by Chris Haffenden, David Graves, and Alesia Sidliarevich
Over the past month, Agrokor bondholders and prospective investors have made frantic calls to Zagreb-based lawyers to find out how friendly the local jurisdiction is for foreign creditors to the beleaguered Croatian retailer. At face value, there is some reassurance with local pre-bankruptcy and bankruptcy procedures broadly based on German and internationally recognisable concepts. The bankruptcy and pre-bankruptcy procedures underwent a major overhaul in September 2015 to improve proceedings which used to average 10 years. Whilst the changes should speed up the process and are more creditor friendly, there are not enough completed proceedings since to assess the impacts of the changes, a local lawyer cautioned.
Agrokor’s EUR 886m (total outstanding) 2019 and 2020 OpCo bonds and its EUR 485m HoldCo PIK-toggle notes dived into the 70s and 30s respectively in recent weeks on concerns that Agrokor may be unable to refinance its PIK notes ahead of their June 2018 maturity and cause a cascade of defaults. The opaque nature of the company’s accounts, concerns over related party transactions and how it consolidates its earnings from subsidiaries have raised a number of red flags. Debtwire’s recent research piece cautioned about limited headroom for top-line growth and potentially inflated EBITDA.
Despite seemingly attractive entry-points, many potential investors are put off by the Croatia domicile, with many saying that the jurisdiction is too difficult, citing historically poor recoveries, lack of competent courts and lengthy processes.
In the event of an insolvency filing, the vast majority of the group’s debt, comprising unsecured bank loans, bonds and substantial trade claims (over EUR 2bn) would be lumped together, the local lawyer noted. The PIK notes sit at Dutch HoldCo level and would be ignored by the courts, he added.
Croatian Pre-bankruptcy and bankruptcy procedures
Pre-bankruptcy can be filed by the debtor, or creditors with permission by the debtor. Up until September 2015, claims were decided by settlement committees at the Croatian Financial Agency (FINA) with no recourse for creditors to challenge. A financial restructuring plan was voted upon by creditors split into three groups, and the settlement agreement was heard in front of a commercial court.
Since September 2015, pre-bankruptcy proceedings are now conducted in front of a court not FINA, and a creditor is no longer obliged to file – but the court can initiate a proceeding if it determines the existence of a threatening inability of the debtor to make payments. This can include late payments of salaries and taxes (over 30-days). The procedure has to be completed within 120 days, there is a 90-day extension period in exceptional circumstances.
A payment moratorium is imposed, no interest can accrue and there is a ban on enforcement. Reported and disputed claims are heard at the first examination hearing, and a financial restructuring plan is adopted provided that in each group of creditors the majority had voted in favour, and the sum of the claims of those which voted for the plan exceeds by two-times those who voted against. If the total amount of disputed claims is over 25% of the total, the proceedings would discontinue.
Bankruptcy can be initiated due to illiquidity, insolvency and over-indebtedness. A company is illiquid if it cannot meet obligations over a certain period of time when they come due and payable. There is a legal presumption of illiquidity if it is 60-days behind in meeting monetary obligations exceeding 20% of the total in its financial reports, or if it is more than 30 days behind in employee salary payments.
A bankruptcy trustee takes over the running of the business, but there are limits on asset sales, unless they add to the value of the bankruptcy estate. Employee claims are first ranking, and secured creditors have right of separate settlement. Creditors have 15 days to report their claims to the trustee, and an examination hearing will recognise claims. Disputed claims lose the right to vote, unless their claims are evidenced by an enforceable document.
No VAT receipt
Some Agrokor lenders are concerned about the implications of substantial amounts of overdue VAT payments and late salary payments to employees, said two sources close to its lenders.
The first source estimated Agrokor owes around EUR 800m in VAT (versus EUR 300m of cash at end-September), whereas the other did not know the exact quantum, but noted that it was ‘a big number’. Under the bankruptcy law, tax authorities and employees would be preferential creditors and non-payment of either could trigger a filing, noted the first source.
In its latest earnings report, Agrokor details that it is in arrears on salary payments of around 33-days, which on face value is very unusual for a retailer, who is unlikely to have many deferred payments nor large bonuses to employees. However in Slovenia, there is the ability to pay employees at the start of the month which may explain some of the discrepancy. According to the first source, some employees are owed up to two-month’s salary. There are signs that the company is in arrears with suppliers, with one local press report suggesting that some were being offered store vouchers in lieu of payment.
Agrokor did not respond to multiple requests for comment. A tax authority spokesman declined to comment.
Whilst the above would indicate conditions may already be present for a pre-insolvency filing, the Croatian authorities may be reluctant to push for it, given that the retailer is the largest employer in the country. The current Croatian Finance Minister, Zdravko Maric, was Agrokor’s director for strategy and capital as recently as a year ago, and claims to know the company well – maybe too well.
However, the owner and CEO Ivica Todorić has little public support, and EU state-aid rules could rule against a public bailout, though staff pensions could be protected as part of a sale process, said the first source.
Russian for the checkout
Agrokor’s bonds were displayed in the discount aisle after it announced on 18 January that it had pulled the syndication of a club loan facility. The syndication was launched on 19 September 2016 after the successful completion of a broader refinancing exercise of various short-term loan facilities worth EUR 500m in total with BNP Paribas, Credit Suisse, Goldman Sachs, JPMorgan, Sberbank Europe, and Sberbank of Russia.
The failure to syndicate sparked concerns that the company would struggle to refinance the PIK in the next 18 months. The company’s appearance at BNP’s Leveraged Finance conference in London just a few days later failed to reduce the investor queue at the checkout, amid chatter that the company was seeking to sell its best assets to reduce OpCo debt.
Largest lenders Sberbank and VTB have around EUR 1.3bn of exposure, refinanced on similar economic terms, but with the benefit of a spring-forward maturity if the PIK debt was not refinanced three months prior to its June 2018 maturity. The loans are unsecured, and carry similar covenants to the 2020 bonds.
However, even before the ink dried on the latest loan signing in September, the Russian banks had concerns about Agrokor’s debt levels at operating company level, said the first source. As reported, consolidated leverage was around 6.6x as at end-September, but the first source believes it is around 7.9x.
In a unusual move, Russian Ambassador Anzar Azimov, speaking at Croatia’s 25-year anniversary celebrations, took the opportunity to remind the Croatian leadership about Russia’s concerns over the financial position at Agrokor: “We’ve on several occasions credited Agrokor, believing it will help stabilise the company. We’re not considering fresh loans,” he was quoted by the state news agency Hina.
Rumours abound that the Russian banks are seeking security, but management are resisting attempts, noted the local lawyer. Giving the banks favourable treatment could be seen as fraud in insolvency under the concept of unlawful preference, as it must be given to bonds and trade suppliers too which rank pari passu.
Recent local press reports suggest Agrokor is close to selling its drinks business Jamnica to Coca Cola. However, the bid/ask is wide, with Coca Cola bidding around EUR 500m compared to a EUR 800m asking price. Unless it can attract a multiple in the mid-teens for Jamnica, the rationale for the sale is not clear, as it owns just 80.44% – this would be dilutive to earnings. The drinks business resides in the restrictive group, and proceeds would go to bank lenders and bonds rather than the PIK, noted one advisor. With the bonds in the 70s, the holders and the bank lenders are unlikely to waive their rights to the proceeds and allow them to be used for a discounted offer for the PIK, he added.
Azimov’s comments would suggest, that it is more likely that reports that Agrokor could sell its three crown jewels are motivated by the Russian banks’ wish to reduce OpCo leverage. This would be concerning to the PIKs as little value would be left, since the food business is loss-making.
Coming down from his high castle
Agrokor remains tightly held by its owner Ivica Todorić and his family. Croatia’s original oligarch, he lives in his Kulmer castle high above Zagreb, a metaphor if there ever was one. One widely floated option amongst the advisory community is that the owner would take advantage of the dive in the price of the PIK to fund a discounted offer, or use some of the available baskets to launch an exchange offer to elevate some of the debt, in an attempt to preserve his optionality – similar to sponsor Bain Capital’s bond exchange offer with South African retailer Edcon in 2015.
But according to the first source, Todorić is unlikely to have the means, having taken out around just EUR 5m per year in dividends in the past few years. This also presupposes he recognises the need for restructuring, as he “is detached from reality.” With management controlled by family members, the prospect of convincing directors to undergo a restructuring process is slim, noted the first source.
Another option is for Todorić to contribute some of his other assets – but once again this may not help the PIK notes – as most would be grabbed by OpCo.
For legal analysis on how the existing debt fits within the confines of the restricted group, please see the latest Xtract Research report Agrokor: How High Can It Stack Its Debt
PIK n’ Fix
In the absence of a refinancing or restructuring proposal from the sponsor, the PIK holders appear to have limited options. Their best hope is to try and team up with the bonds and float a restructuring solution, suggested the second source and a restructuring advisor familiar with the situation.
However, the operating company bonds are mostly held by par holders, and whilst there have been several trades in the PIKs into distressed funds, they still make up the minority, noted a second advisor.
The PIK-toggle notes are issued at Adria, the Dutch BV Holdco, and are secured over the shares in the borrower and over 95% of the shares in Agrokor. But taking the shares would trigger a change of control for the bonds, and the two listed subsidiaries would trigger a mandatory takeover offer and leave them open to completion and merger clearance issues, noted the first source.
PIK note holders may have the ability to blow up the structure, but this only takes you so far, noted the second advisor. With banks now having the spring-forward mechanism PIK holders have lost first mover advantage and are now relying on lenders not to act, he added.
Another option is to find funds to refinance the PIKs at a discount, or take out the operating company debt. But this will be difficult to achieve, given high leverage and doubts over the company financials, noted the first advisor. Holders would require a lot of due diligence, and that presupposes that the company will allow them to look at the books, he concluded.