March 29 (SeeNews) - Moody's Investor Services said on Wednesday it has downgraded the Croatian retailer and food manufacturer Agrokor corporate family rating (CFR) to Caa1 from B3 and its probability of default rating (PDR) to Caa1-PD from B3-PD.
Moody's has also downgraded the senior unsecured rating assigned to the notes issued by Agrokor and due in 2019 and 2020 to Caa1 from B3. The outlook on the company's ratings remains negative, it said in a statement.
"Our downgrade of Agrokor's rating reflects our view that the company is no longer able to sustain its high level of trade payables, which may constrain its liquidity position", Vincent Gusdorf, a vice president -- senior analyst at Moody's, is quoted as saying. "This comes at a time when the company has limited means to raise additional sources of liquidity owing to its restricted access to credit markets and its reliance on a limited number of banks".
This is the second time this year that Moody's has downgraded its CFR on the company. In February, it also changed its outlook on Agrokor to negative from stable.
Agrokor entered serious financial trouble after Moody's January decision to cut its rating became 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.
In order for Agrokor to lift its ratings, Moody's said it must improve its liquidity and address the refinancing of the PIKs in a manner that would not negatively affect the restricted group, among other things.
The ratings agency also said in the statement:
"RATINGS RATIONALE
Moody's believes that the support from Agrokor's suppliers has weakened, while its credit quality hinges notably on its ability to keep payables above the industry's average. Payables amounted to HRK16,197 million (EUR2,175 million) as of 30 September 2016, which translates into 150 of days payables outstanding, compared to 60 to 90 days for retail peers. A small reduction in payment terms could therefore lead to a significant cash outflow.
As a result, Moody's now views Agrokor's liquidity as weak. While the HRK2,286 million (EUR307 million) of cash and cash equivalents reported at the end of September 2016 exceeded the HRK959 million (EUR127 million) of short-term debt, Moody's estimates that the company's liquidity would not suffice to finance a reduction in payables. Additional sources of liquidity are limited, since the restricted group only had access to €170 million bilateral credit facilities maturing in less than 12 months as of 30 September 2016. Agrokor's access to credit markets has deteriorated and it relies on 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.
At the same time, Agrokor needs to address the repayment of the payment in kind (PIK) toggle loans sitting above the restricted group at Adria Group Holding BV. 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 documentation 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. These instruments had a nominal value of €536 million at year-end 2016 and accrue interests at an annual rate of 10.5%.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Negative pressure on the rating could materialize if Agrokor fails to maintain short-term liquidity or if possible changes in the capital structure negatively impact its creditors.
Upward rating pressure is currently limited in light of today's rating action. Moody's would consider an upgrade if Agrokor: (1) improves its liquidity; (2) stabilizes its trade payables and its capital structure on a sustainable basis; (3) demonstrates its ability to achieve an EBITA-to-interest ratio of at least 1.0x; and (4) addresses the refinancing of the PIKs in a manner that would not negatively affect the restricted group."