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Steinhoff’s a black box too big to ignore for vulture investors

Hedge funds pile in, betting there’s still value there. What happened to $5 billion in cash is still to be answered.

Steinhoff International Holdings may look like a non-starter for most investors: its former chief executive is under investigation for fraud and the new managers still can’t explain what went wrong. Then there’s the matter of what happened to $5 billion in cash.

Yet buyers have piled in.

Hedge funds now hold most of Steinhoff’s 3.5 billion euros ($4.3 billion) of bonds and more than 1.5 billion euros of bank loans and private debt, according to four people familiar with the situation who asked not to be identified because the matter is private.

Their bet: a global retailer with businesses on four continents must have enough assets to offset losses they still don’t know about. What’s more, such fat targets don’t come around often enough for distressed-debt specialists to let Steinhoff go without taking a bite.

“If you are a big distressed-debt fund, then you must buy it, even if it’s little more than a blind punt,” Louis Gargour, owner of London-based credit fund LNG Capital, who says Steinhoff’s finances were too opaque and complex for him to touch. “There are few opportunities as big as Steinhoff out there.”

Steinhoff cratered Dec. 6 after acknowledging financial irregularities. Its stock plunged more than 90% and in the aftermath the billionaire Christo Wiese quit as chairman and authorities in its home base of South Africa undertook an investigation.

Three months on, even creditors who signed a non-disclosure agreement with the company haven’t obtained material information over the nature of the accounting issues, people familiar with the matter said. In a Jan. 26 meeting in London, they were told to wait for PricewaterhouseCoopers’ forensic analysis, they said. While the company can’t say when the investigation will be over, it will have to come before more than 1 billion euros of loans come due in August, analysts say.

The problems appeared to be concentrated in the central European business and resulted in an overstatement of assets, revenue, and profit figures, stretching back for years, the company said on Feb. 28. The PwC investigation is digging deeper into off-balance sheet structures and transactions with related parties.

Even as investigations geared up, investors were pawing over Steinhoff’s damaged securities.

Bondholders, which included the European Central Bank, took losses of as much as 50% to unload paper in December that just days earlier was trading near face value, according to data compiled by Bloomberg.

Banks and private debt holders including Commerzbank AG and Natixis SA followed in January, offloading loans at discounts of between 20 and 35%. US banks took losses of $1 billion on Steinhoff in the fourth quarter alone, mostly related to Wiese’s margin loans.

In a report published on Dec. 6, short-seller Viceroy Research alleged that Steinhoff’s holding company was hiding losses in entities owned by associates of former CEO Markus Jooste. Viceroy’s analysis concluded that Steinhoff’s earnings may be at least 1 billion euros lower after adjustments, wiping out most of the company’s expected profits.

“It is possible this is just the tip of the iceberg,” Viceroy said in the report.

The dealings between Steinhoff’s units and non-related parties are often blurred.

Take Alvaglen Estates Limited, a Bahamas-based subsidiary of Steinhoff’s real estate arm, which owns properties in the UK. At least two of Alvaglen’s assets in the UK are managed by Formal Investments Limited of the British Virgin Islands, according to Land Registry records. Steinhoff units operate out of warehouses that appeared in Formal’s portfolio, which was available on its website until last week.

Formal’s chairman is Malcolm King, who is also a family friend of Jooste and a director of the company that manages a wine estate in Stellenbosch formerly owned by Wiese, according to South African newspapers and records. Malcolm King didn’t return emails and phone calls through Formal.

Steinhoff said in an email to Bloomberg News that Formal manages certain Alvaglen properties in the U.K. but “to the best of our knowledge, Steinhoff has no other ongoing business relationships with Formal or Malcolm King.”

In at least one case, the complex structure of Steinhoff could play in favor of creditors.

Creditors including Attestor Capital, Centerbridge Partners, Farallon Capital Management, Silver Point Capital, and York Capital Management bought a large portion of 1.6 billion euros of convertible bonds due in 2021 and 2022. Bond documents show the notes are guaranteed by a predecessor of Steinhoff’s parent company, a unit now called Steinhoff International Holdings Proprietary Limited, SIHPL, which management defined as a “shell company” in a Dec. 19 presentation.

That “shell company” is owed billions by the profitable South African division. The company confirmed in a presentation published on Feb. 23 that SIHPL has a loan claim worth R24.6 billion ($2.1 billion) against the South African part of the Steinhoff group. The price of 1.1 billion euros of bonds due August 2022 spiked 10 cents on the euro to about 75 cents on the next trading day, according to data compiled by Bloomberg.

Representatives at Silver Point and York declined to comment. Officials at Attestor, Centerbridge, and Farallon didn’t return emails and calls seeking comment.

Others entangled in the complex web may not fare as well. Take the 4.8 billion euros of loans and bonds issued by Steinhoff Europe, the holding unit of operating divisions in Europe. The company has several sub-holdings, some of which booked loans worth billions that are difficult to trace. Austria-registered Genesis Investment Holding GmbH has 2.2 billion euros of liabilities to unspecified affiliates. Lower down the chain, AIH Investment Holdings AG reported 1.4 billion euros of loans to affiliates and 356 million euros of receivables in 2016.

One of the crucial unknowns is the status of Steinhoff’s cash holdings. The retailer reported 3.1 billion euros in cash as late as March 2017. It also raised $1.2 billion in the September initial public offering of its South African arm. In December, when management said that investors shouldn’t rely on its old financial reports, it didn’t say how much money was in its coffers.

Steinhoff then raised credit lines of about $700 million for units in the UK, US, and France from Davidson Kempner Capital Management, Barclays Plc, and Tikehau Capital SCA. Even still, “work remains to be done” to ensure Steinhoff’s businesses have the necessary funding, management said on Feb. 28.

“Steinhoff said they had billions in cash last year, and raised more after the latest report, but still went out to raise new money to keep the company afloat,” said Anthony Giret, a credit analyst at SpreadResearch in France. “The company must answer very substantial questions before we have an idea of how much money creditors could recover.”

© 2018 Bloomberg

COMMENTS   18

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Damn, Moneyweb unwittingly posting a “pro-ish” Steinhoff article. Guess Cape Town will see showers today.

Of course they see opportunity. There is. Results will be finalized within the next month or so. The company basically stated as much when they set the date for the AGM.

The adjustments are going to be ugly, but with a holding in STAR that is triple the market cap of the group, give me a break.

I’m going to sound like a crypto douche, but if you have a few Rand laying around, you’d be a fool not to invest. Just don’t tell your better half.

PetrosRubin – You’re understanding of the article here above is quite different from the information conveyed by the article – out of operational cash flow and caught up in a much too high debt. Three months down the line and the Co. have not yet implemented stringent and severe cost-cut measurements as is urgently required to save itself. Out of cash means out of business.

France how do you know they haven’t implemented cost cutting measures? Why else would they have appointed a restructuring officer?
Surely if they couldn’t meet any of their obligations it would have been all over the internet?

Petros I must admit my enthusiasm for Steinhoff and Jooste does not match yours.

enthusiasm for Jooste? Uhmmmm he’s gone…

laurensK – if one can read (and understand), you can gather information.

France, Is that your best shot buddy?
Sorry for ruining your arguement with a request for facts to substantiate your claims.
What’s the saying about wrestling a pig?

France. There is no way for you to know they haven’t implemeted cost cutting measures.

But if you believe they haven’t that is your opinion, which is why the markets are such a cool thing. We make our own assumptions. Cost cutting won’t save the company, that just sends a message that the board is taking this seriously.

The real signals are what the SENS don’t say essentially. I believe that is important. STAR is worth more than teiple SNH. How is that rational and evidence of “cool heads” of investors.

I just happen to think differently, but I love the debate.

Me thinks Petros Rubin was one of those caught when the stock fell? Perhaps trying to persuade people to take a punt and push up the stock price to reduce his losses..

But nonetheless, there must (could) be value and maybe its worthva punt..?And it could fall further. Or be delisted…

@Rebelboer. You are right, well about one aspect. Let me elaborate.

I do own shares, but there was no way for you to have known that. You took a wild guess and got lucky, which is probably an extension of your investment philosophy as well.

If you think I am able to persuade a handful of retail investors to push up the share price, then you must be pretty thick (No big time money manager reads Moneyweb). The comments section on MW is a graveyard.

My avg cost was ZAR6500 before the news broke, so I got stung. I am down to ZAR1280, so I have loaded up, based on conservative estimates of the debt levels. The news of Steinhoff only selling a portion of the KAP holding further enhances my outlook on the company.

So let me make an assumption about you. You’re not really a rebel. You’re the guy too scared to make informed decisions, so you go click on a Steinhoff article, comment on the Steinhoff article, but still claim it’s going bust.

Don’t buy the share, it will keep it low for some of us in the meantime. Cheers.

To the rest of the “masses”, don’t let me poison your mind. 🙂

@Petros
@France
@Rebel
We might have different opinions, but I assume we are all interested in where this saga is going.
What in your opinions should be a fair share price?
I have read anything from R12-R28 per share.

I too am invested; I spent a lot more money than my wife will be happy with at R6/snh

@laurensk

IMO it is either going to R0 or R15 based on a few rough calculations I have done.

The STAR holding is worth ZAR13.50 if I were to rake the latest share price target of Standard Bank Securities. But tjen there is the debt… So difficult to say at this point without knowing debt or even the cash (the easiest balance to audit !)

Goodluck to all.

LaurensK – On the risk side for Steinhoff NV there is the following:
a) Downward revaluation of assets to be expected;
b) Huge provision for auditing and restructuring costs;
c) Huge provision for penalties, litigation and legal costs;
d) Subdued revenue due to reputation damage / lower sales;
e) Cash strapped / will continue to sell off assets at lower than desired prices;
f) Extend of all their trouble not yet clear;
g) Company overall to be expected / more selling off of assets;
h) Time factor – rebound won’t be anytime soon;
i) Essential to pay off huge debts (will take time);
j) Diminished market appetite for its equity.
k) Target for break-up and take overs.

@France

I stopped reading your list when you said “huge audit provision”. This figure is not huge, and shows a lack of understanding of Financial Statements. Yes, audit partners charge around 5-7k an hour for work, the Pwc Report is unlikely to cause a collapse of a company with 130 000 employees.

Some on the list are applicable, but we all knew that.

PetrosRubin I did not get lucky when I said that you got stung by Steinhoff. That was obvious. It must hurt worse than a prostate exam. Especially if one’s biggest virtue is not humility.

I did not invest in Steinhoff because of the news which broke about two years ago about ‘accounting irregularities’ and because I knew that Markus Jooste’s abilities were far exceeded by his arrogance. That reminds me of people like you.

I will only buy shares in Steinhoff when the shareprice falls even further. Im guessing I’ll be buying them from you..

@rebelboer

Meowwwwe kitty settle down. Weak effort. I’m still well diversified so don’t stress.

I don’t take you seriously. You would short the stock if you “knew” about the issues at Steinhoff because of the irregularities.

Must say you’re very interested in a company that you don’t want to buy/ short or don’t care for because of their lacl of ethics. You’re a walking contradiction. You claim that you don’t want to touch steinhoff, but your words says different.

Hmmm, buy them from me? This isn’t a private placement man.

If it goes to zero, so be it man. At least I jave the balls you so eloquently refer to. You had them cut out at Boland Landbou it seems?

Note how you add no value to the discussions, younjyst hate on the company. I prefer to provide reasons why i still like the share.

Chat in a few weeks when SNH is still kicking. Cheers man.

If Steinhoff was really that bad I do not think the NEW set of directors would have sold a portion of their KAP
They would have sold the WHOLE OF KAP or be in breach of their Fiduciary Duties

If you don’t yet own a slice – you probably never will – the risk reward still seems to favor reward especially at current prices .

They can continue to sell good assets – and ultimately most accounting scandals are just that – debits at the window and credits outside – swinging around non-cashflow items.

Most of the large global entities have their own source of cash now.

I still see light

I bought my (thankfully, relatively small holding of) Steinhoff shares for R70.69. I don’t see the light. 🙁

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