Agrokor Faces Heat From Investors as Debt Binge Falters
(Bloomberg) -- Agrokor d.d.’s debt tumbled to the lowest on record this week after its banks failed to syndicate a loan, triggering concerns that Croatia’s biggest company is struggling to execute a plan to refinance debt amassed for expansion.
A former family flower business that grew into a food and retail conglomerate spanning the former Yugoslavia, Agrokor began facing deeper competition as Croatia approached its entry to the European Union in 2013. The price of its securities plunged by as much as a quarter after the company canceled the loan deal on Jan. 18, citing unattractive terms.
Investors have now shifted focus to upcoming maturities, including Agrokor’s PIK toggle loans, which give the borrower the option of paying coupons with cash or more debt, and whose status may also impact its other debt. Agrokor issued PIK loans to help finance the 2014 acquisition of Slovenian retailer Mercator in the largest takeover in the Balkans, crowning its period of expansion.
“Agrokor has been the most successful private sector company in the region, but heavily dependent on debt financing,” Okan Akin, an emerging market analyst at AllianceBernstein Holding LP, said by e-mail. “Over the years, contrary to their continued commitments on deleveraging, their debt levels actually increased. It looks like now the market is telling them that it is time to take drastic actions."
Yield Surge
The yield on Agrokor’s bonds due 2019 reached 23.4 percent by 2:05 p.m. in Zagreb, compared with levels below 10 percent before Jan. 18, when the company canceled its syndicated loan deal. The 485 million euros of PIK ($522 million) issued by Agrokor’s parent company Adria Group traded as low as a quarter of face value, according to traders with knowledge of the matter.
The closely-held company, some of whose subsidiaries are listed in Zagreb, said on Jan. 26 that it was meeting its obligations and had no need for additional financing.
“We have the plan and the strategy which the company plans to execute in a timely fashion,” Ivan Crnjac, executive vice president in charge of strategic development and capital markets, said by phone from London on Thursday. He declined to elaborate.
Russian Lenders
Agrokor grew from a family business during the communist era to an enterprise with 60,000 employees, including about 20,000 outside Croatia, taking advantage of the reopening of borders after the wars of the 1990s. Owner and Chief Executive Officer Ivica Todoric, 66, who has become one of the richest people in the Balkans and manages the company with the help of his three adult children, has floated the idea of an IPO as a financing option, without taking any further steps so far.
The group’s expansion has boosted its revenue to the equivalent of 15 percent of Croatia’s gross domestic product. To finance this growth, it has often relied on Russian lenders. Three years ago, Sberbank agreed to lend Agrokor 600 million euros, due in 2021, and added another 350 million-euro loan last year. VTB Bank PJSC extended the maturity of 340 million euros for two to three years in November 2016.
“Agrokor was growing and acquiring companies through borrowing, and not through accumulated capital,” said Damir Novotny, who manages Zagreb-based consultancy T&MC. “Its model of combining food production, food processing and retail is not competitive, its profitability margins are narrow, and interest rates on its loans are high."
Some of the facilities refinanced in 2016 include a "cross acceleration provision and may become immediately due and payable” if PIK toggle loans and bonds due in May 2019 are not refinanced 90 days before their maturities or if they don’t have their maturities extended to at least March 2020, said Anthony Giret, an analyst at Spread Research, in a note to clients.
Capital Structure
“Agrokor must undertake substantial refinancing in 2017 and evidence some deleveraging by next year, as we do not anticipate the group to be able to manage such debt acceleration based on current liquidity and expected cash generation,” Giret said.
While Agrokor has satisfactory liquidity and can count on potential support from the Croatian government and banking ties, the PIK loan is key to allay concern among investors that the risk will spread to its other debt, said Tanvi Arora, a credit analyst at Lucror Analytics in Singapore.
“Fundamentally I don’t see a problem with the business yet," Arora said. "If they aren’t able to refinance the PIK, there would be a cross default to the bonds too and that would mean a restructuring for the whole capital structure. I think they’re currently working on options."
2017-02-03 13:17:50.576 GMT
By Jasmina Kuzmanovic and Luca Casiraghi