Braskem S.A. downgraded by S&P due to high leverage and negative outlook

S&P Global Ratings downgraded Braskem S.A.'s (BAK) credit rating to 'BB' from 'BB+' due to high leverage and a negative industry outlook characterized by low prices and supply/demand imbalances. The downgrade reflects concerns about Braskem's EBITDA and cash flow generation, with adjusted leverage exceeding 9x in 2024 and Q1 2025; however, Braskem maintains a sound liquidity position supported by an extended debt maturity profile and strong cash reserves. The negative outlook indicates a potential further downgrade if profitability doesn't improve, though potential anti-dumping measures and tax relief in Brazil could provide upside.

Analysis

S&P Global Ratings has downgraded Braskem S.A.'s (BAK) credit rating to 'BB' from 'BB+', citing continued high leverage and a negative outlook for the petrochemical industry, which is currently characterized by low prices due to demand and supply imbalances with no significant near-term improvements anticipated. This downgrade, occurring on May 27, 2025, also extends to Braskem's senior unsecured and subordinated notes, although its national scale ratings remain 'brAAA'. Braskem's EBITDA and cash flow generation have failed to improve in recent quarters, leading to S&P's adjusted leverage for 2024 and Q1 2025 exceeding 9x, exacerbated by lower-than-expected volumes at low prices and the impact of peak foreign exchange rates at the end of 2024 on its approximately 90% U.S. dollar-denominated debt. Despite these pressures, Braskem maintains a sound liquidity position, supported by an extended debt maturity profile with no significant maturities until 2028, a strong cash position, a revolving credit line, and the fact that most of its debt is at fixed rates averaging slightly above 6%. The company's large scale and strong market position in Brazil are also noted credit strengths. Potential upsides, such as an investigation into alleged dumping by U.S. and Canadian polyethylene exporters and discussions in Brazil's Congress for a special tax regime for the chemical industry, could boost volumes, prices, and tax relief, but S&P has not incorporated these into its forecast due to uncertainties. Regarding ownership, Novonor's receipt of a nonbinding offer for its controlling stake from Petroquímica Verde Fundo de Investimento em Participações is unlikely to change S&P's view of Braskem as insulated if the existing shareholders' agreement is adhered to. The negative outlook reflects a one-in-three chance of a further downgrade in the next 12-18 months if profitability and cash flow do not improve, or if liquidity weakens or Alagoas-related provisions increase. Conversely, an outlook revision to stable is possible if credit metrics improve due to factors like reduced import competition, increased tax relief, higher petrochemical spreads, or efficiency gains.

Key Decisions for Investors

• Investors should acknowledge the heightened credit risk following S&P's downgrade of Braskem to 'BB' with a negative outlook, reflecting severe industry headwinds and company-specific leverage concerns.
• Monitor Braskem's leverage ratios, EBITDA, and cash flow generation closely in upcoming financial reports, as these are critical metrics S&P will watch for potential further downgrades or a stabilization of the outlook.
• Evaluate the potential impact of anti-dumping measures against PE imports in Brazil and the proposed REIQ tax relief, as these unconfirmed catalysts could materially improve Braskem's financial performance if implemented.
• Track developments regarding the potential sale of Novonor's controlling stake to Petroquímica Verde Fundo de Investimento em Participações, considering any potential strategic shifts or impacts on financial policy under new majority ownership.
• Given the challenging outlook and the one-in-three chance of another downgrade, investors should consider the downside risks, including continued weak petrochemical spreads, pressures from imported products, and potential further provisions related to the Alagoas geological event.