Guy Norton in Zagreb -

The tide has well and truly turned for real estate firms and construction companies in Croatia. After years of plenty when at both home and abroad there was an abundance of state-sponsored infrastructure developments and a glut of liquidity available for private sector projects, Croatian property developers are now having to face up the grim prospect of much leaner times ahead, given sharp cutbacks in government spending and the shrinking availability of project finance across the globe.

One company that typifies the fate of the sector, which until the global economic crisis hit was one of the key drivers of the Croatian economy, is civil engineering firm Ingra. In recent months it has been forced to lay off workers, cut its remaining employees' salaries and has now embarked on a major financial restructuring programme, which it hopes will save it from insolvency.

Hopes that it would be able to ease its financial problems by selling off one of its key assets, sports/entertainment centre Arena Zagreb have turned to dust, with the proposed sale failing to generate any bids that were acceptable to the company. Ingra is now working with KPMG and local bank Privredna Banka Zagreb (PBZ) on a restructuring plan under which it is looking to reprogramme its short-term liabilities into longer-term debt, so as to overcome a liquidity squeeze caused by a downturn in construction contracts and asset sales. Measures undertaken to date include the sale of shares in November to fund the lay-off of around 20% of its 170 or so staff. There was little cheer for the 135 or so staff that escaped the axe either, with Ingra announcing a 20% pay cut for remaining employees in December.

Arena of failure

Yet it's the failure of the proposed sale of Arena after Ingra received only one lowball bid from a UK real estate fund that has dashed any hopes it would be able to drum up enough cash to see it through a challenging 2010.

The showpiece Arena Zagreb project, which hosted the Men's Handball world championship and concerts by the likes of Beyonce in 2009, has ultimately proved to be a millstone around Ingra's neck. It spent over €90m on developing the 20,000-capacity stadium in a public-private partnership project with the City of Zagreb and the financial support of the Croatian government. But there is little prospect of it seeing a meaningful return on its investment in the near future and the company must start making repayments on loans taken out to fund the stadium at the beginning of March. To make matters worse, Ingra has fallen out with the Arena's principal leasee, the City of Zagreb, over claims that the city has fallen behind schedule with its €7.5m a year rent payments, casting a pall over the hall's long-term future.

Following the failure of the Arena Zagreb sale, in an official announcement to the Zagreb Stock Exchange at the end of January Ingra said it was working with KPMG Croatia and PBZ on a financial restructuring plan.

In recent years the company has been an active capital markets user, issuing both equity and commercial paper. The downturn in the construction and property markets in Croatia means that it is now facing a liquidity squeeze and so is looking to term out its liabilities in the hope of being able to ride out the recession in Croatia. In recent months it has even be forced to pay suppliers with its own shares.

The coming weeks and months will prove a major test of the mettle of Ingra chief executive Igor Oppenheim, the company's largest single shareholder with a 10% stake, who will need to persuade other investors, principally commercial banks and pension funds, to keep faith with the company.

Plans on the table include the issuance of up to HRK250m of commercial paper, which will help pay off existing debts. At the start of February, the company issued €7m and HRK22m of 12-month commercial paper, which will partly redeem outstanding issues that fall due in March and May. According to Ingra, the deal attracted more than 20 investors, with mutual funds taking 41%, pension funds 33%, banks 17% and other investors 9%. The company is also looking at raising new bilateral or syndicated loans.

If risk appetite among potential investors and lenders proves insufficient, there is speculation that Ingra will be forced to turn to the government for some form of state aid. With government finances themselves looking stretched, it remains questionable to what extent the state authorities will be willing or able to help construction companies.

In a recent report, Goran Vuksic, an associate at the Institut za Javne Financije (Institute of Public Finance) in Zagreb, argues that construction companies should not receive state funds simply in order for them to able maintain property prices at levels that are unacceptably high for ordinary citizens.

As a result of its financial travails, by mid-February Ingra had seen its share price fall by 43% to HRK41 from its 12-month high of HRK75 hit in June 2009. In order to bolster the vale of its shares which are likely to form a an important source of collateral for future financings, Ingra has bought back 32,000 of its own shares in recent months.