Billions Are Sinking Into a Balkan Black Hole

  • Suppliers may stand to get repaid before bondholders, lenders
  • Sberbank makes provisions for more than 50% of its loans

Fights don’t come more lopsided than this: global giants Fidelity International and Axa Investment Managers facing off against the likes of a chocolate and biscuit maker to get paid following the stunning collapse of Agrokor d.d., the biggest company in the former Yugoslavia.

But in this Balkan battle, it’s confectioner Kras d.d. that has the edge.

Zdravko Maric, Croatia’s finance minister, speaks with journalists during the Euromoney Central And Eastern European Forum, in Vienna, Austria, on Tuesday, Jan. 17, 2017. The conference traditionally gathers over 1000 issuers, investors and policy makers from both inside and outside the central and eastern European area to discuss the outlook for the region’s economies. Photographer: Akos Stiller/Bloomberg

Croatian finance minister Zdravko Maric was director for capital markets at Agrokor until last year.

Photographer: Akos Stiller/Bloomberg

That’s because the Croatian government has intervened to put the interests of almost 5,000 domestic businesses ahead of international financiers in the wake of an aborted Russian-led reorganization and allegations that its books were cooked. It was the latest twist in the saga of the retail chain that went down owing more than 6 billion euros ($6.5 billion). In a little over three months, the value of Agrokor securities evaporated after lenders pulled the plug on its debt-fueled expansion. And now politicians across the region are making sure local interests are protected.

“Agrokor has transformed itself from the biggest private company into one of the biggest systemic risks to the Croatian economy,” Morgan Stanley’s economist Georgi Deyanov wrote in a note to clients. “The government’s action resulted in the implicit state guarantee of Agrokor’s short-term debt and arrears to suppliers.”

Also at risk: the government in Zagreb itself. Finance Minister Zdravko Maric was director for capital markets at Agrokor until last year. Prime Minister Andrej Plenkovic needs a new coalition partner after a junior party withdrew support over its disapproval of Maric.

Agrokor’s significance in the region can hardly be overstated. It directly employs 30,000, about 2.5 percent of the country’s workforce. Tens of thousands work for companies that fill the shelves of its supermarkets.

Saving Agrokor, especially its main retail arm Konzum, means shielding local food producers like the confectioner Kras, which employs 2,500 people in Croatia. Kras’s exposure to Agrokor is about 28 million kuna ($4.1 million), legal representative Marica Vidakovic said by phone. About 70 percent of the products sold in its shops are sourced locally, more than its competitors like Germany’s Lidl or Kaufland, which have been eroding Konzum’s market share in recent years.

Ivica Todoric. Iliya Pitalev/Sputnik via AP

Ivica Todoric

Photographer: Iliya Pitalev/Sputnik via AP

The Croatian parliament pushed through a new law — dubbed Lex Agrokor — to deal with “systemic companies” on April 6. The following day, owner Ivica Todoric ceded control of the company he founded in 1976 to the state. Ante Ramljak, a government-appointed commissioner, took over days later.

“The law provides a favorable position for suppliers,” said Emil Tedeschi, chief executive officer of Atlantic Grupa d.d., a Croatian food producer. “If the government didn’t bring Lex Agrokor, today there would be an enormous blow to the economic system and we would be witnessing scores of bankruptcies in Croatia.”

Agriculture minister Tomislav Tolusic said on Wednesday that Agrokor’s unpaid bills to small suppliers will be repaid in full, including arrears.

The state may end up footing the bill for the legal challenges that will probably ensue, said Goranko Fizulic, a former Croatian economy minister.

“An unequal treatment of creditors without clear criteria and a base in the law, and payment of old debt to just one category of creditors, open a possibility of lawsuits,” Fizulic said.

The rest of the former Yugoslavia followed suit. Slovenia, Serbia, Bosnia-Herzegovina, and Montenegro also moved to stop assets in Agrokor’s local units moving to the parent company.

Meantime, the global investment powerhouses tallied their losses and took steps to fight for their share of what remains.

Axa IM and Fidelity, holders of Agrokor’s bonds, saw the notes lose as much as 70 percent of their value since January, according to data compiled by Bloomberg. The value of about 520 million euros of loans to a Agrokor holding company that pay interest at maturity has been almost completely wiped out. The loans, whose holders include Invesco Ltd. and Canadian Pension Plan Investment Board, are now quoted at 4 cents on the euro, the data show.

Confectioner Kras employs 2,500 people in Croatia.

Source: Kras

Axa IM has now formed a group with U.S.-based hedge funds Knighthead Capital Management and T. Rowe Price Group Inc., which bought into the bonds at discount in the last three months. The group is working with PJT Partners, a financial adviser, while Invesco and the Canadian pension fund are working with Moelis, to help in negotiations with the company, people familiar with the matter said.

Representatives for CPPIB, Fidelity, and T. Rowe Price declined to comment on their holdings. An official at Axa IM confirmed that it holds Agrokor’s bonds and it’s working with PJT, while representatives at Invesco and Knighthead didn’t return calls seeking comment.

Moscow-based Sberbank PJSC said on Wednesday it has made provisions for more than 50 percent of losses on its 1.1 billion-euro debt holding after failing in its effort to lead a reorganization. Russia’s VTB Group said last week it may also take provisions on some of its 300 million-euro exposure.

“The state’s interests don’t always correspond with our interests as creditors,” said Herbert Moos, chief financial officer of VTB. “They have socially oriented concerns that might not fully overlap with our priorities.”

The government has created a temporary five-member council, which counts two representatives for suppliers and one for banks that have also lent to suppliers. The other two representatives are for Agrokor’s lenders and bondholders. Under the terms of Lex Agrokor, the commissioner and the council members can decide to award precedence to suppliers in repaying debt.

Agrokor’s total debt is still unclear. As of September, the retailer owed 2.2 billion euros to suppliers on top of the 3.4 billion euros of financial debt and 520 million euros of holding-company loans, according to the company’s most-recent financial report.

The company said last month that there could be errors in its past financial accounts and asked stakeholders not to rely on its historical financial statements until an investigation had been completed. It said it planned to bring in PricewaterhouseCoopers to investigate, replacing Discordia, the Zagreb affiliate of international accountancy firm Baker Tilly.

Officials at Discordia didn’t return calls and e-mails seeking comment on their auditing.

The new accountants are focusing on factoring programs and loans made by domestic banks to cover late payments to suppliers and guaranteed by Agrokor, according to people familiar with the matter. More debt may emerge following the review, the people said.

The key for international creditors could be to provide new financing to keep the business running, and, with that, gain some control of the restructuring process.

The local subsidiaries of Erste Group Bank AG, Intesa Sanpaolo SpA, Raiffeisen International Bank AG, and UniCredit SpA provided an 80 million-euro rescue loan to Agrokor’s last month, which will be used to pay for bills that have come due since the government took over on April 10.

The group of bondholders may be willing to provide as much as 400 million euros in new finance, separate people familiar with the matter said last month. The agricultural minister said on Wednesday the government wants the proceeds of any new financing to be used to repay small suppliers. 

“There’s a lot at stake for Croatia and other countries in the region,” said Aleksej Gren, an analyst at Exotix Partners in London. “There are so many parties involved — governments, suppliers, different classes of creditors — and that carries conflicts of interests. Negotiations are likely to be very complex and time consuming.”

—With assistance from Anna Baraulina, Jake Rudnitsky, Boris Groendahl and Sam Dodge.

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