The Extraordinary Administration of Agrokor d.d.
By: Tom Bannister, Akin Gump Strauss Hauer & Feld LLP
The “Implementation Commencement Date” pursuant to Agrokor d.d.’s (Agrokor) Settlement Plan occurred on 1 April 2019, and with it the business, assets and operations of the Agrokor group (the group) transferred to a new creditor-owned group, the Fortenova group. This marked the effective restructuring of a group with c.€6.7 billion of debt, within two years of the first ever appointment of an “Extraordinary Administrator” in the Republic of Croatia. This article looks at the background to the Extraordinary Administration, the parties involved in the successful negotiation of a Settlement Plan, and the challenges that faced those parties throughout the process.
Background to the Extraordinary Administration
The group’s main operating activities are in agriculture, and food and drink production, distribution and sales (in both retail and wholesale) in Croatia and other Balkan states. Founded in the late 1970s by Ivica Todorić, the group expanded into a business that, by 2016 (the year prior to the commencement of the Extraordinary Administration procedure), had annual revenues of over €5 billion (representing 11 per cent. of the GDP of Croatia) and employed over 50,000 people.
In 2016, the group’s liquidity position became increasingly restricted following a fall in revenues and a rising cost of capital. Agrokor undertook a refinancing exercise in the final quarter of 2016, but that exercise was ultimately unsuccessful. While Agrokor raised an additional €100 million in bank debt in February 2017, this was insufficient to meet the funding needs of the group. By this time, the liabilities of the group stood at €6.7 billion. These liabilities were owed to a diverse creditor group that included international and regional financial institutions (through both note and bank debt), and roughly 6,000 trade and other non-financial institution creditors.
The Extraordinary Administrator
The “Law on the Procedure of Extraordinary Administration in Companies of Systemic Importance for the Republic of Croatia” (the EA Act) was drafted and implemented by the Croatian Parliament in the face of an impending liquidity and balance sheet crisis within the group. The EA Act introduced a new “Extraordinary Administration” procedure (the EA procedure) into Croatian bankruptcy law. The EA Act came into effect on 6 April 2017 and Agrokor filed for the appointment of an Extraordinary Administrator on 7 April 2017. Ante Ramljak was appointed as Extraordinary Administrator of Agrokor and its affiliated and controlled companies (together, the EA group) on 10 April 2017, and was later succeeded by Fabris Perusko (as Extraordinary Administrator) and Irena Weber (as deputy Extraordinary Administrator) on 28 February 2018.
The stated purpose of the EA procedure is to protect the sustainability of operations of companies of systemic importance for Croatia which, with its operations (individually or together with its controlled or affiliated companies), affect the entire economic, social and financial stability of Croatia. The EA procedure was designed to provide a fast and effective preventive restructuring procedure to secure liquidity, sustainability and stability of the business operations of the affected company. This is achieved by the Extraordinary Administrator formulating a settlement plan or agreement for the satisfaction of creditors’ claims (a Settlement Plan), with such Settlement Plan then put to the Creditors Committee (see further below) and creditors for approval. The EA procedure also protects the affected company during the process with a stay that prohibits the institution of liquidation or bankruptcy proceedings, and the bringing or conducting of civil or enforcement proceedings, against the company and its controlled and affiliated companies (other than employment claims).
Representation of the Creditors in the EA procedure – the Creditors’ Committee
The EA Act provides for the representation of creditors in the EA procedure in the form of a creditors’ committee (the Creditors’ Committee). A provisional Creditors’ Committee was appointed by a decision of the Commercial Court of Zagreb (the Court) on 13 April 2017 to represent each class of the group’s creditors in the EA procedure. The Creditors’ Committee members were Knighthead Capital Management, LLC (representing Agrokor’s noteholders), Sberbank of Russia (representing unsecured creditors), Zagrebačka Banka d.d. (representing secured creditors), KRAŠ prehrambena industrija d.d. (representing large suppliers) and Mr. Toni Raič (owner of craft “Stočarstvo Raič za uzgoj goveda”, representing small suppliers).
The Creditors’ Committee has the right to be informed about the condition of the company (and its controlled and affiliated companies), to participate on behalf of the creditors in the preparation of a Settlement Plan and to approve the final form of the Settlement Plan.
As discussed further below, the Creditors’ Committee and the interests of the wider creditor group played a key role in the EA procedure and the negotiation of the Settlement Plan.
The EA Act permits the incurrence of new debt by the Extraordinary Administrator in priority to other claims (save for claims of employees or former employees), provided the financing is approved by the Creditors’ Committee and is necessary for the reduction of systemic risk, the continuation of business activities, or concerns the settlement of claims from ordinary operations.
Shortly following the appointment of the Extraordinary Administrator, Agrokor entered into an €80 million loan agreement with Zagrebačka Banka d.d., Erste & Steiermärkische bank d.d. and Raiffeisenbank Austria d.d. to bridge an immediate funding need. This emergency funding was later refinanced as part of a €1,060 million super priority term loan facility (the SPFA), which was approved by the Creditors’ Committee on 8 June 2017. Under the SPFA, €480 million was provided to the group as new money to stabilise the liquidity of the group, to make payments to certain suppliers in respect of their pre-petition trade claims and to ensure continued supply to the group. The SPFA also provided for a “roll-up” refinancing of participating lenders’ pre-petition claims.
Challenges for the negotiation of a Settlement Plan
The Agrokor restructuring is of great significance to Croatia. It was the first time the EA procedure had been used, while the importance of the group to the Croatian economy led to significant and intense media attention and political pressure throughout the restructuring.
The restructuring was highly contentious. In the Croatian courts, creditors brought challenges to the validity of other creditors’ claims in the EA procedure, bringing uncertainty to the eligibility of those creditors to vote and receive their settlement consideration in respect of those challenged claims. Challenges were also brought outside of Croatia, including to the Extraordinary Administrator’s applications for recognition of the EA procedure. This litigation, alongside a lack of direct legal precedent for the EA procedure in Croatia, brought with it real and ongoing uncertainty as to the outcome of the EA procedure.
The Settlement Plan had to represent the diverse interests of the relevant stakeholders to stand a chance of success. Common ground needed to be found between the international and regional financial institutions, the trade creditor representatives, the representatives of the SPFA group, and the Extraordinary Administrator and management, to provide a viable restructuring solution for the group.
Against this backdrop, the Extraordinary Administrator and Creditors’ Committee had very limited time to negotiate the Settlement Plan. The statutory timeframe provided a maximum of 15 months to negotiate and propose a Settlement Plan outlining the terms of a proposed restructuring of the group. A failure to meet this deadline would have resulted in the bankruptcy and liquidation of the group. This time pressure was supported by the maturity date of the SPFA, which was originally tied to the earlier of the confirmation of a Settlement Plan, the date falling 15 months after the opening of the EA procedure, or the opening of insolvency proceedings under Croatian bankruptcy law.
The Approved Settlement Plan
The objective of the approved Settlement Plan was to transfer the assets of the group to the new Fortenova group, owned by the Impaired Creditors of the group. The key elements of the Settlement Plan (as it relates to the transfer of the group to the Fortenova group, and the treatment of creditors’ claims against the group) are outlined below.
Treatment of group companies
The Settlement Plan divided the group into the following categories, on the basis of a diligence and valuation exercise of the group’s assets and liabilities. This classification determined the method of how each group company (or the assets thereof) would transfer to the Fortenova group.
- Agrokor and “Non-Viable EA Croatian Subsidiaries”: Croatian companies in the EA group that were classified as insolvent by the valuation exercise. The assets of these companies transferred to newly incorporated operating subsidiaries in the Fortenova group by a “business unit” transfer.
- “Viable EA Croatian Subsidiaries”: Croatian companies in the EA group, classified as solvent by the valuation exercise. These companies were transferred to the Fortenova group by share transfer.
- “Non-EA Croatian Subsidiaries”: Croatian companies that were not subject to the EA procedure (for example, because Agrokor’s ownership interest in that company was not sufficient to constitute a controlled or affiliate company under the EA Act) and therefore sat outside the EA group. These companies were transferred to the Fortenova group by share transfer.
- “Foreign Subsidiaries”: non-Croatian companies that were not subject to EA procedure and therefore sat outside the EA group. These companies were transferred to the Fortenova group by share transfer, other than those companies that remained in the group following the Implementation Commencement Date in accordance with the terms of the Settlement Plan.
Treatment of creditor claims recognised in the EA procedure
Creditors’ claims against the group and recognised in the EA procedure were treated in accordance with the category assigned to the group company that was liable for that claim:
- Claims against Agrokor and Non-Viable EA Croatian Subsidiaries were categorised as “Impaired Claims”. An entity priority model was used to attribute a settlement recovery value to each Impaired Claim:
a) Impaired Claims with a settlement recovery of over HRK40,000 were assigned to the Fortenova group in exchange for stapled “New Instruments” issued by the newly incorporated holding structure of the Fortenova group in the Netherlands. The New Instruments consist of (1) equity (in the form of depositary receipts issued by a Stichting Administratiekantoorin in respect of shares issued by a Dutch BV) and (2) convertible bonds, which convert to depositary receipts in certain circumstances. On the Implementation Commencement Date, the creditors that held these Impaired Claims became the ultimate equity holders of the Fortenova group.
b) Impaired Claims with a settlement recovery of up to HRK40,000 were cashed out, to help ease the administrative burden on the Fortenova group by reducing the number (by thousands) of smaller equity holders.
c) Secured Impaired Claims were reinstated in the Fortenova group up to the value of the secured asset on amended repayment terms. Any claim amount in excess of the value of the secured asset was treated in accordance with paragraph a) above.
- Claims against Viable EA Croatian Subsidiaries, Non-EA Croatian Subsidiaries and Foreign Subsidiaries were reinstated in the Fortenova Group on amended repayment terms.
While the Extraordinary Administration of Agrokor was a first for Croatia and faced many significant challenges, it successfully drew on a number of internationally recognised tools and standards in the restructuring industry. Notably, the EA procedure shows the importance of involving a representative creditor body (alongside specialised advisers) from an early stage to gain credibility and to gather support for the restructuring, and the continued use of debt-for-equity swaps as a useful tool for reducing leverage.
 The EA Act provides that a Settlement Plan is deemed adopted if either (1) a simple majority of all creditors vote in favour of it and if, in each category of creditors, the sum of all claims of creditors who voted for the Settlement Plan exceeds the sum of claims of the creditors who voted against the Settlement Plan, or (2) exceptionally, if the total sum of claims of all creditors who voted for the Settlement Plan amounts to at least two thirds of total claims.
 The author notes that the permanent Creditors’ Committee, which the EA Act envisages will be elected by creditors to replace the provisional Creditors’ Committee during the course of the EA procedure, has not been formed in the Extraordinary Administration of Agrokor. The provisional Creditors’ Committee has the same rights, powers and obligations as the permanent Creditors’ Committee, and assumes and performs the functions of the permanent Creditors’ Committee until such time as that committee is formed.
 Including a 3 month extension with Court approval.
 The author notes that this summary is not, and is not intended to be, a comprehensive summary of all elements of the Settlement Plan.
 While the EA procedure consolidated the EA group (as the Extraordinary Administrator was appointed over Agrokor and each of its controlled and affiliated companies in Croatia), recoveries under the Settlement Plan were determined on a claim-by-claim and entity-by-entity basis.
 The assets of the Agrokor group were transferred to the Fortenova group in partial satisfaction of the assigned Impaired Claims that, as a result of that assignment, each EA group company owed to the Fortenova group.