When Settling for a 75% Writedown Is a Bondholder’s Best Option

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Tonon Bioenergia, a Brazilian sugar and ethanol producer, is asking creditors to accept losses of as much as 75 percent so the company can avoid a default.

For bondholders, the deal may just be their best option. All they have to do is look at the prospects facing fellow bond investors across the industry to realize how much worse it can get. After halting debt payments, Grupo Virgolino de Oliveira SA and Aralco SA Acucar e Alcool have seen their notes plummet to less than 10 cents on the dollar, indicating bondholders expect to recoup little of their investment.

“Considering what we’ve seen with GVO and Aralco recently, it looks like a decent enough deal,” Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC, said from Miami. “Creditors can choose between taking this offer, or the company files for bankruptcy protection and they get virtually zero.”

The unappealing choices confronting investors underscore just how precarious the state of Brazil’s sugar industry has become as prices for the sweetener sink to a six-year low and the nation’s currency plunges. Since 2011, 47 ethanol and sugar mills have closed and 70 are under bankruptcy protection, according to Unica, Brazil’s sugar-cane millers group.

Raw-sugar futures for July delivery fell 3.9 percent to settle at 12.67 cents a pound on Monday in New York. Brazil’s real advanced 0.3 percent to 3.0325 per dollar in Sao Paulo.

Creditor Talks

Bocaina, Sao Paulo-based Tonon is asking secured and unsecured bondholders to accept the deal, according to two people familiar with the matter who asked not to be identified because the information is private. The transaction could also involve new financing for Tonon, which has about 250 million reais ($83 million) in short-term debt with 11 banks, they said.

Tonon declined to comment on the negotiations.

Tonon has $530 million of bonds outstanding. Its $300 million of notes due in 2020 have lost 78 percent since peaking in July and trade at 20.9 cents on the dollar.

Holders of the company’s notes include AllianceBernstein and hedge fund Gramercy Funds Management LLC, said the people familiar. Neither firm replied to telephone or e-mailed requests for comment.

GVO is negotiating a debt-for-equity conversion with its creditors, Chief Executive Officer Joamir Alves said Thursday at a LatinFinance event in Sao Paulo. He said the company’s liquidity situation is “tough.”

Aralco Bankruptcy

GVO didn’t reply to telephone calls seeking comment on talks with bondholders. The Ariranha, Brazil-based company’s $300 million of notes due 2018 were last quoted at 3.5 cents.

Aralco’s $250 million of bonds maturing in 2020 trade at 9.1 cents after the company filed for bankruptcy in March 2014.

Aralco had its bankruptcy plan approved by the vast majority of its creditors after “going through a long and difficult process,” press officer Lilian Castilho said in an e-mail. “This shows the confidence the market has in the company’s actions and payment capacity.”

The industry’s woes, which are being exacerbated by a drought and caps on ethanol prices, have also prompted USJ Acucar e Alcool SA’s $275 million of bonds to sink 50 percent this year to 35.2 cents on the dollar. USJ is not restructuring its debt and has a comfortable cash position to meet its short-term commitments, press officer Mariela Castro said in an e-mail.

S&P Downgrade

Tonon was downgraded by Standard & Poor’s last week two steps to CCC+, seven levels below investment grade.

The company will face cash flow deficits in the coming harvests and increased refinancing needs since more than 90 percent of the company’s debt is in dollars, S&P said.

“Do investors want to accept a 75 percent haircut? Obviously not,” Wilbur Matthews, the chief executive officer of Vaquero Global Investment LP, said by telephone from San Antonio. “But do they have a lot of choice given these terrible precedents with Aralco and GVO and many other agricultural companies? No. Some of them don’t even come out of bankruptcy. These things just wind up in never-never land.”

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