Trouble ahead for Croatia's local debt market

By bne IntelliNews December 1, 2009

Guy Norton in Zagreb -

International investors may have recently demonstrated their faith in Croatia's long-term economic prospects by buying $1.5bn worth of 10-year sovereign Eurobonds in November. But in the local Croatian debt market there are worrying signs that recessionary economic conditions are severely affecting Croatian corporates ability to repay debt.

Already a number of firms have admitted that they are having difficulties repaying commercial paper or bond debt. Among those companies strapped for cash are computer and electronics retailer HG Spot, clothing and toy retailer Magma, construction company Zagreb-Montaza and medical equipment supplier Hospitalija trgovina.

Local Croatian media has speculated that HG Spot may become the subject of a takeover bid after it failed to redeem HRK55m worth of commercial paper due to liquidity problems prompted by a sharp drop in consumer spending, which has fallen by almost 13% this year. As a result, in the first half of 2009, HG Spot reported a HRK18m loss. Croatia's biggest IT company M San Group and German retail chain Mediamarkt are viewed as potential buyers.

Meanwhile, Magma has admitted that is has approached investors with regard to restructuring two commercial paper issues totalling HRK120m that fall due in June and March 2010. Magma's creditors include including Raiffeisen Group's mandatory pension fund, insurer Croatia Osiguranje and lenders Splitska banka and Zagrebacka banka among others.

Separately, construction company Zagreb-Montaza's chief executive officer, Vlado Covic, has said that the firm is looking to restructure HRK30m of commercial paper, which falls due in December. Covic says he is currently consulting with principal creditor Zagrebacka banka and other investors on possible refinancing solutions. The construction sector in Croatia has shrunk by over 10% this year due to cutbacks in both public and private sector spending.

Finally, medical equipment supplier Hospitalija trgovina has already initiated talks about refinancing bonds worth HRK75m. Hospitalija's majority owner with a 51% stake is Croatian alternative asset manager Quaestus Private Equity, headed by former finance minister Borislav Skegro.

The repayment problems faced by a growing number of corporates has led to a sharp drop in trading volumes, with corporate debt turnover on the Zagreb Stock Exchange trading slumping by 99.4% in October to just HRK212,000.

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