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| Thiago Gil |
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| ''Structural early warning in corporate credit: Evidence from a Brazilian agro-industrial distress episode'' |
| ( 2026, Vol. 0 No.0 ) |
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| 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. |
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| Keywords: structural credit models, corporate finance, credit default, agricultural finance, distressed assets |
JEL: G1 - General Financial Markets
G3 - Corporate Finance and Governance: General |
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| Manuscript Received : Sep 23 2026 | | Manuscript Accepted : Oct 10 2026 |
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