The Long and Short
Downgrade of FS Bioenergia
This material is a Marketing Communication and does not constitute Independent Investment Research.
Moody’s downgraded FS Bioenergia, the Brazilian energy company, this week from ‘Ba3’ to ‘B1’ and changed its outlook change from negative to stable. Fitch may mirror Moody’s shortly. While free cash generation should turn positive after the company’s latest cycle of capital investment is complete, ethanol prices remain under pressure due to gasoline price parity and excess ethanol supply during the 2026/2027 harvest, adding to uncertainty around margins for the company. Although the company’s recently issued bonds have bounced off recent lows, they may retest those lows as circumstances unfold.
Operational data for the recently ended fiscal fourth quarter and full fiscal year (at the end of March) were about in line with market expectations across the main metrics: corn crushed, ethanol produced and sold, DDG products sold and corn oil sold. This operational execution resulted in net revenue growth of 2.3% to R$3.1 billion for 4Q26, with ethanol sales representing 67% of the total while animal nutrition was about 17%. These data engendered an EBITDA generation of R$910 million for the period, a 13% year-on-year improvement, representing EBITDA per liter of R$1.47, versus R$1.28 in the corresponding period last year.
Despite the positive fundamental deltas, FSBIO bonds have been under pressure in recent months, with the market focusing on the ethanol price weakness. Petrobras resisted adjusting to international price parity during the conflict in the Persian Gulf as Brazil’s current administration positions in front of the October presidential election. At around $80/bl for Brent, there is a more than 25% discount currently built into prices at the pump in Brazil, which in turn will likely continue to depress ethanol pricing, at least through the election.
Adding to the market pressure on balance sheet metrics, as the company continues to invest in its fourth facility (Campo Novo de Parecis), the newly announced plans for the fifth facility—in the same part of Mato Grosso that Amaggi was initially considering plant construction—should delay deleveraging and take peak net leverage to about 4.5x by the third quarter of the 2026/2027 fiscal year (the quarter ending in December 2026). Though the R$2.0 billion capex initiative is fully funded though the Brazilian Development Bank, the expected $100 million Amaggi equity injection and recent domestic lending, the weaker balance sheet metrics over the coming 12 to 18 months were already likely to weaken positive credit sentiment for the two primary bond issues (with yields for both bonds now increasing to the mid 9% area).
This latest ratings action and potential mirror action by Fitch, which remains at BB-/Stable, are likely to put more pressure on prices in the coming sessions. Both agencies have previously indicated that net leverage above 4.0x (on a sustained basis) are downgrade triggers. The recently issued 2036 bonds are up a few points from the lows in recent weeks. However, this Moody’s action, together with the potential for additional negative action and a slow expected ethanol price rebound may combine to retest the year-to-date low-price levels, taking yields closer to 10%, where far value discussions become more palatable.
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