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SAO PAULO, Aug 13 (Reuters) - Copersucar, Brazil's biggest sugar trader, quietly parted ways with its biggest milling group in May, the CEO of the milling group, Grupo Virgolino de Oliveira (GVO), said on Thursday, reflecting a deepening crisis in the global sugar market as prices languish near seven-year lows and debts mount.
GVO, one of the founding members of Copersucar in 1959, is the latest mill to break commercial ties with the trader. That curbs Copersucar's marketing power in Brazil, the world's top grower, and in the global market just a year after it set up Alvean, a joint venture with agricultural merchant Cargill.
Milling group Aralco ended ties with Copersucar in 2014 and Sao Martinho, another miller, did so in 2008.
Copersucar still has 40-plus associated sugar mills, and is unlikely to have trouble covering its delivery contracts. It said it would not comment on GVO's departure, other than to say that there are financial obligations outstanding.
GVO CEO Joamir Alves, who took over the company in January to restructure its debt, said in an interview the formal breakup in May was amicable and due to deteriorating credit conditions across Brazil's sugar and ethanol sector.
"If it weren't for our need to generate rapid cash flow to operate, we would still be with Copersucar," Alves said by phone from GVO's mill in Catanduva, one of four it operates in the main cane-producing state of Sao Paulo.
Copersucar extends guarantees to its associated mills to help them secure bank loans for operating cash. In exchange, the trader gets exclusive rights to sell 100 percent of the mills' sugar and ethanol.
GVO had reached the limits of the guarantees Copersucar could offer, Alves said.
"The banks tightened their requirements for mills after the default of the Aralco" milling group in early 2014, he said. "We needed cash fast and Copersucar couldn't do that for us."
Like many mills in Brazil, GVO is selling sugar and ethanol on the spot market as fast as it can cut cane.
GVO's exit from Copersucar underscores the plight of the bulk of Brazil's roughly 320 debt-laden cane mills.
As did many mills, GVO ran into trouble after overinvesting in Brazil's ethanol boom in 2007-09, only to see those bets crushed by government policy to subsidize gasoline prices.
More than 100 of Brazil's once 400-plus mills have closed their doors or entered bankruptcy protection over the past eight years, as a glut of sweetener has pressured prices.
Brazil's currency, the real, has depreciated nearly 40 percent against the dollar over the past year, inflating the unhedged dollar-linked debts of GVO and other mills. At the same time, sugar prices continue to drop.
"The real devaluation impacted the company's capacity to pay its debt denominated in hard currency," Alves said, adding that GVO has stopped payment on its bonds awaiting fresh negotiations with bondholders.
So far, Alves has been able to keep GVO operating after securing deals with banks, suppliers and workers to forgo interest payments temporarily and postpone or extend payment periods.
Bondholders rejected Alves' proposal for a debt-for-equity swap and a new cash injection. GVO has stopped payments on nearly $600 million in uncollateralized bonds but it expects to reopen negotiations with bondholders.
The group expects to produce 350,000 tonnes of sugar and 590 million liters of ethanol this season. (Reporting by Reese Ewing; Editing by Peter Galloway)