Raizen creditors balk at splitting Brazil sugar-ethanol giant, sources say

By Luciana Magalhaes, Oliver Griffin, Rodrigo Viga Gaier and Lisandra Paraguassu

SAO PAULO, Feb 26 (Reuters) - A proposal to break up Brazilian sugar and ethanol producer Raizen RAIZ4.SA faces stiff resistance from creditors in discussions over how to revive and recapitalize the struggling firm, people familiar with the discussions told Reuters.

The world's largest sugar producer - a joint venture of Shell SHEL.L and industrial group Cosan CSAN3.SA - posted a quarterly net loss of 15.6 billion reais ($3 billion) and warned of "significant uncertainty" about its ability to keep operating.

Sources say BTG Pactual, which runs a fund that entered Cosan's controlling shareholder group last year, has proposed splitting the company in two, separating the fuel distribution business from refineries and other assets. The gas station unit could then get fresh capital from the bank, the sources said.

The idea fell flat with creditors who want to keep the company intact to ensure a quick turnaround and are pressuring shareholders to inject as much fresh capital into Raizen as possible, sources said.

Raizen, Cosan, BTG Pactual and Shell declined to comment on the matter. Shell reiterated that it is working with Raizen and Cosan to support Raizen's deleveraging.

Concerns over Raizen's future have drawn the attention of President Luiz Inacio Lula da Silva, who met with officials from BNDES and state oil firm Petrobras to discuss the sugar company's situation last year and again this month, according to sources. Raizen shareholders were on hand for the latest meeting, in which Lula expressed concern, but made no call to action, a source said.

Neither BNDES nor Petrobras, which is evaluating other potential biofuels investments, has shown interest in capitalizing Raizen, sources said. Petrobras is restricted from investing in fuel distribution after spinning off its own gas station chain, now called Vibra Energia VBBR3.SA.

Petrobras is not assessing the acquisition of Raizen assets, the company said. BNDES did not immediately respond to requests for comment.

Raizen needs more than 20 billion reais in fresh capital, said one of the sources, who asked not to be named because the talks are private. On Wednesday, Reuters reported that Shell was open to injecting some 3.5 billion reais into Raizen.

The beleaguered sugar and biofuels producer saw its net debt climb to 55.3 billion reais by the end of December, due to a combination of heavy investments, erratic weather and wildfires, which led to weaker harvests and lower crushing volumes.

($1 = 5.1491 reais)