It is no surprise Unigel is in a very complicated situation, and it has been several months without any positive news. The latest tangible good development was in September when the company agreed to a 90-day extension with debenture-holders (which then expired in December and was not renewed).

The key problem, in our view, is that the Brazil-based chemical producer no longer depends on itself, but is at the mercy of others, such as Petrobras and creditors. In addition, Unigel doesn’t just need to restructure its debt, but also needs extra money, which has complicated the situation even more.

Let’s do a little recap of where the situation stands with each interested party.

Petrobras: Back in 2018/2019 Unigel leased two idle ammonia and urea plants from Petrobras. The company also signed an agreement with the state-controlled oil firm to supply Unigel with the natural gas needed for production. The price of the gas was not cheap, but because the spread between the price of these nitrogen-based fertilizers was so high everything was fine. Between 4Q21 and 3Q23, Unigel recorded BRL 1.4bn (USD 273m) in EBITDA just in its agro segment.

Unfortunately for Unigel, the ample spreads didn’t last long and by 1Q23 EBITDA for the agro segment was “only” USD 9m. The rest is history, as now Unigel is trying to renegotiate the natural gas supply agreement with Petrobras. This has proven difficult, and so far there isn’t anything concrete . Something probably playing a significant role is the political party in power in Brazil. Under the right-wing President Jair Bolsonaro (2019-2022), Petrobras focused on its core business and leased the fertilizer plants. Now, the administration of Luis Inacio Lula da Silva (left-wing and favors a large government role in the economy) probably wants the plants to go back to Petrobras.

There has been occasional news that the two sides were close to an agreement, but nothing concrete so far has been announced. The longer it drags on, the less negotiating power Unigel has, and the lower the chance of a deal being reached.

From the customer’s point of view, does it matter if Unigel produces the fertilizers domestically versus importing them? One would like to think so, but probably buyers are more price sensitive than “loyal” to a local producer. According to a USDA document dated 6 March 2022, Brazil imported almost all its nitrogen-based fertilizers from Russia. Nowadays, it doesn’t seem like Russia has many markets open, so probably they are very competitive with prices and local producers don’t care where it comes from.

Debenture holders: In September they reached an agreement for a 90-day grace period after Unigel had broken the 3.5x maintenance covenant. At the time, that was very promising because it gave Unigel time to negotiate with Petrobras and international bondholders, but negotiations with domestic bondholders clearly took longer, and so far have been inconclusive.

In December, the debenture holders opted to not renew the grace period, as they want a seat at the negotiating table. Debenture holders tried to accelerate the debt, Unigel filed a precautionary measure with a Sao Paulo bankruptcy court and obtained an injunction suspending all debt enforcement measures until 18 February.

2026 bondholders: Until Unigel defaulted on its coupon payment in October, international bondholders were sitting on the sidelines. Now they seem to be behind the wheel. As reported, an ad-hoc group led by PIMCO offered new money and an exchange of their existing 2026 for 80% of the company. The company rejected the offer and there is a mediation with bondholders scheduled for 15 January. If PIMCO bought its stake at much higher prices, as is likely, it would try to structure a deal that would reduce its losses. On the other side, the family probably doesn’t want to give up control of a company that took 57 years to build. There is likely some emotion attached and the owner doesn’t want to hand over his life’s work to a bunch of bondholders who just view this as a trade.

Unigel has good assets that are probably worth a sizeable amount of money under normal circumstances. But in a distressed sale, it is unclear how much a potential buyer would pay knowing that the potential owners (creditors in the extreme case the family losses control of Unigel) are not operators and probably want to get rid of it as soon as possible.

So now what could happen? Either the company reaches an out-of-court agreement with creditors (which seem less and less likely) or Unigel files for judicial recovery. For an out-of-court agreement to happen, the Brazilian chemical producer would need to reach an agreement with bondholders and debenture holders.

On one hand, filing for judicial recovery would extend the protection against individual lawsuits, thereby providing Unigel with additional time to reach an agreement with its main creditors over the terms of a fair debt restructuring plan. On the other, all prepetition claims would be impaired by the process (except tax and claims guaranteed by fiduciary liens, considered extraconcursal by the law), which results in the need to obtain the support of the “qualified majority” of claims and creditors. In other words, affirmative votes from the majority of creditors of each of the four classes of claims (I – labor; II – secured; III – unsecured; and IV – microenterprise) in terms of headcount is required, regardless of the amount of their claims. In addition, it is also necessary to get the approval from the majority by amount of claims belonging to classes II and III.

Additionally, companies under judicial recovery have their activities supervised by a judicial manager and rely on court authorization to sell assets or give them in guarantee of financial loans. Finally, if the recovery plan is rejected, it is up to creditors to decide whether to propose an alternative plan or to see the company declared insolvent, and the judicial recovery converted into a liquidation proceeding.

Alternatively, if Unigel is able to obtain the support of at least 50% of the holders of its domestic and international bonds, it could file an extrajudicial recovery process – the Brazilian version of the prepackaged Chapter 11. This proceeding would entitle the company to decide which claims will be restructured, and the plan acceptance procedures are simpler, faster and tend to lead to less litigation, compared to judicial recovery. The debt restructuring proposal and the evidence of enough creditor support are filed along with the bankruptcy petition, and if the court refuses to sanction the plan, the company may file a new extrajudicial recovery process in the following day, after fixing the matters that led to the initial rejection. In other words, there is no risk of liquidation or alternative creditor-proposed plan in this modality of in-court restructuring proceeding.

Unigel needs to finish the sulfuric acid plant (USD 35m more in capex), the expansion on the latex production line (USD 10m) and needs working capital (let’s say two month of sales, or USD 200m-USD 250m under normal conditions) and probably funds for maintenance. This means Unigel needs to have around USD 300m in cash. It had USD 58m as of 3Q23, plus whatever comes from the sale of its Mexican operations, meaning around USD 150m in total (assuming the company didn’t lose any more cash during 4Q23). So, it needs USD 100m-USD 150m of new money — not easy.