Mubadala, Brazil's FS eye distressed debt in $12.2 billion Raizen restructuring

Summary

• Mubadala and Brazil's FS are in early talks to buy Raizen's distressed debt, people familiar said.
• Raizen agreed in March to restructure roughly 65 billion reais, or $12.2 billion, out of court.
• Creditors converting debt to equity would take more than 80% of the company's capital.

The latest

Two bidders are circling the debt of Raizen SA, the troubled Brazilian sugar, ethanol and fuel distribution giant, according to people familiar with the matter cited by Bloomberg. Brazilian corn-ethanol producer FS and Abu Dhabi sovereign wealth fund Mubadala are each seeking to buy paper held by creditors. The talks are preliminary, the people said, with no guarantee a deal follows.

Details

• The advisers: FS has hired Morgan Stanley to advise on the potential acquisition, according to the people familiar, who asked not to be identified because the discussions are private. They said the process remains at an early stage. Morgan Stanley, FS, Mubadala, Raizen and IG4 all declined to comment.
• The restructuring: Raizen, jointly owned by Shell and Cosan, reached an out-of-court agreement with creditors in March to restructure about 65 billion Brazilian reais, equivalent to $12.2 billion. Bloomberg described it as one of the largest corporate debt restructurings ever undertaken in Brazil.
• The equity swap: As part of the restructuring, creditors agreed to convert debt into equity, a step that would hand them more than 80% of Raizen's capital. FS, Mubadala and IG4 are all seeking to acquire the debt before that conversion takes place, the people familiar said.
• Why it soured: Raizen's financial problems deepened earlier this year as its cash position deteriorated and bond prices collapsed following a series of credit rating downgrades. The company has been squeezed by a run of unsuccessful strategic bets, higher interest rates and weak harvests.
• The third bidder: IG4 Capital Group, which signaled interest in June in buying enough debt to take control of Raizen outright, is now pursuing only the debt tied to the company's sugar and ethanol division, according to people familiar with the matter.
• Asset sales: Alongside the equity conversion, Raizen is seeking to sell assets as part of its effort to cut leverage. The company has not disclosed which units are on the block or a timeline for completing any disposals.
• Who FS is: FS - Fueling Sustainability is one of Brazil's largest producers of ethanol made from corn, with roots in Mato Grosso, one of the country's leading crop-producing states. It is backed by Summit Agricultural Group, headquartered in the US state of Iowa.
• Recent backing: In July, crop trading house Amaggi bought a 40% ownership stake in the ethanol producer, in a transaction that included a $100 million capital injection into FS through an initial share issuance.

Background

Raizen is a joint venture between Shell and Brazilian conglomerate Cosan, operating across sugar, ethanol and fuel distribution. A separate Mubadala-backed company has been weighing the acquisition of three sugar mills in Brazil.

Between the lines

Timing is the whole trade. Because creditors are set to take more than 80% of Raizen's capital through the conversion, buying the debt beforehand is effectively a route to buying the company at a discount. IG4's narrowing from full control to the sugar and ethanol division alone suggests the competing bidders may end up carving the business by segment rather than contesting it whole.

What's next

Whether FS or Mubadala converts preliminary talks into a binding agreement before creditors complete the debt-to-equity swap, and which Raizen assets are put up for sale as part of the deleveraging push.

Source: Bloomberg