(Bloomberg) -- Abu Dhabi National Oil Co.’s decision to back away from its billion-dollar bid to acquire a major stake in petrochemicals company Braskem SA is putting an end to one of Latin America’s best bond rallies of the year.

The company’s notes were some of the biggest decliners in both the US high-yield market and among Latin American corporates on Monday after news that the highly anticipated deal had unraveled. Dollar debt due 2030 — one of the company’s most liquid — has continued to slide and was down almost 4 cents this week as of Wednesday morning.

Novonor, which jointly owns Braskem with Brazilian oil giant Petrobras, has been trying to sell its stake for years. The troubled conglomerate — formerly known as Odebrecht — was at the center of Brazil’s notorious Carwash corruption scandal, during which it had used its Braskem shares as collateral for debt that went unpaid. 

Prospects of a deal with Adnoc and expectations for better earnings have spurred a rally in Braskem’s debt this year. Notes of Brazilian parent firm Braskem and Mexico’s Braskem Idesa SAPI ranked within the top three performers among Latin American corporates in the first quarter. 

Now, the surprise collapse of talks with Adnoc is sparking concerns bondholders could have missed something with the Alagoas situation that spooked the Abu Dhabi-based firm, said Carolina Chimenti, an analyst at Moody’s Ratings, referring to a rock-salt mine Braskem operates in northeastern Brazil that partially collapsed last year.

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Barclays Plc recommends selling Braskem’s bond due 2031, adding that they don’t see a deal materializing imminently. 

“Upside from M&A appears unlikely for the foreseeable future,” Barclays’ Ansel Tessitore and Badr El Moutawakil wrote in a note Tuesday. “Valuations in the Braskem complex should be primarily dictated by the company’s standalone credit fundamentals rather than by a potential M&A premium.” 

Return to Fundamentals

Not everyone is ditching the credit, touting Braskem’s strong balance sheet. The dissolution of the deal doesn’t change how the business is performing, said Siby Thomas, a portfolio manager at T.Rowe Price.

“The problem is the market has been more focused on short-term catalysts, including the M&A, while the petrochemical-spread improvement will take time to play out,” Thomas said. “But over the long-term, fundamentals should matter more than the sponsor.”

The decline in bond prices after the Adnoc news was an overreaction as there are several other avenues Novonor could pursue for its stake, said Alexis Panton, a strategist at BNP Paribas. Petrobras, formally known as Petroleo Brasileiro SA, is waiting for other companies to make bids. 

Potential suitors include Petrochemical Industry or PIC, a subsidiary of Kuwait Petroleum Corp. and J&F Investimentos SA, the holding company of the billionaire Batista family, local media has reported.

While analysts say Braskem’s fundamentals remain constructive — the company is due to release earnings on Wednesday after markets close — gains tied to an acquisition seem unlikely in the short term.

“Petrochemical spreads improved a little in the last few months, so the selling could be a bit less violent,” said Eduardo Ordonez, a debt portfolio manager at BI Asset Management in Copenhagen. “But selling nonetheless.”

--With assistance from Maria Elena Vizcaino.

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