Brazil's famously-indebted sugar and ethanol groups has only "limited scope" for reducing its leverage this year, Fitch Ratings said, seeing little chance of significant rises in prices of the biofuel or the sweetener.
"Systemic risk" in the Brazilian cane crushing sector - the world's biggest, responsible for nearly half global sugar exports - "has increased" following the default last year by Aralco Industria e Comercio on $250m of bonds last year, and financial "struggles" at peers such as Grupo Virgolino de Oliveira, Fitch said.
"A comfortable cash position and access to financing are becoming increasingly important," the ratings agency said.
However, Fitch doubted the potential for the sector making quick wins in its drive to improve its financial position.
While a decision by Brazil's government earlier this year to raise taxes on gasoline, which in turn allowed ethanol prices to rise "is a positive" for the sector, "it will not materially alleviate the financial stress on these companies in 2015.
"Hikes in ethanol prices are not likely in the short term," the agency said.
Meanwhile, the "rebound of international sugar prices is taking longer than expected to materialise" too, Fitch said, citing "limited scope for sugar price hikes" this year.
"The global deficit expected for the international 2014-15 crop is not expected to materially offset the large inventories build-up of the past seasons.
"Any material sugar price recovery will depend on the prospect of a much larger deficit in 2015-16."
The dynamics meant that the "scope for leverage reduction is limited" in the sector this year, Fitch said.
"The sector's cash flow from operations is expected to decline, and access to working capital financing has already become more restrictive."
Meanwhile, "necessary" investments in cane crops and industrial assets "will keep pressuring the companies' free cash flow, avoiding the deleveraging process.
"Fitch expects the Brazilian sugar and ethanol industry to remain under pressure."
Raizen Energia, the country's top cane crusher, is the only member of the sector Fitch rated investment grade, thanks to its unusually high degree of liquidity, due to large cash holdings.
"Current market conditions, which have resulted in severe financial distress for many issuers, illustrate the importance of companies holding substantial liquidity," the agency said in a report.
Others are dogged with high levels of debt taken out to fund cane and mill investments, but which relied on assumptions of higher sugar prices in their business plans.
New York sugar futures topped 36 cents a pound in February 2011, nearly three times the 12.89 cents a pound at which the spot July contract stood in lunchtime deals on Friday.
However, the report also stressed the role of diversification in potentially improving companies' fortunes, highlighting, for instance, the Move by Biosev into industrial alcohol, and into a "wide spectrum of sugar products, including crystal, refined, liquid and inverted liquid sugar".
Jalles Machado markets specialist sugar products, including organic and crystal sugars which sell for wide premiums.
USJ also sells crystal sugar, and has medium-term supply contracts with the food industry, that protect it from commodity volatility.
Also, "geographic diversification is positive from a credit perspective, as it mitigates weather-related risks," Fitch said, terming Biosev "well positioned" in having its 11 mills spread through São Paulo and Mato Grosso do Sul states, and the north east
By William Clarke