Latin Finance - July 2008 - (Page 28)

braskem interview Brazil’s Battling Chemical Brothers by Dan Shirai and Ben Miller arlos Fadigas, Braskem’s CFO, speaks rapidly and candidly about his company’s many forays into capital markets. Like his counterparts at Odebrecht, Braskem’s biggest shareholder, he brandishes a sleek fluency in issues surrounding cross border financing, investors and bank lenders. He appears particularly pleased with his ability to have squeezed the tightest possible margin out of the bank market last year when his company needed a loan to buy its competitors Ipiranga and Copesul. “For $1.2 billion, we didn’t need 10 banks lending to us,” Fadigas tells LatinFinance. He conducted a beauty contest and got three banks to commit to an affordable bridge financing at Libor plus 35 basis points, stepping up to 55 basis points in the second year of draw down. That was well below market levels for Brazil, even pre-subprime. “As far as we know, it was the cheapest [dollar] bridge loan ever in Brazil,” says Fadigas of the facility jointled by Calyon, ABN AMRO and Citi. As LatinFinance went to press, Braskem was halfway through the process of taking out the facility in the bond and loan markets. But all the savvy in the world cannot change the fact that Braskem, a successful niche player producing highly sought after industrialized products, must still purchase naphta, its main oilbased raw material, at market rates. The price of oil and its derivatives have soared in recent months, providing Petrobras with a windfall at the expense of clients, the biggest of which is Braskem. Incidentally, the oil giant also controls 30% of the Braskem’s voting shares. This two-sided relationship puts the pair at extreme odds in the commercial context but aligned at a broader strategic level. C LatAm’s largest petrochemicals company is growing through acquisitions and regional ventures. But it remains hampered by Petrobras, a leading shareholder and provider of raw materials. Braskem is also menaced by local currency appreciation and an increase in imports. “Braskem is in a very difficult position to improve margins,” says Kovarsky. Braskem’s Ebitda margin at the end of the first quarter was around 13%. Braskem’s stock price reflects the challenges. In early June, ordinary shares were trading at around 14 reais, roughly in line with 2005 year-end. There is a new effort underway to address this. “Braskem is one of the biggest buyers of naphta in the world and because of this – not because Petrobras is one of our shareholders – we have been recently advocating that we deserve to be offered [the naphta] at a discounted price,” says Fadigas. As a result, the two companies are now in tough commercial negotiations on the issue, notes the CFO. Whether these will yield any concrete results in the near future for Braskem, however, is unclear. Braskem’s lack of vertical integration is its Achilles’ heel, say local business executives who point to the company as an example of the dangers of running a commodities business in Brazil without full control of the supply chain. “I think if I were to depend on Petrobras, they’d try to screw me,” notes Eike Batista, the leading shareholder and executive of a host of Brazilian natural resource companies including MMX, a vertically integrated Brazilian mining complex. “How do you think BR Distribuidora [Petrobras’ fuel distribution company] has managed to dominate the Brazilian gasoline market?” Venturing into Venezuela: Fadigas The Bully Shareholder The problem for Braskem is that while expenses rise, it has not been able to pass costs onto customers, thanks to steep international competition from companies like Dow Chemical, BASF and Saudi Arabia-based Sabic. “Brazil and therefore Braskem are in a natural disadvantage to some of its competitors with regards to feedstock,” says Paula Kovarsky, vice president for oil and gas, petrochemicals and transportation equity research at Itaú Securities. “While companies like Sabic have access to cheap and abundant natural gas, Braskem’s resins production is mostly naphtha based, a more expensive feedstock,” she adds. Rising oil prices are compressing petrochemical margins worldwide, in an environment where demand is slowing. 28 LATINFINANCE July/August 2008

Table of Contents Feed for the Digital Edition of Latin Finance - July 2008

Latin Finance - July 2008 Contents Investment Banking Outlook Compensation Survey Colombia Investment Banking Borrowers vs. Investors Banorte Profile Braskem Financing Strategy Brazil Hydro Finance Peru Port Privatization Panama Money Flows Argentina Local Markets Guide to Banking Technology Who Said That?

Latin Finance - July 2008

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