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Rating Action:

Moody's changes outlook on Agrokor to negative; affirms B3 rating

24 Feb 2017

London, 24 February 2017 -- Moody's Investors Service today changed to negative from stable the outlook on Croatia-based food retailer and manufacturer Agrokor D.D.'s (Agrokor) B3 corporate family rating (CFR), B3-PD probability of default rating (PDR) and B3 senior unsecured ratings assigned to the 2019 and 2020 notes. Concurrently, Moody's has affirmed all these ratings.

"Our decision to change Agrokor's outlook to negative reflects the uncertainties weighing on its credit profile, which is constrained by a more limited access to credit markets and a need to stabilize operating performance and leverage at a time when the company's shareholder Adria is due to address the repayment of its PIK toggle loans" says Vincent Gusdorf, a Vice President -- Senior Analyst at Moody's.

RATINGS RATIONALE

Today's action reflects Moody's current view that there are an increasing number of risks and uncertainties weighing on Agrokor's credit quality as evidenced by a deterioration in its access to credit markets as well as high exposure to a small number of banks, with Russian financial institutions Sberbank (Ba2/Ba1 stable, ba1) and Bank VTB, JSC (Ba2/Ba1 stable, b1) providing 52% of the restricted group debt and 87% of its bank debt as of September 2016.

This comes at a time when Agrokor is attempting to stabilize its operating performance and leverage amidst fierce competition in its core retail markets.

Furthermore, the impending deadline to refinance the payment in kind (PIK) toggle loans sitting above the restricted group, at Adria Group Holding BV, also weighs on Agrokor's credit quality. Failing to refinance the PIKs could potentially lead to an acceleration of the restricted group's debt either on 8 March 2018, because a clause included in some bank documentations allows lenders to ask for a repayment of their loans, or on 8 June 2018 when the PIKs become due, as this could trigger a change of control. Moreover, a potential capital loss by the PIK holders could in turn negatively affect Agrokor's ability to tap the credit markets in the near future.

Furthermore, Moody's considers that Agrokor's payables are high for the industry. They amounted to HRK16,197 million (EUR2,175 million) as of 30 September 2016, which translates into 150 of days payables outstanding (versus 60 to 90 days for retail peers). A potential shortening of payment terms could strain Agrokor's liquidity, although Moody's acknowledges that payables have been broadly stable since the purchase of Mercator in 2014.

On the positive side, Moody's recognises that Agrokor has sufficient liquidity to repay its 2017 and 2018 debt maturities. At the end of September 2016, the restricted group reported HRK2,286 million (EUR307 million) of cash and cash equivalents compared to HRK959 million (EUR127 million) of short-term debt and EUR150 million of loans maturing in September 2018.

Agrokor's B3 rating is based on the assumption that its leverage will gradually stabilize. According to management, revenues were flat on a like-for-like basis during the third quarter of 2016 despite the fierce competition of discounters. While the PIK debt at the Adria level weighs on Agrokor's credit profile, a default on the Adria debt -- which is not issued by or guaranteed by Agrokor -- would not automatically or inevitably lead to a default by Agrokor itself. Moody's currently forecasts that Agrokor's Moody's-adjusted (gross) debt to EBITDA will reach 6x at the end of 2017 and in 2018, or 6.8x including the PIKs. This assumes that Agrokor will stop the erosion of its EBITDA, which fell by 9.6% to to HRK3,020 million (EUR400 million) during the first nine months of 2016.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the uncertainties currently weighing on Agrokor's credit quality due to the evidenced limited access to the debt markets and the fast approaching deadline to refinance the PIK debt at Adria.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Negative pressure on the rating could materialize if Agrokor's Moody's-adjusted EBITA-to-interest expense ratio fell substantially below 1.0x, if it failed to curb the deterioration of its EBITDA, if free cash flows became significantly negative, if its liquidity profile further weakens or if the refinancing of the PIK note at Adria level negatively impacts Agrokor's liquidity or access to the debt markets.

Upward rating pressure is currently limited in light of today's rating action. An upgrade would require that (1) Agrokor improves its operational performance, (2) improves its liquidity and access to debt markets, notably through a credit neutral resolution of the maturity of the PIKs, and (3) enhances its financial disclosures. Quantitatively, Moody's could consider upgrading the ratings if Agrokor managed to reduce its Moody's-adjusted debt-to-EBITDA ratio significantly below 5.5x, excluding the PIKs. However Moody's cautions that any change in the group structure may lead to a revision of its debt-to-EBITDA target, for instance in case of the creation of additional minorities in the group structure.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vincent Gusdorf
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yasmina Serghini
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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