raizen’s sugar and ethanol business and its fuels distribution business were underperforming in the calendar 2025, though it was our view that this was already priced in.
- Ratings downgrades were not only possible but probable, but again, priced in.
- The Company’s decision to move substantial (off balance sheet) working capital lines onto the balance sheet did not materially alter the overall leverage of the company and rather provided (preferable) longer term financing. However, the optics of an additional turn of ‘reported’ net leverage was poor timing, at a minimum.
- There continued to be a story of asset sales and equity injections, though the former was not substantial and not significant in terms of leverage reduction while the latter was not occurring quickly and the delays were interpreted as indications of intractability. This, in turn, is ultimately the potential key differentiator in terms of pricing and yield range in 2026.
The Raizen bonds touched the low $60s for a 13% yield, for an investment grade entity. Eight weeks later, it retains the investment grade rating, though Moody’s has taken the rating to Ba1; Fitch is now at ‘BBB-‘ and S&P finally downgraded the credit though remains at an investment grade ‘BBB-‘. Further negative action may be forthcoming if Raizen’s shareholders delay the much-needed equity support. We remain of the view that Raizen still has enough potential upside to be a top performer in Latin American corporates, particularly considering the tight spread/yield jump off point for much of the broader market.
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