February 24 (SeeNews) - Moody's Investor Services said on Friday it has changed its outlook on Croatian retailer and food manufacturer Agrokor from stable to negative, after in January it downgraded its corporate family rating (CFR) on the company to B3 from B2.
At the same time, Moody's affirmed its B3 rating of the company, its B3-PD probability of default rating (PDR) and the B3 senior unsecured ratings assigned to the 2019 and 2020 notes, it said in a statement.
"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," Vincent Gusdorf, a vice president - senior analyst at Moody's, is quoted as saying.
Agrokor entered serious financial trouble after Moody's January decision become public. Following the news, the company pulled out of a syndicated loan deal it had struck with several international lenders, which sent the price of its bonds on international markets into a downward spiral.
Media have been speculating that Agrokor will need to sell off a number of its affiliates in order to service its obligations, which include a PIK loan it took out in 2014 to fund its acquisition of Slovenia's Mercator.
In order for Agrokor to lift its ratings, which is imperative for the conclusion of new loans, Moody's said it will have to improve its operational performance, improve its liquidity and access to debt markets and enhances its financial disclosures.
The ratings agency also said in the statement:
"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."