April 8, 2011 11:33 am

Balls up: Czech lottery ruled insolvent

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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Czech lottery group Sazka’s provisional creditor committee convened for the first time this week since the company was declared insolvent, Debtwire reports. Five local lenders met at Sazka’s headquarters to review documents and also sat down with Josef Cupka, the company’s insolvency administrator, several sources close to the situation said.

Temperatures are running high and Sazka’s creditors – among them holders of EUR 199m in defaulted Eurobonds – are understandably nervous. Prague’s municipal court ruled Sazka insolvent on 29 March, but that prompted affiliate Bestsport, which owns the city’s O2-sponsored concert arena, to file for insolvency too. Sazka has a tripartite ownership structure that will complicate legal proceedings, according to several Prague-based lawyers, and the O2 Arena was supposedly the choice asset in the Eurobond’s security package.

Complicated is understating Sazka’s case. Sazka issued EUR 215m of 15-year bonds in 2006 to fund construction of the multi-purpose arena. It kept up with interest and amortisation payments until January this year when it failed to reimburse EUR 4m within a five-day grace period.

The venue that became the O2 Arena is owned by Bestsport, and Bestsport is owned by a civic association called OSZO that acts as a co-obligor on the bond. OSZO owns the land underneath the arena and Sazka’s shareholders own OSZO.

Sazka sent cash to OSZO that was then transferred to Bestsport as a lease payment, and Bestsport would remit the money back to Sazka as a credit repayment.

That meant when Sazka was declared officially insolvent on 29 March, Bestsport had to file for insolvency because its only flow of income had dried up, said two sources close to the situation.

Bestsport listed in its court filing overdue liabilities to five companies totalling CZK 457.3m (EUR 18.7m). The debt stems from bills of exchange presented to Bestsport between December and March.
The company owes CZK 22.5m to the Czech branch of Italian banking group UniCredit; CZK 25m to BAWAG, an Austria-based bank; CZK 8m to NLB Factoring, part of Nova Ljubljanska banka; CZK 154m to Sidereus, a Cyprus-registered vehicle controlled by Czech businessman Radovan Vitek; and CZK 247m to ETO, a Prague-based company also controlled by Vitek. Bestsport disputes most of its debt to ETO, the company noted in filings.

Keep calm and carry on

The chairman of the court-appointed creditor committee, Josef Novotny, told Debtwire before this week’s meetings that Sazka’s assets will not cover its debt. The committee has held no direct talks with Sazka shareholders and will route communications through Aleš Hušák, the chairman of the board, Novotny said.

If creditors decide Sazka can be re-organised without going into bankruptcy, the company would be given 120 days to draft a plan that Josef Cupka would be expected to execute.
But the insolvency process is not going smoothly.



Sazka is owned by various sporting and civic associations, five of which recently opposed Hušák’s mandate to speak to the creditor committee on their behalf. One association head, Roman Jecminek, one of Hušák’s most voluble critics, was removed from his position as Sazka’s deputy general director on 31 March.

Sazka wants Josef Cupka removed as well. It alleged in court documents filed this week that the insolvency administrator could not be impartial because of his work on another controversial case involving Czech investment group KKCG. KKCG, which is controlled by Czech businessman Karel Komarek, has pursued Sazka aggressively through the Prague municipal court this year.

Cupka, who has already had his appointment terminated once by the Prague High Court at Sazka’s urging, said he remains focused on preparations for an interim creditor committee meeting on 26 May.

Meanwhile, Sazka is attracting fire from senior politicians. The Czech education minister, Josef Dobeš, has publicly criticised Aleš Hušák in a manner Sazka has labelled unbefitting of a “civilized country”.

Temperatures are running so high partly because Sazka is such a well-known company in the Czech Republic.
It was set up in 1956 and has run its Sportka lottery since April 1957, raising over CZK 27bn (EUR 1.1bn) for good causes and paying out CZK 93bn in prize money, according to its 2009 annual report.

The civic associations that comprise Sazka’s current shareholders also have an estimated 2.5 million members, or roughly one quarter of the Czech Republic’s population. And several hundred businesses with lottery terminals had to put down a deposit with Sazka, typically worth EUR 3,500-EUR 5,000. They could have to seek redress via the courts and several such claims have already been logged with the Czech insolvency register.

So rather than playing out in an obscure courtroom with an audience of local bank lenders and trade creditors, this insolvency case is a very public affair.

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