Moody’s: Endorsement of Croatian Agrokor’s debt settlement credit positive for sovereign

The approval of the debt settlement agreement for the country’s largest food and retail conglomerate Agrokor on Jul 4 is credit positive for Croatia (Ba2 stable) as it eliminates the risk of a messy restructuring and the adverse effects of a prolonged bankruptcy on the economy given Agrokor’s size and importance as employer of 2.5% of the country’s workforce, Moody’s said in its Thursday’s Credit Outlook. The agency noted that the debt settlement deal approval in line with the legal deadline supported its baseline scenario that the effect of the Agrokor’s crisis on the economy via worsening sentiments and confidence would be limited, adding that it continues to expect the economy to expand by 2.7% this year after evidently the problems with the group had limited impact on both GDP growth and unemployment rate. Moreover, the solution to the crisis has reduced the risk of marked adverse impact on tax revenues, Moody’s said. The agency believes that the Agrokor settlement reduces the potential further threats to the political stability given the narrow majority of the HDZ-led ruling coalition and would prevent the case to be further distraction for the cabinet from its policy agenda. And yet, Moody’s said, despite the above, the country’s credit profile will remain prone to any future restructuring of Agrokor’s sizable operations under its new creditor owners resulting from a cut in investment on part of large number of Agrokor companies. The agency sees the biggest credit risk for the sovereign stemming from the potential material job losses. Note that Moody’s has not updated its sovereign rating on Croatia since March 2017 when it changed the outlook to stable from negative – given the above assessment, we may expect the agency to improve the outlook on the rating to positive during the next credit rating update scheduled for Aug 17.

Note that last week Fitch maintained Croatia’s sovereign rating at BB+ on the back of projections for stable GDP growth and potential for further reduction in public debt to GDP ratio and raised its outlook to positive from stable on the back of projections for budget surplus this year. With regard to Agrokor, Fitch assessed that the economy and banking sector have remained resilient to the Agrokor crisis with the banking sector remaining profitable despite the large provisioning against Agrokor-related exposures. The agency also assessed that the government coalition has remained resilient despite the political fallout after the e-mail scandal.

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