The ratings agency also also affirmed its 'B' short-term corporate credit rating on Agrokor, while at the same time lowering to 'B-' from 'B' its issue rating on the three senior unsecured bonds issued by the company and due in 2019-2020, Standard & Poor's Ratings Services said in a statement late on Friday.
"The downgrade reflects our view that Agrokor's capital structure is negatively affected by rising refinancing risks linked to upcoming debt maturities in 2018", S&P explained. "At the same time, the group remains highly leveraged (adjusted debt to EBITDA over 6x), with a lower-than-projected EBITDA base for 2016-2017 due to underperforming retail operations in Slovenia. Currently, access to capital markets also appears to be very uncertain".
The ratings agency also said in the statement:
"[..]The immediate refinancing risk, in our view, is the €535 million subordinated PIK loan (not rated). The borrower is Adria Group Holding B.V. (held by Mr Todoric, the main shareholder of Agrokor group) and this loan served to fund the €544 million acquisition of Slovenian retailer Mercator in June 2014. We understand that this loan, which can accrue at 10.5% per year, needs to be refinanced or extended by March 8, 2018 or Agrokor's senior lenders can ask for the immediate repayment of €840 million of Agrokor's bank debt. This would immediately weigh on the group's liquidity position and likely lead us to lower the ratings further.
We also note that bank debt covenants indicate that Agrokor group's debt leverage should decrease to 5.0x reported net debt to EBITDA by September 2018 (versus 5.8x as of September 2016), which we do not currently foresee in our current base case unless there is a change in the capital structure or a sustained uptick in the group's operating performance.
Currently, we do not see debt levels decreasing substantially in 2017 while the group's operating performance has been slightly deteriorating, mostly due to its Slovenian retail business Mercator (40% of Agrokor group's revenues). Although Mercator has disposed of a number of noncore retail assets, increased competition should remain and we believe that a turnaround in Mercator's profitability will take more than 12 months. This has led us to slightly lower our forecasts for 2016-2017, with EBITDA interest coverage of about 1.7x-2.0x (compared to 2.1x-2.5x) and adjusted debt to EBITDA of 6.0x-6.5x (compared to 5.5x-6.0x). That said, we anticipate that the group's free operating cash flow (FOCF) will remain positive in 2016-2017.
We see current high market volatility as limiting the group's ability to raise new debt or equity on capital markets, and potentially making negotiations to change the capital structure more challenging. That said, we view positively that Agrokor refinanced €840 million of senior bank debt (20% of total debt including the PIK loan) in 2016 and that there are no large senior debt maturities in 2017-2018. Still, in the medium term, Agrokor appears to be quite reliant on its two main lenders, VTB and Sberbank, to refinance large debt maturities due in 2019-2020.
We understand that the group is actively working on prolonging its upcoming debt maturities and optimizing its financing costs. We also note that Agrokor is one of the largest employers in Croatia with more than 30,000 employees and accounts for 16% of the country's GDP.
Our new base-case projections for 2016-2017 assume:
- Flat revenues of Croatian kuna (HRK) 49 billion (€6.6 billion), reflecting a slight revenue decline in retail operations (mostly from Mercator) and low revenue growth from food manufacturing.
- S&P Global Ratings-adjusted EBITDA margin of about 10%, reflecting lower profitability at Mercator, offset by cost saving measures and higher earnings due to the growth in the beverages and ice creams businesses which are higher margin.
- Positive FOCF of HRK800 million-HRK1,000 million (€108 million-€135 million) annually, with capital expenditure (capex) of about 3% of revenues.
- Adjusted debt of HRK31 billion-HRK33 billion (€4.2 billion-€4.5 billion), which includes borrowings in the consolidated group, PIK toggle loans at Adria Group Holding, operating lease commitments, and net pension deficit against which we net out unrestricted cash balances.
Based on these assumptions, we arrive at the following credit measures:
- EBITDA interest coverage of 1.7x-2.0x; and
- Adjusted debt to EBITDA of 6.0x-6.5x.
The negative outlook mainly reflects our view that Agrokor's PIK loan negotiations and plans to improve its debt structure might take time to resolve in 2017.
Despite the rising refinancing risk for the upcoming debt maturities, we believe the group faces manageable short-term liquidity constraints until early March 2018 and limited senior debt maturities in 2017-2018. We would consider a negative rating action if Agrokor does not actively and rapidly manage the upcoming debt maturities, such as the PIK loan, which needs to be refinanced before March 2018.
We could also lower the ratings if there was a continued decline in operating performance--below our base-case scenario--in the retail operations. This would negatively affect FOCF generation and potentially the group's liquidity position.
We could revise the outlook back to stable if Agrokor, in a timely manner, takes the appopriate financial measures to address its upcoming debt maturities and progress in deleveraging its capital structure.
We would also view positively a stabilization in Agrokor's operating performance thanks to an improvement in the profitability of Mercator's retail operations and continued solid earnings growth in the ice creams and beverages businesses. This could translate into adjusted debt to EBITDA stabilizing or decreasing toward 5.0x, on a sustainable basis, and EBITDA interest coverage of at least 2.0x."
