New legal framework in Croatia to rescue Agrokor

Simon Rowley and Greg Cross report on retailer Agrokor’s finanical crisis and subsequent turnaround

SImoN roWLEY Director, AlixPartners (UK)

grokor is the largest retail competition gaining an a serious issue in one entity very privately-owned group increased market share, which quickly spread to affect the whole in the Republic of A reduced Agrokor's revenues and group. Croatia and one of the also impacted negatively on These pressures presented the GrEG CroSS Adriatic region’s largest Vice President, profits. group with a very challenging AlixPartners (UK) vertically integrated The governance structure liquidity situation and although companies with distribution whereby many major decisions Agrokor successfully raised EUR markets all across Europe. were made solely by the CEO, Mr 100m of new financing in the first Agrokor’s revenue of EUR Ivica Todorić also contributed to quarter of 2017, it was insufficient 6.1bn is equivalent to 12% the increased pressure on the to make regular payments to its of Croatia’s GDP. group. suppliers, which resulted in It operates through several Key pressures created by the reduced or suspended deliveries strategic business segments group’s strategy included the of goods and services. including retail and wholesale, historical M&A “buy and build” The legal framework was food production and distribution model and over-investment in developed specifically for this and agriculture. It also owns many production facilities, which were situation diverse businesses outside these incapable of producing sufficient core sectors. return on expenditure. As the government became Agrokor’s financial crisis was Furthermore, archaic financing increasingly aware of the caused by external factors and solutions that included bills of difficulties facing Agrokor, it was management decisions exchange, trade loans and cessions concerned that a failure of the provided short term solutions to business could lead to economic During 2016, Agrokor started to day to day issues but were instability in Croatia, as many Share your views! suffer as a result of negative inappropriate for the group’s size Croatian suppliers which relied macroeconomic trends with and complexity. This contributed heavily on Agrokor began to find increasingly aggressive low-cost to a “house of cards” effect where themselves in a difficult financial

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position as a result of Agrokor’s commenced an investigation into initial EUR 80m) with the liquidity squeeze. Accordingly, at events leading up to the filing and remaining EUR 530 million being the beginning of 2017, the issued an international arrest the refinancing of pre-petition government, led by Prime warrant following allegations of debt and its conversion to a super- “ Minister Andrej Plenković, but fraud in connection with his senior ranking on a EUR 1 to THE directly managed by Martina actions at Agrokor. Extradition EUR 1 basis. The refinancing was GOVERNMENT Dalić, the Deputy Prime Minister proceedings are currently ongoing unsuccessfully challenged by (DPM), reviewed its current with an appeal being lodged by certain creditors who argued that REVIEWED ITS bankruptcy laws and decided that Mr Todorić, after the initial the EA Act did not allow such a CURRENT the current pre-bankruptcy and hearing in April 2018 determined move. bankruptcy procedures would not that Mr Todorić should be This additional liquidity BANKRUPTCY be suitable for Agrokor’s size, returned to Croatia. provided Agrokor with sufficient PROCEDURES complexity and systemic Liquidity was an immediate cash to provide a stable platform importance and therefore began issue with additional capital from which it could start to AND DECIDED the development of a third, new urgently required rebuild trust with suppliers and THAT THEY reorganisation regime, the Law on resume normal operations. the Procedure for Extraordinary As there was almost no cash It also expressly provided for a WOULD NOT Administration of Companies of available in the group’s key pool of up to EUR 150m, which BE SUITABLE Systemic Importance for Croatia operating entities on 10 April could be used to pay pre-petition (the EA Act), which came into 2017, the Extraordinary debts of critical suppliers in order FOR AGROKOR force on 6 April 2017. Administration immediately set to ensure that these businesses The EA Act was designed to about raising new finance, an could continue operations and provide protection from creditors action permitted under the EA support Agrokor’ s on-going for a period of up to 15 months, Act. business. allowing the debtor to find a Within a few days, the The financial position of settlement plan (effectively a Extraordinary Administration was Agrokor was different from restructuring proposal), which able to secure EUR 80m of what many stakeholders thought ” must be agreed for by either a funding from local lenders in simple majority in number and order to address immediate Shortly after the commencement value of each creditor class or by liquidity challenges. This was of the proceedings, advisors were 66 2/3% of the total value of designed to allow the businesses to engaged to provide an initial view creditors. continue operations and of Agrokor’s capital structure, The commencement of undertake some belated identifying that the group had proceedings resulted in the preparations for the critical over EUR 6bn of debt, including appointment of a new summer tourist season, a period EUR 505m in secured debt. management team for the group where historically 40% of annual Many stakeholders had previously EBITDA is generated. To assist understood that there was By the end of March 2017, it with the systemic challenges minimal, if any, secured debt. became clear that Agrokor had facing the country, it was Given these findings, the insufficient liquidity to continue important to ensure this liquidity Extraordinary Commissioner normal operations, as demands could quickly find its way to determined that new auditors for payments amounting to over suppliers in order to secure would be required and PwC was EUR 460 million had been filed continuity of business and thus, a engaged to audit the 2016 against the group’s companies. portion of the funds raised were financial statements. Once Discussions with the used to settle certain pre-petition finalised, this resulted in write- government for a bailout were liabilities. A significant portion of downs of EUR 2.9 billion through unsuccessful and ultimately Mr these payments were made various adjustments resulting from Todorić turned to the courts to specifically in respect of “border accounting irregularities and seek the protection of the EA Act. claims”, invoices which were meant that post adjustments On 10 April 2017, Agrokor dated prior to the EA liabilities exceeded total assets by entered the Extraordinary commencement, but fell due EUR 1.9 billion, providing a basis Administration and Ante Ramljak afterwards. for the Extraordinary was appointed as Extraordinary As it was clear that the initial Commissioner to bring criminal Commissioner (EC). EUR 80 million would be charges against Mr Todorić for, Immediately following the insufficient for Agrokor’s medium among other things, falsifying appointment, Agrokor’s senior term liquidity needs, a more financial reports. management team was removed extensive new money process was After liquidity was stabilised, from the holding company board launched and by June 2017, the a restructuring proposal was as required under the law. Mr Temporary Creditors’ Council developed to address the Todorić subsequently left Croatia approved a EUR1.06 billion unsustainable capital structure appearing in London some weeks super-senior facility comprising later, where he still resides. The EUR 530 million of new money As operations eventually began to Croatian state prosecutor (including a refinancing of the normalise, an interim governance

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structure was put in place whilst Shortly thereafter, Fabris Peruško the other local jurisdictions, the restructuring plan was was appointed as the new EC of notably , have not yet developed. During this time, Agrokor, with Irena Weber as his recognised the EA Act. Agrokor developed a granular deputy. The DPM, Martina Dali c´, The plan has been approved by bottom-up business plan for the also resigned a couple of months “ creditors and the focus is now ongoing operational development later, amid tremendous pressures on implementing the plan and OVERALL, THE and sustainability of the operating on the process and on the returning to normal business PROCESS WAS A business of the group. They government. activity indicated that the group was Mr Peruško picked up from SUCCESSFUL profitable and had the potential to Mr Ramljak in leading the The final plan was filed at Court RESTRUCTURING further improve, but that the negotiations with the Temporary on 26 June 2018 and on 4 July existing capital structure was not Creditors’ Council and by 10 2018, Croatia’s largest ever court OF ONE OF THE sustainable. April 2018, the anniversary of the hearing was convened in the The business plan provided start of the proceedings, a Cibona Basketball Arena in REGION’S the EA with a robust forecast, commercial agreement was , where the plan was LARGEST from which the creditors’ financial reached with creditors and a term approved by an overall majority recoveries in the settlement plan sheet published. A three-month of 80.2%. COMPANIES, could be foreseen. The objective extension of the EA process was The court confirmed the ENSURING of the settlement plan was to secured, enabling the finalisation settlement plan shortly after, on 6 maximise returns for the creditors of the documentation and July 2018, triggering a period of ECONOMIC by ensuring that the group presentation of a settlement plan 73 days during which depositing STABILITY IN continued as a going concern, as to creditors. The key elements of challenges would be possible. opposed to a liquidation or the the settlement plan remained After satisfactory resolution to the CROATIA disposal of some or all of the consistent with the proposal challenges, the plan will be operations. published in December 2017. irrevocably confirmed and the The restructuring proposal Some additional nuances included process of implementation can was published in December 2017 contingent payment rights for commence. The protection of the setting out that the creditors certain creditors, based on future EA Act will remain in place until would swap impaired debt for business performance and a the implementation process has equity and other instruments in a solution for the recourse rights, been completed. ” deal that would allow them to take related to bills of exchange. With a distributable value of full ownership of the group with The plan also allows for the EUR 2.8 billion and outstanding their shareholdings being based largest secured creditor, Sberbank, claims of EUR 5.6 billion as at on the estimated returns on an to swap its existing minority stake that date, the plan was approved, entity by entity basis across the in the Slovenian subsidiary the overall average recovery being companies included in the EA. for an additional stake of around 50%. This is not a true As negotiations progressed, in the new group structure. This is benchmark of returns to the public and the political particularly beneficial as Sberbank individual creditors, as the pressure resulted in the had commenced litigation against complexity of the group’s replacement of both the some of the group’s entities in financing structure and the Extraordinary Commissioner other jurisdictions, where the EA permitted pre-petition payments and the Deputy Prime Minister protection was not recognised. In during the EA process mean that response, Agrokor had challenged individual creditor recoveries will Agrokor had made front page Sberbank’s claims against the vary materially. news since April 2017 and the group. Ultimately, value was Overall, the process was a former CEO had, through a blog preserved for all creditors, as successful restructuring of one of he set up, been attacking both the agreement on this crucial the region’s largest companies, process and the participants for component of the settlement plan maximising returns to creditors, many months. One of the included both the withdrawal of preserving jobs for over 50,000 challenges was in relation to the litigation from Sberbank and the people and ensuring economic new law and whether it was acceptance of Sberbank’s claim stability in Croatia. Whilst it is constitutional; the Court by Agrokor. clear the law could be further ultimately confirmed it was, but Although the EA Act was refined, and a mandatory review this took time. Other challenges clearly not initially included in is likely to highlight areas of related to the writing of the law, Annex A of the EU Insolvency improvement, it is an encouraging email leaks related to the DPM, Regulations, the Croatian sign that both the public and the the cost of advisers and conflicts government successfully applied to private sectors can move rapidly of interest. As a result of this have it added and this occurred on together to deliver such preventive pressure, the EC, Ante Ramljak, 14 June 2018. The proceedings action – and all in 15 months. Share your views! concluded that his continued Where else could this have been were recognised in the UK in the I involvement was a hindrance to course of litigation and a Chapter done so quickly? reaching the settlement and 15 application was also successfully resigned in February 2018. made to the US Courts. Some of

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