Partial World Bank Guarantee Could Help Raise Croatia’s Rating – Euromoney

A better debt profile of Croatian state (road) companies, as well as an increase in investment rating, could become achievable for Croatia with the help of the World Bank, should this international financial institution assist it by providing a partial guarantee on the bond it plans to issue by the end of the year, writes the British monthly Euromoney.

Croatia hopes to receive a partial guarantee from the World Bank for the bond, which would help it in the reprofiling of the debt of some Croatian state companies and in meeting the criteria necessary to achieve the goal of entering the eurozone, several sources familiar with the matter told the British financial monthly Euromoney.

This would be the second partial guarantee from the World Bank; the first time such a guarantee was issued was in October last year when Ghana issued an international 30-year bond worth one billion dollars.

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Now Croatia, with a BB rating and stable outlook, is in negotiations with rating agencies to achieve an improvement in its credit rating with the help of a partial guarantee from the World Bank, writes Euromoney.

This multilateral development bank approved a loan of 22 million euros and proposed a guarantee of 350 million euros to Croatia in April this year for the modernization and renewal of the road sector project.

Investment bank Lazard is working with the Croatian government on structuring the transaction and optimizing the debt of several companies it owns. These companies – Hrvatske autoceste (HAC), Autocesta Rijeka-Zagreb (ARZ), and Hrvatske ceste (HC) – have 5.2 billion euros in debt, which is currently fully guaranteed by the Croatian government.

Long-term Bond

The Ministry of Finance of the Republic of Croatia hopes to sell a bond with a maturity of more than 20 years, from which the raised funds would go to these state companies. Croatia hopes to sell this bond this year, with a partial guarantee from the World Bank that would be sufficient to raise the rating by two notches, writes Euromoney. A source familiar with the negotiations said that Croatia is targeting a transaction of approximately 900 million euros with about 250 million euros worth of World Bank guarantee.

The debt of the aforementioned three Croatian state companies reaches 10 percent of Croatia’s gross domestic product (GDP). HC’s exclusive source of revenue comes from the redistribution of fuel taxes, meaning that the government must record its debt in the state balance sheet. The share of Croatian public debt in GDP is 83.8 percent, and Croatia hopes to reduce it to 75.3 percent by the end of 2019. A public debt share of 60 percent in GDP, according to the Stability and Growth Pact, is one of the conditions, with certain flexibility, for entering the eurozone, the monthly reminds.

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At Lazard, the debts of the mentioned three companies have been divided into categories requiring certain actions, such as refinancing, those that do not require specific actions, and those that will need to negotiate with creditors, said a source familiar with the matter. Approximately 80 percent of Croatian public debt is owed to commercial banks, mostly domestic, while about 20 percent is owed to multilateral development banks, state officials say.

In addition to optimizing the operations of HAC, ARZ, and HC, Lazard plans to address the inefficiencies in the road and electricity sectors, as well as assist Croatia in buying out MOL’s stake in INA.

Euromoney Country Risk states that Croatia is moving towards an investment rating, given the dramatic improvements in state finances. Croatia is currently ranked 65th on the global risk rating scale, with its current rating two notches below investment grade.