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
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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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