Western Balkan governments seek to guard against Agrokor fallout

Western Balkan governments seek to guard against Agrokor fallout
By Clare Nuttall in Bucharest May 23, 2017

Governments across the countries where troubled food and retail giant Agrokor is active are taking steps to protect their economies against the impact of the debt crisis at the Croatian company. 

The problems at Agrokor put at risk tens of thousands of jobs - the group employs around 60,000 people across the region including 40,000 in Croatia - as well as the businesses of its many suppliers. In an attempt to mitigate the fallout, new legislation has been adopted in both Croatia and neighbouring Slovenia, while ministers in other countries such as Bosnia & Herzegovina are mulling similar steps. 

When it became clear that Agrokor would be unable to make upcoming debt repayments, Zagreb stepped in to appoint an emergency management team at the group, led by Ante Ramljak. The company announced on May 11 that, as of end March, Agrokor’s 19 largest subsidiaries, which include Agrokor itself as well as retailers Konzum, Tisak and frozen foods producer Ledo, had liabilities amounting to HRK40.4bn (€5.44bn). 

As the crisis unfolded, the Croatian parliament approved an emergency law on assistance to systemically important companies that cannot pay their debts. The law, which came into force on April 6, applies to companies with liabilities of more than €1bn that employ over 5,000 people. 

“The aim of this law is primarily to protect the interests of the Croatian economy, all stakeholders in the situation - workers, employees, suppliers, those who are leaning on suppliers, creditors, the company itself - in a way that would allow it a high quality and sustainable restructuring,” Prime Minister Andrej Plenkovic said ahead of the parliament vote, according to a government statement. 

While the law, dubbed “Lex Agrokor” has its critics, Hugh Owen, partner at Allen & Overy in Budapest and head of its South Eastern Europe desk, points out that such legislation is not unusual. “To a certain extent, legislation that is designed to target a small number of companies is not that uncommon, particularly where those companies are systemically important,” he says, pointing to similar steps such as Hungary’s decision to classify airline Malev as a company of strategic importance and put it into bankruptcy protection.

“One can hardly blame the Croatian government for acting. They would surely have been accused of inaction if they simply did nothing,” he says. 

One particular source of controversy, as noted by Owen, was a late amendment to the law allowing creditors that provide fresh loans to Agrokor to have priority in repayment including in possible bankruptcy proceedings. 

He points out that without “super senior rescue financing, the banks wouldn’t lend and the company would grind to a halt”. 

“The company needs working capital to keep functioning so although some people get hurt and it might not feel just to some, it’s a hard reality of restructuring situations that such super senior priorities are necessary and normal.” 

After the law was adopted, Erste, Raiffeisen and two local banks - Zagrebacka banka and Privredna banka Zagreb - granted an emergency €80mn loan to Agrokor. The group is now in talks with Sberbank, one of its main creditors, about a fresh loan as it urgently needs an injection of €400mn to support its operations. 

One of the contributors to the problems at Agrokor is the group’s aggressive expansion over the last few decades, funded by expensive debt finance. However, the company also revealed in an April 27 statement that potential irregularities have been discovered in its financial statements. The group’s eight listed subsidiaries are currently suspended from trading

This added to the pressure on Plenkovic’s government and specifically on Finance Minister Zdravko Maric, a former Agrokor executive. The breakup of Croatia’s ruling coalition was precipitated when the opposition Social Democratic Party (SDP) filed a no-confidence motion against Maric, as ministers from the Bridge of Independent Lists (Most), the junior partner of Plenkovic’s Croatian Democratic Union (HDZ) refused to commit to supporting the finance minister. Maric won the vote by a wafer-thin margin on May 4, but it’s still unclear whether Plenkovic will be able to drum up enough support from MPs to appoint replacements for the former Most ministers in his cabinet. 

The Agrokor crisis is also a hot political issue in Slovenia, where Agrokor took over local retail chain Mercator in 2014, a deal that was opposed by many ordinary Slovenians who dislike seeing former state assets fall into private hands. After Croatia, Slovenia’s economy is arguably most at risk from a collapse of the group, given the approximately 10,000 people it employs. 

In April, the Slovenian government adopted its own law - known as “Lex Mercator” - amid unconfirmed speculation that Agrokor had been diverting funds from Mercator. The law was approved by the parliament and came into force on May 6. 

The new law is intended to prevent the diversion of funds from companies defined as strategically important; Mercator is currently the only company that meets the criteria of having at least 6,000 employees and annual revenues of over €1bn. 

While similar to Lex Agrokor in some ways, the overall aim of Lex Mercator is somewhat different. 

“Whereas the Croatian law concerns the appointment of a special administrator who effectively takes over the company, the Slovenian legislation provides for the appointment of an extraordinary management board member whose sole competency and responsibility is in relation to the transactions with the majority owner,” explains Owen. “The member of the board and the extraordinary management board member jointly represent the company and adopt decisions on any transaction with the majority owner and its affiliates, so this law is more to do with the relationship between Mercator and Agrokor.”

In addition, the company is not allowed to give any loans or guarantees to the majority owner without the permission of the extraordinary manager, and all transactions with the owner must be at arms length. “Therefore it seems that this legislation is more aimed at restricting the outflow of funds/value from Mercator,” concludes Owen.

Meanwhile, the governments of other countries in the region such as Bosnia and Serbia - where Agrokor is also a major employer - have not yet taken such steps but are monitoring the situation closely. 

Officials from Bosnia, Montenegro, Serbia and Slovenia set up a joint ministerial team in response to the Agrokor crisis at a meeting in Belgrade on April 19 that was not attended by Croatia. The team will exchange information daily, and launch joint actions to preserve jobs, protect suppliers and ensure the stable operation of Agrokor Group companies, a Serbian government statement said. 

In Bosnia, MPs in the lower house of parliament called on May 10 for the government to take control of Agrokor’s local subsidiaries to protect employees and prevent capital outflows. On the same day, the foreign trade and economic relations ministry delivered a note to members of the upper house of parliament warning that thousands of jobs might be in danger and tens of millions of euros at risk as a result of the crisis.