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Inside Out: Don Don Debt Refinancing

Inside Out: Don Don Debt Refinancing

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The Deal: In July, CEE Legal Matters reported that the Slovenian office of ODI Law had represented AIK Banka and SKB Banka (Societe Generale’s Slovenian entity), on the EUR 36 million cross-border syndicated debt refinancing of the Don Don Group – a regional industrial bakers with plants in Slovenia, Croatia, Serbia, Bosnia and Herzegovina, Montenegro, and Bulgaria. Selih & Partnerji advised Don Don on the deal.

The Players:

  •  Counsel for AIK Banka and SKB Banka: Suzana Boncina Jamsek, Partner, ODI Law
  •  Counsel for Don Don Group: Mia Kalas, Partner, Selih & Partnerji

CEELM: Suzana, how did you and ODI Law become involved with AIK Banka and Societe Generale on this matter? Why and when were you selected as external counsel initially?  

Suzana: ODI had assisted the bank syndicate (including Societe Generale’s Slovenian subsidiary, SKB, and the EBRD)) on the financing of the acquisition of Pekarna Grosuplje by Don Don back in 2015. We also worked with SKB on other occasions, and as the deadline for this transaction was rather tight, we were selected very quickly after we provided our proposal, following the RfP.  

CEELM: How about you, Mia? How did you and Selih & Partnerji become involved with the Don Don Group on this matter? 

Mia: We have quite a history of advising the Don Don group. We first met in 2015 when they appointed us as their lead legal counsel in negotiating a syndicated multi-purpose facility used, among other things, to acquire one of the largest Slovenian bakeries. The greatest challenge of that initial financing was to align the quite different positions of the six lenders, and to overcome legal issues in several jurisdictions in a relatively short period of time to meet the closing deadline for the acquisition. We built a trustful relationship with the management of Don Don in that initial project, so our engagement in this refinancing of the 2015 facility was in a way a logical continuation of our mandate. 

CEELM: What, exactly, was the initial mandate when you were retained for this project, at the very beginning? 

Suzana: From the start, ODI was hired to draft collateral agreements in Slovenia, Croatia, and Serbia, and to draft corresponding legal opinions. The creditors initially planned to draft the facility agreements themselves, but soon after the terms of the transaction were agreed upon among the parties they decided that it would be much more efficient to let us draft the entire contractual documentation.

Mia: The client had been periodically turning to us on various topics deriving from the 2015 facility, so it is a bit difficult to exactly define the initial mandate or the moment we were first engaged. I understood quite early that the covenants of the existing facility became obstructive to the client’s opportunities to grow its business, and that they were therefore considering refinancing. I would say the first part of our new mandate crystallized at the end of 2018, when we advised the client how and when to notify the existing lenders on the intention to refinance, predominantly with the view of reducing the prepayment fee as much as possible, and also considering the existing lender’s right of first offer. In spring 2019, the client negotiated the main commercial terms with the new lenders, and then asked us to assist in all legal work on the financing documents in mid-May 2019. All documentation was finalized within about a month, and the Slovenian conditions precedent for disbursement completed in June 2019. 

CEELM: Who were the members of your teams, and what were their individual responsibilities?

Suzana: The transaction was led by me, in Slovenia, and Partners Branko Ilic in Croatia and Tamara Curovic and Milos Curovic in Serbia. The team included also Senior Associate Masa Drkusic and Associate Neza Grasselli.

Mia: I led our team and assisted in negotiations of the loan documentation with the banks, commented on the security documents, and supported Don Don at the notary meeting for establishment of collateral. Our Senior Associate Nika Bosnic commented on certain types of collateral, assisted in respect of the existing creditors’ consents to establishment of collateral, and worked on the list of movable properties to be pledged. While on the outside such a list appears to be a technical task, I have in past practice actually seen it delay a deal as all data must match quite strict requirements, so it is important that it is composed flawlessly. In this deal very many movables needed to be pledged, so Nika’s eye for detail was invaluable.   

CEELM: How was the deal structured, why was it structured in that way, and what was your role in helping reach those arrangements? 

Suzana: Financing involved two creditors and two borrowers and involved various jurisdictions. Due to regulatory restrictions under Serbian law the facility agreement was broken into several separate agreements in order to expedite the proceedings before the Serbian regulators. Namely, both parties were determined to conclude the deal before summer, which meant that all documentation needed to be aligned within a month. The matter also included a comprehensive legal due diligence of assets to be collateralized and negotiations with the insurance company that insured the claims.

Mia: I am afraid I cannot provide much detail due to confidentiality restrictions. What I can disclose, with the client’s consent, is the following. Unlike the preceding syndicated deal with one LMA-standard agreement (monitoring and exercising of which proved to be quite demanding and rigid), this transaction entailed two syndicated loan agreements by two Slovenian banks, one for financing of the Slovenian part of Don Don’s group operations and one for a revolving facility extended to the Serbian Don Don entity. This allowed for more flexibility and easier adaptation to jurisdiction-specific restrictions such as the Serbian forex regulations. Further interactions with the lenders should be also be more straightforward compared to aligning with six different banks in the past. Our role was particularly to make sure that, from the legal perspective, all relevant steps of the process were timely agreed-upon and aligned, so that the disbursement could take place at the planned time. 

CEELM: What’s the current status of the deal? 

Suzana: The deal was concluded before summer, the funds were drawn and the collateral established.

Mia: All conditions precedent for utilization have been completed and the term loans have been disbursed.  

CEELM: What was the most challenging or frustrating part of the process?

Suzana: The extremely tight timeframe and changing regulatory requirements in Serbia.

Mia: As before, unfortunately I cannot provide much detail. One particularly frustrating moment for the client was when, quite late in the process, they learned that the agent of the pre-existing financing facility was – due to the silence of one of the syndicate banks – reluctant to provide a certain consent which we absolutely needed to move forward. This was an unprecedented complication, and the time for direct negotiation with the silent bank had run out, so a different solution was needed fast. The client was relieved when the agent accepted our legal interpretation that, while the necessary consent was an “all lenders’ matter,” the deadline for the silent bank to respond had passed, and thus the need to obtain its explicit consent had fallen away. 

CEELM: Was there any part of the process that was unusually or unexpectedly smooth/easy?

Suzana: The debtor and their legal counsel were very cooperative and easy to work with.

Mia: In my view, generally, the entire process was efficient and smooth, and we worked well with the ODI team on the other side. I was impressed by the quickness of the notary meeting for establishment of collateral, and the notary was really well prepared.

CEELM: Did the final result match your initial mandate, or did it change/transform somehow from what was initially anticipated? 

Suzana: It changed to the extent that we took over the entire drafting of the documentation.

Mia: Generally, the final result matched my initial expectation that our role would evolve as the project was continuing. I did, however, not expect that the loan agreements would be so complex, as initially they were supposed to be based on shorter templates of local banks.  

CEELM: Suzana, what specific individuals at AIK Banka and Societe Generale directed you, and how did you interact with them?

Suzana: We worked with Roman Varga, Deputy Head of Legal at Gorenjska Banka (the Slovenian subsidiary of AIK Banka) and Maja Mencinger, Corporate Relationship Manager from Key Accounts Coverage/Large and International at SKB (the Slovenian subsidiary of Societe Generale). The working relationship with our client was pleasant and constructive.  We met in person a few times and sat together until we solved all problematic issues.  

Mia: Our main point of contact at Don Don in this project was Director Alenka Mozetic Zavrl. She led the negotiations from a strategic perspective. Don Don’s CFO Marusa Tratnjek was responsible for financial details, such as preparing the required financial information for the banks and the proper calculation of financial covenants. We met several times for preparation, and regularly spoke on the phone. Our cooperation was smooth, as they have a well-developed strategy and clearly know their commercial preferences, so they are very efficient in making decisions. They are also very pleasant on the personal side, so I enjoy working with them a lot.

Exactly the same goes for the team of KJK Fund II – a minority shareholder in Don Don – led by the fund manager Kustaa Aima. We have been providing legal support for their Slovenian investments since 2014, and also advised them in this transaction, predominantly on corporate law matters.

CEELM: How would you describe the working relationship with ODI Law on the deal?

Suzana: Our relationship with Selih & Partners was professional and constructive.  

Mia: I am happy that, as always, our cooperation with ODI Law was constructive and efficient. We had a few differences of opinions on certain topics as is normal in any deal, but as both of our teams are responsive and ready to listen to arguments of the other side, it is never too difficult to find a workable compromise.

We had the luxury that the core teams of both sides are physically located in Slovenia, therefore the most important part of the loans negotiations were meetings in person, with representatives of our clients present as well. In my experience, best progress is usually achieved in face-to-face meetings. In this deal, all sides met in person twice, the second time in an intense all-day drafting session. Security documents which are more standard documents were aligned by email and by phone.  

The entire process, from my first review of the draft loan agreement, to the completion of Slovenian conditions for disbursement, took less than six weeks. The major part of the commercial negotiations was completed before we joined the project, but in my view less than six weeks is still very fast. I believe the disbursement was actually completed a bit later due to the need to obtain certain regulatory approvals in Serbia, but this part was out of our and our client’s hands. 

CEELM: How would you describe the significance of the deal to Slovenia and/or CEE in general? 

Suzana: The Don Don Group is one of the biggest business groups in Slovenia, with a yearly turnover of approximately EUR 100 million, and this financing was one of the biggest cross-border financing deals in Slovenia in 2019. Furthermore, the entire transaction was concluded in record time, especially taking into account the regulatory requirements in Serbia.

Mia: Don Don is one of the leading industrial bakeries in the SEE region. The regular challenges of Don Don’s business include the need to follow consumer preferences, implement the latest techniques, and deal with fluctuating wheat prices. However, Don Don also faces certain very specific challenges related to the historical position of the Grosuplje bakery in the Slovenian market.

The bakery business is tough and the branch has consolidated significantly in the last five years, so it is often “expand or be eaten.” On the other hand, I have seen that financing banks are usually worried about (excessively) fast growth of the borrowers. If they address this concern rigidly, they will inevitably face a clash with the borrowers who, in the first year or two after utilization, are not ready to ignore further business expansion opportunities over the restrictions in their loan agreements.

In my view the most important general message from this deal is that with good will, careful planning, and appropriate effort, a medium-sized enterprise like the Don Don group can achieve refinancing under commercially better and less restrictive terms, which has not always been easy for medium sized enterprises of this type. I do believe that this new financing package will help Don Don further strengthen its position in the region, and hopefully also the consumers will get a fair share benefit of this. For example, I have just recently tried their brand new LCHF bread and can only say that it is fantastic. (I hope this does not sound too much like advertising, but it is completely true).

This Article was originally published in Issue 6.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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