The Long and Short
Potential equity should shore up Raizen SA
This material is a Marketing Communication and does not constitute Independent Investment Research.
Raizen paper (BBB/Baa3/BBB) in the belly the curve currently trades around 120 bp wide of ‘BBB-‘ Suzano, wider than the historical curve-adjusted average of around 85 bp. Continued progress on improving liquidity through asset sales and some deleveraging from a working capital unwind in calendar 2025 should assist. However, the big price mover is clearly a potential capital injection, which looks likely to materialize within the next six months or so, providing relative value opportunities in the process.
While Raizen continues to make operational improvements across its platform of businesses, it still faces a complex and difficult operating environment. It is dealing with higher leverage, weaker sugar prices, lower-than-expected sugarcane production and tight distribution margins. Though the company is making progress on cost reduction as well as with cash generation through asset sales, company guidance for the current crop year signals a slow trajectory of improvement, which in turn keeps credit investors cautious about adding risk, despite the spread differential to comparably rated credits.
On the sources and uses front, the company has reduced expansion investments with a current plan to focus only on the ongoing initiatives. But this means a significant reduction in recurring spend is not likely to materialize until fiscal 2027, given existing payment commitments. Given EBITDA generation expectations for the current crop year, operational cash burn will be significant as a result of the shift in supplier financing from working capital to debt, following the tax changes in Brazil.
This strategy change drove a 50% increase in net debt at the end of the first quarter this year to R$49 billion, from R$32 million year-on-year before accounting for the R$3 billion in long-term client prepayments from E2G contracts or the recent asset sales totaling around R$2.6 billion. As a result. Raízen’s reported net debt/EBITDA at quarter end was 4.5x, outside the range typically associated with the BBB/Baa3/BBB ratings. Presently, the collective agency opinion looks patient, given the clearly communicated balance sheet strategies by management. To that end any significant near-term negative action looks unlikely.
Mindful of the potential multi-year process to return to historical debt ratio levels (below 2.5x), the company will probably pursue more aggressive tactics to support credit metrics. This has been underlined in a series of news headlines recently. There apparently are multiple initiatives under scrutiny to inject capital into the balance sheet through third party interest. This may come through cash injections into the Cosan holding company—and a drop down in tandem with Shell, the other primary Raizen shareholder—or through a direct stake purchase at the Raizen level by a minority shareholder, thus keeping Shell and Cosan as pari primary controllers. Either of these scenarios would be a solid positive for metrics and credit spreads over the medium term as the company would surely solidify its investment grade rating.
Though crop output is likely to be lower in the current 2025-2026 crop year, the cane quality is expected to be better, improving productivity. And together with stable average sugar prices, year on year operational cash generation should improve. On the fuels side, small increases in volume together with flat margins points to stable to slightly better performance at the EBITDA line also.
Dropping to the free cash flow calculation, and adding a couple of billion in BRL to the unadjusted EBITDA calculation from 2024-2025, with about R$9 billion in capex and R$6.6 billion in interest expense (with each 100 bps in CDI accounting from about R$600 million in interest expense), offset in part by the working capital release, cash burn continues in the current crop year, though should ameliorate in 2026-2027 atop a lower CDI rate amidst stable operating conditions. The higher last-12-month EBITDA this year should help reverse the recent credit metrics increase with our expectation that net debt/EBITDA comes in at about 4.0x (as reported) or a little lower – suppressing ratings risk in the process, absent any capital injection.
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