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Structural early warning in corporate credit: Evidence from a Brazilian agro-industrial distress episode

Author

Listed:
  • Thiago Gil

    (Cordiant Capital)

Abstract

Accounting-based credit metrics can miss deteriorating fundamentals when leverage ratios remain stable but debt service dynamics shift. I apply the Leland and Toft (1996) structural credit model to Raízen S.A., Brazil's largest ethanol and sugar producer, over five fiscal years to March 2025 together with the December 2025 interim reporting date. The model flags elevated risk in FY2023/24 (nineteen months before the first negative rating action and twenty-three months before the loss of investment grade) while D/EBITDA held flat at 1.3× and agencies affirmed their ratings. The mechanism is the asset drift turning negative: debt service rose faster than market asset value, causing expected firm value to trend toward the default barrier even as accounting ratios showed no change. Benchmarking reveals that the Altman Z-score fails to discriminate distress in this capital intensive sector, while the Ohlson O-score confirms the timing but offers no economic interpretation. A peer comparison with two sector firms confirms the signal is firm-specific rather than sectoral. The case illustrates how structural models can complement traditional surveillance by capturing debt sensitive dynamics invisible to backward-looking ratios.

Suggested Citation

  • Thiago Gil, 2026. "Structural early warning in corporate credit: Evidence from a Brazilian agro-industrial distress episode," Economics Bulletin, AccessEcon, vol. 46(3), pages 926-933.
    • Handle: RePEc:ebl:ecbull:eb-26-00838
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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