Fitch Ratings sees high default risk for Brazilian sugar and ethanol in 2014

In Brazil, Fitch Ratings says weak capital structures, tight free cash flow, and challenging capital market access, combined with the overall poor outlook for the sector, leave default risk for Brazilian sugar and ethanol companies high for 2014.

For Fitch rated issuers, the median total adjusted leverage ratio for Brazilian sugar and ethanol companies was 5.9x, while the median net leverage ratio was 5.4x, which compares unfavorably with ratios of 5.3x and 4.8x during the same period in 2013. Free cash flow will be pressured by depressed sugar prices and cost pressure for diesel, labor and logistics.

Four out of six companies in Fitch’s portfolio show high or moderate refinancing risks and limited alternative sources of liquidity, like land-holdings. Issuers should remain highly dependent on local credit banks, as the international debt market is likely to be tough to high-yield credits in 2014.