Brazilian companies such as Gol, Suzano and Lupatech have recently seen a sharp increase in their debt ratios; bondholders and rating agencies are watching out.

According to Brasil Economico, the appreciation of the dollar and aggressive acquisition strategies increased substantially the indebtedness of Brazilian companies without an equivalent return on investment, putting managers under pressure from bondholders and rating agencies. Themarket is closely watching leverage ratios, like debt to cash (EBITDA), and investors are increasingly demanding convergence of these ratios to healthy levels, as promised by these companies before issuing the bonds.

A round of renegotiation between the parties should start soon. Among the companies that should soon renegotiate terms with bondholders are Suzano, Lupatech, Gol, Gafisa, Fibria, Marfrig
. All of these companies have a high level of debt to EBITDA.

Petrobras’ supplier Lupatech, for instance, has the size of its debt at about 4.5 x Ebitda. The problem started before the 2008 crisis, when Lupatech went into a buying spree of companies hoping that a strong demand for oil & gas services and equipment (due to Petrobras “pre-salt” euphoria) would materialize… but it did not. 

Other companies, including Gol, Fibria and Suzano have had its debt affected by another problem: the exchange rate.  
In the case of Gol (NYSE: GOL), the foreign currency debt has reached 72.4% of its BR$4.7B total debt in the last quarter. The EBITDA (earnings before interest, taxes, depreciation, amortization and also before the aircraft leasing), was BR$124.2 million at the end of September. The market expectation is of a weak fourth quarter as well. It is likely that the company will not pay the premium to investors. All of its debt holders are banks, which also have business relationship with the company, so they may even waive the interests.

The same foreign exchange problem affects Fibria, which has 92% of its BR$11.3 billion in debt tied to foreign currencies, and Suzano, which has 52.8% of its BR$8.3 billion in debt in foreign currencies. In the third quarter, Suzano’s debt level was 4.23 times Ebitda but it expects to be at
4x in the forth quarter, although if the dollar exceeds BR$1.75, the ratio will be above that. 

Another company near the edge is Marfrig, with a debt/Ebitda of 4.04 times. But, according to the company’s president, Marcos Molina, there is no need to renegotiate its bonds as an increase in cash flow and asset sales should reduce debt.

How are their stock doing? After all, a picture paints a thousand words…
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