Brazil's sugar and ethanol industry likely faces "further defaults and bankruptcies", Fitch Ratings said, even as weaker prices of the sweetener have added to pressure on the sector.
The cane milling industry in the world's top sugar producing country has been rife with credit troubles, thanks to debts run up in an expansion campaign ahead of the global financial crisis, and the slump in prices of the sweetener from their 2011 top.
While bankruptcy filings peaked at 18 in 2009 during the world financial meltdown, they have continued at an average pace of about 8 a year, taking the total to 87 as of January, according to data kept by MBF Agribusiness.
And only a handful have emerged from bankruptcy, with the rate of Brazilian corporates overall emerging from the process at some 5% since a new regime was put in place in 2005 to protect failing firms.
"Disagreements between the debtors and creditors are mostly to blame for the lack of recovery so far," Fitch said, noting that no cane processors appear to have emerged from the process.
"The judicial reorganisation process appears not to be a viable path to recovery since not a single success has been reported," said Claudio Miori, Fitch associate director.
And the number of cane crushers filing for bankruptcy only looks like continuing to increase, given that many balance sheets remain stretched, at a time when banks, having "suffered" from previous defaults, "are now more selective" in lending.
"Companies with weaker positions will struggle to maintain adequate liquidity and deleverage," Fitch said, estimating at R$150 mills' average debt per tonne of cane crushed.
"Around two-thirds of mills filing for bankruptcy protection held total debt per tonne of sugar cane crushed of more than R$200 a tonne."
While sugar prices have recovered from values as low as 10.13 cents a pound recorded in New York's futures market in August 2015, the revival "is not anticipated to solve the sector's financial problems", Mr Miori said.
"Further defaults and filings for bankruptcy protection are very likely."
Smaller companies – those processing up to 1.3m tonnes of sugar cane per year – are most likely to find the credit door closed, the ratings agency added.
These businesses account for around 25% of the sugar crush in Brazil's key Centre South production region, but accounted for 68% of bankruptcy applications up to the end of 2016.
Sugar futures in fact recovered in early deals on Monday to stand at 13.95 cents a pound in New York, having on Friday touched 13.63 cents a pound, the weakest for a spot contract in more than a year.
By Jamie Day