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Damning Bozalek ruling could upset the whole twisted applecart for Steinhoff

Failure to pay close to R150bn plus interest to bondholders – or reach a roll-over agreement with them – will trigger liquidation. The payment is due in December.
Banners that were removed from a University of Stellenbosch sports field back in 2017 when the accounting scandal broke. Image: Waldo Swiegers/Bloomberg

It’s tempting to assume that Steinhoff’s bid to distribute €900 million (R15.2 billion) to a group of its concurrent creditors and thereby avoid a crippling legal challenge from one of them is now dead in the water.

Judge Lee Bozalek’s damning ruling last Friday would appear to make it impossible for the court to provide the necessary sanction of a Section 155 process needed to give effect to the distribution, termed a Conditional Payment Undertaking (CPU) by Steinhoff.

And if the CPU is dead then it appears, from a reading of the Bozalek ruling, that the Company Voluntary Arrangement (CVA) put in place between Steinhoff and holders of around €8.8 billion (R149.2 billion) bonds in 2018, is also at risk.

Read: Steinhoff’s R15bn settlement deal in jeopardy

Not much wriggle room

Whatever the Steinhoff board thinks about the ruling, an appeal would be problematic given the time constraints within which it is operating.

The CVA expires this coming December. That means in less than six months Steinhoff will be required to repay €8.8 billion to bondholders as well as the rolled-up interest payments of a staggering 10% per annum.

Failure to make the repayment – or reach a roll-over agreement with the bondholders – would trigger liquidation.

The thing is it’s not just the Bozalek ruling that the Steinhoff board has to navigate, there’s also the very considerable liquidation challenge brought by the founders of Tekkie Town, which is due to be heard in the next few months in Cape Town.

Read: Why former Tekkie Town owners want Steinhoff liquidated

A less determined bunch might be inclined to throw in the towel and opt for what seems to be the inevitable liquidation of this deeply troubled international retail group; a liquidation that would kill the CVA and any prospects of its roll-over.

Steinhoff’s strategy

But the Steinhoff board is nothing if not determined, and so far – ahead of a ‘considered response’ to Bozalek – it has seemed determined to continue its ‘extend and pretend’ strategy.

The best-case version of this strategy, according to CEO of Protea Capital Management Jean Pierre Verster, would likely only see the bondholders being fully repaid several years down the line.

However, there could be some clever restructurings or asset sell-offs during that time.

Verster estimates that Steinhoff’s value – largely dependent on its Pepkor and Pepco operations – would have to appreciate by around 18% a year over the next 10 years if Steinhoff ordinary shares were to have any value after paying the crippling CVA burden.

But as Verster – who stresses that he maintains a short position in Steinhoff – points out, this is not the best-case scenario for all concerned.

It is the ‘best case’ scenario for the bondholders as well as the lawyers and executives guiding the company down this path.

One bondholder’s ‘twisted’ view

For the bondholders, 10% per annum is deeply alluring.

So alluring that the CEO of one of the world’s top hedge funds, Seth Klarman of Baupost Group, gave Steinhoff special mention in a January 2020 letter to his investors.

Klarman described Steinhoff as a “twisted apple” along with the likes of Enron and Lehman.

“The business debacles [at these companies] were reflected in market price carnage, as bonds plummeted, claims proliferated, and uncertainty dominated,” he said.

Read: The scale of the Steinhoff deception

“The apples we seek out are treasured by us not for what others will think, or how popular they might become, but for the sweetness they will deliver.

“Ours are typically eating apples, the sweetness accruing to us and not to anyone else.”

Baupost is the largest of the so-called vulture funds that bought up – at a fraction of their face value – the Steinhoff bonds when they were dumped in a rush after the December 2017 reports of accounting irregularities.

The ‘sweetest apples’ scenario

In the best-case scenario those high-risk investors would not only get repaid the full face value of the bonds they purchased but an almost unbeatable 10% per annum compound interest rate between the time they signed up to the CVA and the repayment date.

Verster reckons the interest payments could add several more billion euros to the payout.

So the current bondholders, whose representatives enjoy a strong position on the Steinhoff board, have very good reason to be determined. They have much to lose.

But there are those with far less to lose …

By contrast the various parties that have launched legal challenges believe the terms of Steinhoff’s proposed CPU settlement means they have little to lose and something to gain.

So firm are they in this belief that they have come to terms with the possibility of their actions triggering liquidation.

In the wake of the Bozalek ruling it’s difficult to imagine how the bondholders’ ‘best case’ scenario has any chance of survival.

Bozalek’s ruling

Just to briefly recap the essence of that decision – because the Steinhoff board did not comply with the Companies Act requirements, as set out in Section 45 of the act, the undertaking it provided in 2019 to pay out up to €1.58 billion of the bonds and give other benefits to the bondholders has been declared void.

Steinhoff argued that it didn’t need to comply with Section 45, which requires a solvency and liquidity test, as the guarantee was not for new financial assistance but the mere reorganisation of existing financial assistance.

Bozalek thought otherwise. He deemed the 2019 arrangement to be the provision of new financial assistance to a related entity and on that basis declared the CPU to be void.

Read: Steinhoff forced to try again in effort to resolve legal claims

It’s difficult if not impossible to imagine that the judge who has to rule on Steinhoff’s Section 155 application, which deals with the distribution of €900 million to three categories of creditors, would approve a proposal that rests on a void transaction.

So will Steinhoff abandon the Section 155 application and renegotiate more even-handedly with all the creditors?

Or will it try panel beat the current situation into something that might rescue the ‘best case’ scenario?

The options

Legal experts are emphatic that the board cannot now retrospectively provide the guarantee.

“Even if the controlling shareholders, Steinhoff NV, approved such a guarantee the directors would not be able to,” one leading academic told Moneyweb.

The entire world now knows that in 2019 Steinhoff would have failed the solvency and liquidity test required by Section 45.

All of which means that if the bondholders want to protect their extremely sweet deal the Steinhoff board might have to contrive a new CPU arrangement that would address some of the grievances felt by the various categories of shareholder creditors.

This of course would mean vulture funds like Baupost having to go against their essential nature and contemplate sharing a bite of the apple.

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The law is there to protect all, not just the select few.

On face value, it seems like the judge might have erred in this particular instance. To me it sounds like the Board of Steinhoff didn’t propose any new financing, but rather a restructuring of the current debt. This would not require compliance with S45 of the Companies’ Act 71 of 2008 as amended.

It would be interesting to know if the Appeals Court would have come to the same conclusion as the judge in this case. Appealing the judgement however, will come at great additional cost to Steinhoff and I am not certain whether they have leverage to fund this.

After 45 years in the market this was another steep learning curve.

What have I learned? The market is a high risk place and has paid me handsomely over the years, but there have been times when you walk away and get on with life.

This is one of those times. (also learned a lot about this wiese chappy)

Markus was just his puppet.

Shareholders of any company are in the same position as citizens of a country. The bondholders stand first in line for cash flow and assets in case of liquidation. Bondholders have a right or a claim, while shareholders have an “option” to share in profits if available, and a share of the capital after liquidation and bondholders have been repaid. If there is a shortfall to pay bondholders after liquidation it implies that shareholders receive nothing.

If a country has a debt/GDP of 100% it becomes impossible to repay, and the country will have to pledge assets like harbours and airports as payment, or the purchasing power of the citizens will be confiscated through debasement of the currency to pay the debt.

South Africa and Steinhoff are in similar positions, more or less.

no skin in this festering pot, but hell : that vulture sounds like the sort of guy everybody would love to hold underwater.

Maybe better for all that this whole mess gets flushed

On reading the full judgement and the self-admission of Steinhoff most recent 6 moths financials, Steinhoff was bankrupt many moons ago prior to any share swap transactions referring ALL Contractual Claimants.

Secondly, based from the above the liquidation application of Steinhoff to be heard in Sept 21 can must and will be approved by the courts.

I hope the Zuma saga will trigger the incarceration of Jooste speedily!

We need to support Steinhoff, they employ thousands of people in South Africa. If all parties can agree and settle, we might see some value return in the share. Markus and his friends will get their day in court.

Court cases can take many years to get resolved(Legal fees), it will be in the best interest for everybody to settle this as soon as possible. Liquidation will not happen, and will be the worst option.

Positives are:

PEPCO is trading at over R200 and expanding,
Pepkor over R20,
Matress firm is stable and growing,
Greenlit brands also not doing badly.

Dear Willie07,

Steinhoff employs very few people. The companies in which Steinhoff owns majority shares, by fraudulently misrepresentation, i.e. Pepkor & Pepco are the companies which employ 1000’s of people and it is these companies which are independently run and damaged as well as being listed on different Exchanges.

So, the liquidation of Steinhoff will have zero impact on these companies and their employees.


Your understand or lack thereof is staggering. Ever heard of head office costs? That is no longer shared based on your short sighted outcome.

Each of these companies will now have to foot that.

your top layer bureaucratic global scamming management team did what here?

by the way how are those SHF shares of yours doing?


I do not agree with you. Steinhoff is the majority share holder in Pepco and Pepkor. Both companies will survive, but it will have a massive impact on then financially. With liquidation comes restructuring, and that will lead to job losses.

Thanks you Christo – hope GT and Enrico are well?

Helpful article – thanks Anne.

End of comments.





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