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«Brazilian Sugarcane Procesors Reopen Talks With Creditors»

Laginha Agro Industrial S/A

Brazilian sugarcane procesors reopen talks with creditors  — Portal ClippingMP. Original source: Valor Econômico, 10-30-2012. My translation.

Few of the Brazilian sugarcane ethanol plants that filed for bankruptcy at the outset of the crisis in 2008 have been able to comply with the payment plans agreed upon with creditors.

At the present moment, there are 37 Brazilian processing plants in bankruptcy, comprising 11% of the sector as a whole. Sector companies say that margins have been squeezed in the last two years by rising costs and falling sugar and alcohol prices.  The result is that quite a few of these companies are now renegotiating debt amounts and deadlines with their creditors.

With revenues down and costs on the rise, projected cash flows for these companies are being revised. Few of the sucarcane alcohol plants that collapsed starting in 2008 and filed for bankruptcy are able to satisfy the conditions of the repayment deals negotiated with their creditors. The affected companies say that climatic conditions in the last two years have had a negative effect on cash flow generation, with margins pressured by higher costs and lower prices than expected for sugar and ethanol.

The result is that quite a few of these companies are renegotiating debt amounts and deadlines with their creditors. It is estimated that the bankrupt companies control 37 industrial plants, or some 11% of the Brazilian sector.

“Cash generation projections are being revised,” says attorney Thomas Benes Felsberg of Felsberg & Associates. Felsberg’s firm alone represents 12 bankruptcy cases in the sector, most filed after 2008.  Of this group, only one has managed to meet deadlines agreed upon with creditors, the attorney says.

Naturally enough, creditors are highly reluctant to return to the bargaining table after two years, Felsberg  says.  This is especially true when payments agreed upon are delayed.

Last month, three creditors — two banks and a trading company — pressed for the reorganization of the Laginha plant in Alagoas, owned by federal legislator João Lyra (PSD-AL). The state high court of Alagoas initially approved of the filing, then reversed itself. Now, the company will present creditors with an amendment to the original bankrupcy declaration.  Laginha claims it lacks sufficient bank credit to deal with inclement weather in the cane fields, pointing to a flood that nearly destroyed the facility in 2010.

Generally speaking, cane processors face more than just foul weather and unfavorable pricing trends in their attempt to exit bankruptcy, Felsberg explains. “A number of legal challenges are pending in the courts, making it difficult to exit bankruptcy,” the attorney said.

Under Federal Law 11,101, if a company remains up to date with its obligations for two years after the approval of the reorganization plan, it has the right to request that the recovery proceedings be closed.  Once these proceedings run their course, the recovery plan is treated as an ordinary contract and subject to all the risks thereof.

But emerging from bankruptcy is not a rapid process even for companies that are up to date with their obligations under the plan. Such is the case with Infinity Bio-Energy.

Infinity filed for reorganization in November 2009, had its reorganization plan approved by creditors the following year and then, after being acquired by Bertin and receiving capital from foreign investment funds, petitioned to exit reorganization in late May of this year.  Now, five months later, the company is still waiting for its case to be decided.

The company set up to manage Infinity’s reorganization took 90 days to verify the company’s payments, says Infinity CEO Douglas Oliveira. “After this period, the management company reported to the court that it favored allowing Infinity to emerge from reorganization. Now, however, we have to wait for the Ministry of Justice and the federal prosecutor to weigh in. In the meantime, we continue to lack capital for investment,” the executive says.”

Redundant jurisdiction of this kind is often cited as part of the risco Brasil — the cost of being Brazilian. There is a tendency to try to consolidate these regulatory processes. Example: establishing a Super-CADE to oversee M&A approvals currently divided among the competition regulator and various other federal bureaucracies — Treasury, Central Bank.

The Infinity case is atypical of most cases of court-supervised reorganizations among sugarcane processors. Control of the company was acquired by the Bertin Group for BRL 1.6 billion in 2010.  Infinity managed to raise another BRL 170 milllion between October 2010 and April 2011 from foreign investment funds inclined to assume more risk, as well as funds from the Brazilian credit market, Oliveira explains. Another US$ 38 million was loaned by U.S. investment funds in early June of this year, maturing in three years.

With these capital infusions, Infinity has been able to pay off BRL 15.1 million to unsecured creditors and BRL 18.4 million to other creditors, as well as to convert BRL 138 million in debt to shares in the company. Bertin owns 71% of thecompany while various foreign funds control 21%.

These investments have also made it possible to invest in the agricultural and industrial sides of the business in a bid to increase processing volume at the company’s six units, from 4.3 million tonnes in the 2010/11 harvest cycle to 7 million in 2013/14, as well as to increase capacity for sugar production.  “With this, commodity production increased from 28% to 53%,” Oliveira said.

Even so, he explains, two of the company’s plants have been idled because of a lack of sugar cane. “We started negotiating with the banks in May  but then called a halt to talks, given the legal delays in our bankruptcy proceeding,” the Infinity CEO said.