Brazilian chemicals firm Unigel requested a precautionary measure on 11 December from the Second Bankruptcy Court of Sao Paulo, citing the need to pursue mediation with creditors. Despite an initial rejection, the pre-bankruptcy protection was granted 14 December.

Unigel reported approximately BRL 3.667bn (USD 743m) in debt in its petition.

Debtwire Restructuring Database: Unigel (access required)

The company

Unigel is a Brazilian petrochemicals manufacturer founded in 1966, which operates plants in the Brazilian states of Sao Paulo and Bahia, as well as in Mexico.

The company is owned by the Slezynger family and is Brazil’s second-largest petrochemicals producer, after Braskem.

Unigel produces acrylics, styrenics and nitrogen fertilizers, and also manufactures plastics and packaging products. It is the largest nitrogen fertilizer producer in Latin America and serves customers worldwide. It also has a strong international presence in the textile, construction, packaging, automotive and electronics sectors.

The firm entered the Mexican market in 2006 when Unigel Mexico S de RL de CV was established to acquire acrylic sheet maker Plastiglas de Mexico SA de CV.

In 2018, Unigel Luxembourg was created as a special purpose vehicle to issue bonds and raise funds abroad. That year, Unigel Luxembourg issued USD 200m in 10.5% senior secured notes due 2025, which have since been replaced with the USD 530m 8.75% unsecured bonds due 2026.

The company had been interested in raising USD 500m in an IPO since 2019, without success.

Unigel Participacoes operates as a holding company. It is 100% owned by Cigel Participacoes, where Unigel’s chairman Henri Armand Slezynger has a 52% stake. Unigel’s Vice-Chairman, Marc Slezynger, has an 11.5% stake, the same as his siblings Leo, Daniel, Gabriel and Rebecca.

Unigel Participacoes has a 99.9% stake in multiple subsidiaries in both Brazil and Mexico such as Proquigel Quimica, Plastiglas, Unigel Mineria SA de CV, and others.

Apart from Unigel, members of the Slezynger family own companies in the plastics, logistics, IT, real estate and agribusiness sectors.

Unigel has a number of long-serving, non-family executives. Roberto Noronha Santos was appointed as CEO in October 2018, while Daniel Zilberknop has been the holding company’s CFO since 2011, having worked at the company since 2002.

The debt

The four companies in the precautionary measure request listed debt totaling BRL 3.667bn.

The largest share is BRL 2.754bn related to the Unigel Luxembourg USD 530m 8.75% senior unsecured 2026 international bonds, plus interest. The notes were first sold for USD 420m in 2019, with a USD 110m reopening following in 2021. Pimco is the largest holder, and other holders include Neuberger Bergman, Amundi and BTG Pactual. Bank of New York Mellon is the trustee.

Unigel Participacoes accounts for BRL 550m related to the BRL 500m unsecured domestic bonds due 2027, including interest. Issued in 2022, the bonds pay CDI+ 2.1%. Vortx Distribuidora is the trustee for these notes.

On 6 December, the domestic bondholders announced the early redemption, and at a general meeting on 11 December, voted to pursue an enforcement lawsuit.

Additionally, Proquigel Quimica listed BRL 127.4m in bank debt with Goldman Sachs, and BRL 70.8m related to a Natural Gas supply contract with Shell Energy do Brasil. Proquigel Quimica and Companhia Brasileira de Estireno have BRL 165m in bank debt with Morgan Stanley.

The descent

The first red flag appeared when Unigel reported disappointing 1Q23 results after facing macroeconomic challenges amid a chemical downcycle which reduced spreads across the industry.

Unigel reported net revenue of BRL 1.8bn in 1Q23, down 27% YoY, while its adjusted EBITDA tumbled 82% YoY to BRL 104m. The EBITDA margin stood at 5.75% in 1Q23, versus 22.6% in 1Q22. Net debt was BRL 3bn, and net leverage 2.16x.

At the time, management warned that the challenges faced in 1Q23 would continue and lead to a breach of the covenant limiting net leverage to 3.5x.

The situation worsened in the subsequent quarters when the chemical and agriculture businesses faced lower prices amid weak demand. At the same time, the cost of production continued growing, pressured by an increase in natural gas prices and lower use of industrial capacity.

In June, Unigel hired Moelis & Company to help with liability management efforts to improve its capital structure. The company also said it was working with Felsberg Advogados, a relationship that had lasted a decade covering various projects.

The revelation of the advisory hiring was a surprise, because Unigel had sufficient liquidity at the time, and was expected to get a covenant waiver from its largest creditors. It had BRL 686m at the time, enough to repay debt through 2026. However, the market reaction was swift, with bonds falling to 27 on 8 June, compared to 92 on May 10.

Bondholders began to organize, forming an ad hoc group with Houlihan Lokey as financial advisor, and later adding E.Munhoz as a lawyer.

A group of investors holding 80% of Unigel’s domestic bonds hired Valuation Consultoria Empresarial as an advisor for debt talks with the company. On 11 December, the domestic holders approved the hiring of Lefosse to be the legal representative of Vortx, the trustee of the notes.

As part of the effort to improve its capital structure, Unigel said in June that it was in talks with Petrobras to form a joint venture for its business and green hydrogen project. Unigel suspended operations at its fertilizer plants and sent layoff letters to its employees in August.

As conversations with Petrobras seemed to not be moving forward, and at the beginning of November the company announced it was dismissing 384 employees from its fertilizer unit in the city of Camacari, in Bahia. Only two weeks later, on 14 November, the company announced it was suspending the notice letters it sent to workers, as talks with Petrobras had progressed.

On another front, in September Unigel hired CVPAR Business Capital to explore divestment options, seeking to sell part or all of its non-core assets, including a sulfuric acid production plant under construction with a required investment of BRL 500m.

Unigel skipped the 1 October payment related to its USD 530m 8.75% 2026 bond. The 30-day cure period expired on 2 November, and the trustee of the notes, Bank of New York Mellon (BNYM), sent the notice of event of default to the company.

In October, Unigel hired PadisMattar as a legal advisor to help in the company’s debt restructuring talks with creditors working alongside Felsberg.

In the out-of-court discussions, Unigel had asked creditors to contribute USD 300m in new money, while its shareholders avoided making any contribution. Creditors were only willing to provide USD 100m.

In December, the ad hoc group offered the company USD 150m in exchange for an 80% equity stake, with a backstop from its largest holder Pimco. The proposal also included a 60% haircut to the Brazilian chemical producer’s total debt.

On 4 December, the company reached an agreement to sell Plastiglas in Mexico to Verzatec, without disclosing the financial terms. At the same time, Petrobras announced the negotiations for a tolling agreement with Unigel for the two fertilizer units located in the states of Bahia and Sergipe.

Domestic bondholders approved the early redemption of the notes on 6 December, and then authorized the filing of an enforcement lawsuit on 11 December.

On the same day, Unigel requested a precautionary measure with the Second Bankruptcy Court of Sao Paulo, seeking a temporary suspension of individual debt enforcement against it, in order to conduct a mediation process with creditors. The filling included Unigel Participacoes, Proquigel Quimica, Companhia Brasileira de Estireno, Unigel Luxembourg, and Plastiglas de Mexico, the unit that will be sold to Verzatec.

However, the Sao Paulo court denied Unigel’s request hours later. Judge Leonardo Fernandes dos Santos considered the company had not adequately proved that it met the requirements to obtain the injunction. Unigel appealed the denial on 13 December.

On 14 December, Judge Dos Santos reconsidered, after Unigel presented evidence of the domestic bondholders’ enforcement vote. He reversed his initial decision and granted Unigel the preliminary protection.

The advisors

by Fabiola Gomes, Alvaro Ledgard and Arthur Almeida

Related Links:

Debtwire Restructuring Database: Unigel (access required)

Debtwire Legal Analysis on Unigel