Brazil credit: stress and opportunity

Brazilian credits have been under pressure recently due to a combination of global, Brazil-specific, and idiosyncratic factors all coming together. Our emerging market credit strategies are all overweight Brazil, via exposure to corporate credits in the country (see table below). Therefore, we deem it a good moment to put the various moving parts into perspective.

Source: Vontobel, JP Morgan, Bloomberg, as of September 30, 2025

Understanding the recent sell-off: a three-layer analysis

Recent market conditions reflect growing caution among investors globally. Exuberant equity valuations and tight credit spreads make investors more cautious overall. On Friday October 3, 2025, political noise in developed markets certainly did not help to reassure investors ahead of the US long weekend, with US President Donald Trump renewing his trade rhetoric on China and threatening to cancel the in-person meeting with China’s President Xi Jinping. Adding to global uncertainty, the government coalition in Japan collapsed, and in France, political uncertainty remains elevated after the former prime minister's resignation. These global factors led to a general risk-off sentiment in markets that was amplified in Brazil due to country-specific vulnerabilities.

In Brazil, corporates are suffering from a fundamental policy misalignment. Expansive fiscal policy, combined with a restrictive monetary policy, has driven real interest rates to extreme levels. While many companies remain profitable at operating level before interest payments, their profitability is being eroded by the high capital charges. This has been a topic raised by most Brazilian corporates recently. However, access in the local and international debt markets has remained supportive for most companies. On Tuesday October 14, for example, Movida raised debentures amounting to 750 million Brazilian real (BRL).

The third layer involves high-profile idiosyncratic events that served as triggering factors. Ambipar filed for court protection (“Cautelar”) on September 24, 2025, following the escalating pressure on liquidity. In the weeks before the filing, rumors intensified that a substantial portion of the company’s cash was restricted at Banco Master, a troubled Brazilian financial institution. Management repeatedly denied the claims in investor conversations but never issued a formal statement. This fueled suspicions, as banks noticed increasing urgency for liquidity (Deutsche Bank claimed the margin call on the loan of 35 million US dollars (USD) signed in August 2025) despite reported cash of nearly BRL 5 billion at the end of June 2025. The situation deteriorated rapidly with the resignation of the CFO along with other management team members. On September 24, Santander issued an acceleration notice covering USD 125 million in notes and derivatives alleging failure to complete the required collateral of cash and receivables. This cross-acceleration risk catalyzed the filing after the company engaged with restructuring advisors. The disorganized filing revealed a company unprepared for bankruptcy. The severity of the market reaction might have triggered forced selling in structured products in the Brazilian market known as COE (Certificados de Operacoes Estructuradas) that are widely distributed to retail investors. While the situation at Ambipar remains fluid with creditors’ advisors initiating the engagement with the company, current valuations, in our view, may be below recovery rates, if we exclude fraud both in terms of liquidity and at the operating level.

In contrast, Braskem surprised the market by announcing it was hiring advisors (Lazard, Cleary Gottlieb, and Munhoz) to review its capital structure, with a comprehensive action plan expected within four to six weeks. The company has been suffering from a prolonged weakness in the global petrochemical industry, combined with a complicated shareholder structure where Novonor (former Odebrecht) holds the voting majority, while Petrobras is a minority shareholder. Novonor appoints management and controls the majority of the Board of Directors. That said, consensus is needed on material decisions, including key asset sales or filing for restructuring. Adding complexity, five Brazilian banks (Bradesco, Banco do Brasil, Itau, Santander, and BNDES) hold fiduciary liens over Novonor’s shares securing BRL 19 billion in loans. The banks are advancing to set up a structure where they take control of these shares which, if materialized, would remove the controlling shareholder from the company. Banks and Petrobras could be more aligned to have a consensual approach with creditors once Novonor is ousted. Operationally, Braskem faces structural disadvantages to peers due to its reliance on expensive naphtha-based feedstock versus cheaper ethane-based competitors. Given the strategic importance of the industry, the government is considering providing support to the industry by extending anti-dumping policies and adding the so called REIQ/PRESIQ tax credits. Although timing is uncertain, if the measure is approved, Braskem could add additional annual EBITDA of USD 400-600 million. Bonds are currently trading at prices in the low 30s (compared to issuance and expected reimbursement of 100), with the market seemingly concluding that a harsh restructuring is inevitable. While we cannot exclude that recoveries in Braskem will be low, restructuring is not a certainty. In our opinion, the company could opt to extend short-term maturities in a first stage and address the capital structure later in a more favorable petrochemical market environment. Secured lending may also be an option, as most of the assets are unencumbered. Even assuming a restructuring, we can think of multiple scenarios that could lead to higher recoveries for bondholders than current prices.

The Raizen case: catalyst for a broad market correction

Raizen was the main focus in Brazil on Friday October 10. The largest sugar and ethanol producer in Brazil is owned by a 50%/50% joint venture between the Brazilian conglomerate Cosan and the Dutch-British oil company Shell. It is also Brazil’s second-largest fuel distributor to roughly 7,000 stations and runs Shell’s Argentine operations including 800 stations and a refinery. Despite holding an investment-grade rating by the three major rating agencies (Baa3, BBB, BBB), Raizen bonds fell more than 15 percentage points intraday after being under pressure the days before. The selling pressure seems to have originated from an investors meeting where the word “restructuring” had been uttered.

We believe that the sell-off represents overreaction, as we do not see an imminent restructuring risk. While Raizen faces near-term operational headwinds, the company is taking proactive steps to navigate this challenging period and strengthen its financial position. The sugar and ethanol division has been impacted by depressed sugar prices and temporary volume constraints due to Brazil's wildfires and drought in 2024. The fuel distribution business is facing margin compression that management expects to improve, as the ethanol blend ratio increases from 30% to 35% and regulators crack down on informal competition. These operational challenges, combined with Brazil’s elevated interest rates environment, have pressured credit metrics with net leverage rising to 4.7x. To address the high leverage, the company has launched multiple cost-cutting initiatives, scaled back capital expenditure programs, and announced asset sales that are expected to generate BRL 15-20 billion in proceeds, with BRL 5 billion already completed. While currently cash-flow negative, Raizen maintains a solid liquidity position with BRL 16 billion in cash and additional USD 1 billion in undrawn revolving credit facilities as of June 2025. Additional proceeds from recent asset sales are expected before year-end.

Raizen recognizes that a capital injection would ease balance sheet constraints and accelerate the path to sustainable leverage, although timing remains uncertain. Cosan, who has recently received a BRL 10 billion capital injection that will be fully dedicated to holding-level debt reduction rather than flowing to Raizen, has signaled openness to dilution and is in active discussions with potential strategic partners. Recent discussion with Cosan’s CFO, Rodrigo Araujo, confirmed their expectation to announce a capitalization by March 2026. The estimated amount is in the range of BRL 10-15 billion. Shell has been less vocal on their intentions with Raizen. That said, both Cosan and Raizen agreed to publish a material fact after market close on Friday, where Raizen explicitly stated it was not considering any form of debt restructuring or bankruptcy protection filing. Also, that “The company was informed by its controlling shareholders that they continue to discuss and assess alternatives for the capitalization of the company, aimed at strengthening its balance sheet and supporting its long-term strategy”.

We added exposure to Raizen during the sell-off in anticipation of a price recovery on Tuesday October 14 following the US holiday. The Raizen sell-off appears to have been the straw that broke the camel’s back, triggering a broad-based correction in Brazilian credits. We attribute such broad-based selling to the presence of crossover investors with less emerging market credit specialization indiscriminately exiting positions. The combination of Ambipar and Braskem in the same week had already highlighted investor anxiety, and the Raizen episode illustrates how nervous and prone to overreaction Brazilian credit investors are. In our view, this market dislocation creates opportunities for active managers like us.

Source: Vontobel, Ambipar, Raizen, Braskem, Bloomberg, Santander, Jeffries, BAML, JPM, DB, Barclays, Moody's, S&P, Fitch; as of October 2025

Our portfolio positioning and strategy

While our strategies maintain an overweight in Brazil, we emphasize disciplined risk management. We are monitoring the situation in Brazil closely. We were in Brazil two weeks ago and we have ongoing calls with management of significant Brazilian companies. Currently, we do not hold any single large exposure in our emerging market strategies, with exposure spread across multiple industries and issuers. In Brazil, our biggest overweight in our emerging market corporate strategy is in the oil and gas sector, where we are invested in a wide range of names. This industry benefits from strong bond structures, including collateral, reserve cash accounts, and stronger covenants providing stronger credit protection. The sector’s fundamentals are also supported by Petrobras’ ongoing extensive capital expenditure program. Petrobras is expected to update its strategic plan in November, and although we could see some downward revision in investments, upstream oil and gas exploration will remain the company’s core investment. It is noteworthy that Oceanica successfully tapped its bonds with a book that was strongly oversubscribed just a few weeks ago. As the oil and gas sector has outperformed, we have reduced our exposure and are looking to redeploy cash in some names that have excessively corrected. We have also slightly reduced our exposure to Banco do Brasil.

Conclusion

The recent volatility in Brazil corporate credit reflects a confluence of factors rather than fundamental deterioration across the board. While the petrochemical sector’s challenges reflect broader issues of Chinese excess supply that could permeate to other sectors and countries over time (not only limited to emerging markets), the overriding issues we observe are currently Brazil-specific rather than symptomatic of broader emerging market distress. Macro headwinds from high real interest rates, political uncertainty on upcoming 2026 Presidential elections, a long period of Initial Public Offering drought, the presence of aggressive hedge funds, complex shareholding arrangements, and company-specific credit situations at Ambipar and Braskem have created a nervous market environment.

We believe the sell-off has released opportunities for selective credit investors. Our overweight positioning in Brazil remains intact, supported by diversified exposure with no single name concentration risk, focus on sectors with strong industry dynamics, and an active management approach to capitalize on technical dislocations, and disciplined risk management with ongoing portfolio adjustments.