|Pelješac Bridge is being 85% funded by the European Commission|
Croatia is hoping to get a partial guarantee from the World Bank for a bond transaction that will help it reprofile the debt of some of its state-owned enterprises (SOEs) and meet targets necessary to achieve its goal of joining the euro.
The deal would be only the second to feature a partial guarantee from the World Bank. The first was Ghana’s $1 billion 2030 international bond issue in October. That transaction was designed to help Ghana achieve targets set by the IMF as part of its aid programme. The African country has been troubled by over-indebted and poorly managed state-owned enterprises with large arrears. The bond was 40% guaranteed by the World Bank.
Now Croatia, which has a BB (stable) outlook, is in negotiations with ratings agencies to get a credit uplift from a partial World Bank guarantee. The multilateral development bank approved a loan of €22 million ($26 million) and a proposed guarantee of €350 million to Croatia for the country’s Modernization and Restructuring of the Roads Sector project in April this year.
Investment bank Lazard is working with the sovereign to structure the transaction and to optimize the debt of several of its state-owned enterprises.
Those entities, Hrvatske autoceste (HAC), Autocesta Rijeka-Zagreb (ARZ) and Hrvatske ceste (HC) have €5.2 billion in debt, all of which is guaranteed by Croatia’s government. ARZ and HAC are involved in the operation of Croatia’s highways, while HC is involved in road construction and maintenance – most notably in the construction of the ambitious, and controversial, Pelješac Bridge, connecting Croatia’s mainland with its southern region, which includes the city of Dubrovnik.
In June, the European Commission signed off on funding 85% of the cost of the project, with Croatia providing the remaining 15%. The €357 million grant will go to HC, which is expected to complete the bridge in 2022. The project has been in the works since 2007, but was halted in 2012 amid concerns by Bosnia and Herzegovina that its access to international waters will be disrupted by the project. Croatia deems the completion of the project, and the resulting territorial continuity, necessary to enter the Schengen Zone.
Croatia’s treasury hopes to sell a bond of longer than 20-year maturity, the proceeds of which will go to the SOEs, with the interest paid by the SOEs back to the sovereign. The country hopes to sell the bond this year, with enough of a guarantee to get a two-notch rating uplift. One source with knowledge of the discussions says the country is targeting an approximately €900 million transaction with around €250 million guaranteed by the World Bank.
The three SOEs’ debts total 10% of Croatia’s GDP. HC’s only form of revenue comes from the redistribution of fuel tax, meaning the government has to account for its debt on the sovereign balance sheet. The country’s debt-to-GDP ratio is 83.8% and Croatia hopes to reduce that to 75.3% by the end of 2019 as part of its efforts to exit the European Commission’s Excessive Deficit Procedure (EDP). A 60% public debt-to-GDP ratio is a condition, with some flexibility, of being a member of the euro currency union under the Stability and Growth Pact.
According to Eurostat, 12 of the 28 member states have debt-to-GDP ratios under that threshold, with the average euro area debt-to-GDP ratio at 89.2% as of 2016. Croatia, unlike many countries, includes most of the debt of its public-private partnerships, government agencies and SOEs in its sovereign debt calculations, a government official tells Euromoney.
The EC recommended Croatia’s exit from the EDP in May, as its deficit in 2016 was 0.8% of GDP – well below the 3% limit – and is expected to grow only modestly in the near future. The country has been in the EDP since 2014, one year after it joined the EU.
Croatia is no stranger to the capital markets. It sold a bond in March this year and has said it plans to sell K30 billion ($4.82 billion) more to refinance existing debt.
Lazard is believed to have classified the debts of the three entities into those for which action needs to be taken (such as refinancing), no action need be taken and those for which creditor negotiation is needed. Around 80% of Croatia’s public debt is with commercial banks, mostly domestic, while some 20% is with multilateral development banks, says the government official.
Besides optimizing the operations of the HAC, ARZ and HC, Lazard plans to address inefficiencies in the railway and electricity sectors, as well as helping the sovereign to buy control of Croatian oil company INA from Hungarian energy company MOL. Croatia’s government, which has a 45% stake, and MOL, which has a nearly 50% stake, have been arguing for years over management rights. Croatia even took MOL to court over what it alleged were corrupt practices by the Hungarian company. A later appeal at a United Nations arbitration court was turned down.
Lazard is also helping the government deal with Agrokor, the retailer that represents some 15% of Croatia’s GDP, which it had to take into administration this year.
Euromoney Country Risk has said Croatia is heading towards an investment grade rating, given the dramatic improvements in its finances. It now rates Croatia as 65th in its global risk ratings.