World’s Worst Emerging-Market Bonds Show GVO Cash Crunch

Grupo Virgolino de Oliveira SA bondholders are losing confidence the sugar producer can pay its debt as the slumping price of the sweetener undermines its ability to conserve cash.

The company’s $735 million of notes have tumbled since Sept. 17, when GVO said that profit decreased 24 percent in the first quarter of the fiscal year ending in July. The 12.7 percent decline in the bonds over that span is the biggest among 958 developing-nation corporate debt securities, making them the most distressed debt securities in Brazil.

With sugar prices falling to a five-year low, GVO isn’t generating enough money and raising the specter that it won’t have enough cash to pay the 220 million reais ($90.6 million) it owes in the next nine months, according to Sterne Agee & Leach Inc. The last quarter alone, GVO burned through 150 million reais, leaving the company with just 210 million reais in reserve, based on the Birmingham, Alabama-based firm’s estimate.

“There is the need for new money to cover short-term debt,” Revisson Bonfim, the head of emerging-markets analysis at Sterne Agee in New York, said in an e-mail.

GVO’s $300 million of bonds due in 2018 now sell for 65.5 cents on the dollar and yield 25.02 percentage points more than comparable U.S. Treasuries, data compiled by Bloomberg show.

Maturity Extension

In an e-mailed statement, Fabio Pinto, an investor relations official at GVO, declined to comment on the bonds’ performance.

Ariranha, Brazil-based GVO said Sept. 17 that earnings before interest, taxes, depreciation and amortization fell to 112.5 million reais from 148.1 million reais. Its debt relative to Ebitda was 5.1 times.

To prevent a cash crunch, GVO pushed out maturities on 200 million reais of loans to 2017. GVO, which has 2.9 billion reais of debt, also sold bonds overseas this year.

“GVO’s current cash generation is not enough for the company to pay its debt and invest in its activities,” Claudio Miori, an analyst at Fitch Ratings, said by phone from Sao Paulo. “Unless sugar prices have a very significant recovery, it will need to raise capital in the next 12 months.”

Fitch cut the outlook on GVO’s B- rating, which is five levels below investment grade, to negative on Aug. 27.

Sugar Crunch

A rating at that level implies the bond is highly speculative and that a limited margin of safety remains, according to Fitch’s definition.

Sugar prices have plummeted 9.8 percent this year and fell to 13.5 cents a pound on Sept. 19, the lowest since April 2009.

The real rose 0.6 percent to 2.4151 per dollar as of 3 p.m. in New York.

An industrywide cash crunch earlier this year caused Aralco SA Acucar e Alcool to default on foreign-currency bonds in March after just one interest payment.

Fabrizio Sasdelli, a parter focused on infrastructure and project finance at the Lobo & de Rizzo law firm in Sao Paulo, said GVO could sell an ownership stake to raise more cash.

In February 2010, private-equity fund FIP Terra Viva bought 20 percent of Tonon for 90 million reais. Two years later, the fund increased its share to 30 percent by injecting some 44 million reais into the company.

“It would also be possible for the company to have a minority investment along the lines of what Tonon made with fund Terra Viva four years ago,” Sasdelli said by phone.

GVO’s 2018 bonds now yield 26.76 percent. On average, same-rated emerging-market corporate notes due in about four years yield 6.59 percent, data complied by Bloomberg show.

“These bonds are suffering tremendous pressure from low sugar prices,” Carlos Gribel, a fixed-income analyst at Andbanc Brokerage LLC, said by telephone from Miami. GVO “will need more cash.”

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