April 11 (SeeNews) - Moody's Investor Services said on Tuesday it has downgraded Croatian retailer and food manufacturer Agrokor's corporate family rating (CFR) to Caa2 from Caa1 and its probability of default rating (PDR) to Ca-PD from Caa1-PD.
The outlook on the company's ratings remains negative, Moody's said in a statement.
"Our decision to downgrade Agrokor's rating reflects its filing for restructuring under Croatian law, which in our view makes a default highly likely", said Vincent Gusdorf, a vice president -- senior analyst at Moody's. "It also takes into account uncertainties around the restructuring process, as creditors' ability to get their money back hinges on numerous factors that will become apparent over time."
Moody's has also downgraded the senior unsecured rating assigned to the notes issued by Agrokor due in 2019 and 2020 to Caa2 from Caa1.
This is the third time this year that Moody's has downgraded its CFR on the company.
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 the company must restore an adequate liquidity profile and improve its financial structure by reducing its debt. The ratings agency, however, said the upside potential is unlikely at present.
Moody's also said in the statement:
"RATINGS RATIONALE
Today's downgrade reflects Agrokor's decision to file for restructuring on 7 April 2017 in accordance with the Croatian Law on Extraordinary Management Proceedings in Companies of Systemic Significance. In Moody's view, this course of action implies a high likelihood of default that could have negative effects for existing creditors, although the details of the process are not yet known. The company has also changed its CEO as well as part of the management board.
These decisions follow a deterioration of Agrokor's relationships with suppliers which has significantly impaired its liquidity. The HRK2,286 million (EUR307 million) of cash and cash equivalents reported at the end of September are not sufficient to finance even a portion of payables, which amounted then to HRK16,197 million (EUR2,175 million) at that time.
To address these liquidity issues, Agrokor is seeking additional loans from banks. The company is currently negotiating with its lenders to obtain secured financing, which would create subordination for existing unsecured debt holders.
Recovery prospects on Agrokor's existing debt will depend on a variety of factors. Strained relationships with suppliers could affect the company's market shares and earnings generation. Moody's will also monitor upcoming changes in the capital structure. The CFR could be downgraded further if future developments in the restructuring process lead to lower recovery prospects for creditors.
Although Agrokor has no debt maturity before September 2018, when EUR150 million of bank debt will become due, it must service the interest of its debt. This includes the coupons of its bonds, which are scheduled on 1 May for the EUR300 million notes maturing in 2019 and on 1 August for the EUR325 million and $300 million notes due in 2020. A missed interest payment would represent a default under Moody's definition.
WHAT COULD CHANGE THE RATINGS UP/DOWN
The negative outlook reflects the high risk of default arising from the company's decision to restructure its debt. It also factors in the uncertainties around the form that the restructuring would take, its timing, and its impact on Agrokor's earnings. This creates significant downside risk for the recovery prospects of creditors, although its magnitude will become apparent over time.
Further downward pressure could materialize if Agrokor fails to service the interest on its debt or if Moody's believes that there will be a greater loss for creditors than is currently assumed.
Upside potential is unlikely at this time. In the longer term, Moody's could upgrade Agrokor's rating if it is able to restore an adequate liquidity profile and improve its financial structure by reducing its debt."