Agrogalaxy enters Rio de Janeiro and raises red flag for farmers.

Agrogalaxy announced today that it has filed for bankruptcy after failing to pay a R$70 million installment due today.

The company, a network of over 100 stores providing inputs to producers, has a net debt of over R$1.5 billion with banks and CRAs. However, the total debt is much higher, including the suppliers’ account, which totals over R$4 billion.

Agrogalaxy’s stock, which was already trading near its historic low, fell over 13% today after the news. In addition to the bankruptcy filing, the company announced the resignation of its CEO and five of its nine directors, leaving the company practically adrift.

The bankruptcy filing is not exactly a surprise for those following the sector. Agrogalaxy has been struggling since the beginning of last year when the agribusiness scenario changed drastically.

The company, controlled by Aqua Capital, grew in recent years through a strategy of strong consolidation, acquiring various resellers and financing these M&A transactions with a mix of equity and debt.

This strategy skyrocketed their leverage, but the indicator was masked for a few years because the sector’s outlook was positive.

“The years 2020, 2021, and 2022 were very good for agriculture and input sectors. Distributors’ margins were very high, and they built up a lot of inventory because that inventory only increased in value,” said a Fiagro manager with no exposure to the company. “This caused distributors to step on the accelerator.”

The problem: in 2023, the scenario changed abruptly, with commodity prices falling, especially for soybeans and corn, and producers hitting the brakes.

“For the producer, it was the perfect storm. They had bought fertilizer at a high price due to the war in Ukraine, and later had to sell soybeans at a low price,” said another manager.

A significant portion of Agrogalaxy’s sales are made on credit, with payment only made when the producer harvests. With the crisis in the sector, many producers ended up not paying or delaying payments, putting pressure on the company’s working capital.

This dynamic means that the company suffers twice when the harvest is poor: it has provisioning issues in the current portfolio and also receives fewer orders from the producer for the next season.

The margins, which were already tight, turned negative.

This market typically operates with EBITDA margins of 5% to 6% and net margins of 2% to 3%. During the boom years, EBITDA margin was above 10% and the net margin was above 5%, creating a temporary illusion that leverage was not so high.

However, in the last two years, Agrogalaxy started operating with negative margins. In the second quarter of this year, the company had a negative EBITDA margin of -7.9%. A year earlier, the margin stood at -4%.

Another issue, according to managers quoted by the Brazil Journal, was that Acqua had difficulty integrating the resellers it acquired. “The idea was to integrate, but it ended up becoming clusters,” said one manager. “The reseller in the Midwest, for example, did not align with the credit policy of the reseller in Paraná.”

Agrogalaxy even tried to adapt to the new market reality by reducing its SG&A and seeking a capital injection from its controller. Last December, Aqua injected R$150 million into the company – which, in the words of an investor, “was like pouring water into a frying pan.”

“At this level of interest rates, with the leverage they had, and with the way this market reversal came about, it was very difficult to reverse the situation,” said the Fiagro manager.

Agrogalaxy’s biggest bank creditors are Santander, Citi, and Banco do Brasil. Regarding CRAs, some relevant creditors are Capitânia’s Fiagros, JGP, and XP Asset. For these funds, the impact is expected to be significant. In CPTR11 of Capitânia, exposure to Agrogalaxy is 7% of PL. In XPCA11 of XP, the exposure is even higher at 8.2%. JGPX11 has 8% of its PL in CRAs of the company.

The three funds closed lower today, dropping by 3.5%, 0.8%, and 6.4%, respectively.

At the end of the trading day, Agrogalaxy’s stock was worth less than R$1, with the company valued at R$249 million.

To give you an idea, this is less than what the company raised in its IPO in 2021. At that time, Agrogalaxy raised R$350 million by selling its shares at R$13.75.

The crisis in the agricultural input distributors sector is not exclusive to Agrogalaxy, and the company’s bankruptcy filing will make the market watch the situation of another company operating in this sector: Lavoro, controlled by Pátria, which also emerged with the same consolidation thesis – although it has a different capital and execution structure.