/ 26 April 2018

Steinhoff dances to zombie drums

French chain Conforama
French chain Conforama

Steinhoff International has a seemingly insurmountable debt of R155.8-billion, about 16 times larger than its current market value of R9.5-billion.

The disgraced retailer’s market valuation has plummeted 96% from R215-billion on December 5 last year, when its chief executive, Markus Jooste, stepped down because of an investigation into accounting fraud by German authorities.

“Steinhoff is a zombie operation. I don’t think they can ever trade their way out of this one,” said independent retail analyst Chris Gilmour.

“Their assets are very good … but the sheer physical size of the debt is just massive.” The debt, equivalent to €10.4-billion, as was noted at its recent annual general meeting, comprises a variety of instruments in different jurisdictions, Gilmour said. At what levels bonds and other debt might trade would be “very sensitive information and both sides would want to keep it private”, he said.

At the meeting, Steinhoff commercial director Louis du Preez said the company was in technical breach of its debt covenants but had approached lenders to ensure that these did not become formal defaults.

Being in breach or default means lenders can call up their money, or raise the cost of funding, depending on the agreement.

Jones Gondo, a senior credit research analyst of Nedbank CIB, said a technical default occurred when certain commitments were not met, such as maintaining a certain interest coverage ratio, or producing financial results at a certain time. It specifically excludes non-payment default. “In theory, if in technical breach, you could have a step-up rate,” said Gondo, referring to a scenario in which an interest rate hike kicks in when the issuer of the debt breaches the agreement. Lenders can also bring the maturity date of outstanding loans forward.

In South Africa, a rate hike would perhaps be a 100 basis points or more increase but, in Europe, the trend in recent years has been “covenant-light” even for high-yield investments and this resulted in little to no repercussions in the case of a breach, Gondo said.

On convertible bonds — those that can be converted to equity or cash — Steinhoff has convinced some financial creditors to waive their rights to create a window of stability until June 30 this year.

If banks or other creditors were not comfortable with their position, they would often seek to withdraw.

“If there is no distress, you could sell the debt in the secondary market,” said Gondo, although, he added, in a case such as Steinhoff, debt holders were unable to sell it on without incurring large losses and so often were forced to keep it, and it would not be in a lender’s interest to further aggravate the situation.

Said Gilmour: “As the old adage goes, when you have got R100 outstanding with your bank, you have a problem.

“When you have R100-billion outstanding with your bank, the bank has a problem.”

But some debt holders, such as the European Central Bank, have been able to sell on their Steinhoff investment, although the identity of the buyer is not publicly known.

Gondo said it was typical in such cases that the bond was sold on to distressed debt funds — often lawyers — that have expertise 
in recovery and debt restructuring.

To get new funding, Steinhoff, which has a deeply speculative junk credit rating, had been forced to borrow from some non-traditional financiers, presumably at high rates, following the fallout, Gondo said.

With Steinhoff, the bank debt was significantly bigger and the banks appeared to have some semblance of control over the situation, he said.

They knew what kind of exit they wanted, and it was usually not a capital market solution, he said, noting Steinhoff International was unlikely to live on in its current form.

Fire sales, such as that of the company jet and property, were unsustainable. “The banks know this. It’s up to them to work out the plan,” Gilmour said.

Steinhoff’s financials for the year ended March 2017, which the auditors had refused to sign off on last year, will only be available towards the end of this year.

“It’s a mess,” Gilmour said. “I’m truly fascinated to see what kind of deal can be worked out to avert collapse. In effect, it’s in collapse already.”

A spokesperson for Steinhoff International said the group is currently operating under an informal standstill with creditors with the result that debt rollovers and lender requests are being managed on an ongoing basis. 

The general waiver process is on hold pending presentation to creditors of the strategic options evidencing a sustainable capital structure going forward.

“The interest payable on the outstanding debt varies according to the specific terms of relevant debt facilities or bond documentation,” the spokesperson said. 

Shareholders retain Deloitte, the devil they know

At the Steinhoff annual general meeting (AGM) on April 20, 72.8% of the shareholders voted in favour of reappointing auditing firm Deloitte as the company’s statutory auditor, despite its failure to pick up or report the alleged accounting irregularities and fraud for which Steinhoff is being investigated by German authorities.

The Steinhoff financials for 2017 are expected to be released only towards the end of this year. Additionally, Steinhoff has said its 2015 and 2016 accounts cannot be relied on and are now being restated.

Called to answer questions in Parliament in January, former Steinhoff chairperson Christo Wiese said Deloitte raised concerns about the company financials last year, although they were the same auditors the company had used over the past 10 years, “admitting that they had missed things”.

In a document circulated before the AGM, Steinhoff’s supervisory and management boards said they believed it to be in the best interests of the company that Deloitte be reappointed as the statutory auditor for the financial year ending on September 30 2018.

“One of the company’s priorities is the expeditious finalisation of audited consolidated financial statements for the 2017 financial year, and the revised statements for the 2015 and 2016 financial years.

“Deloitte is already involved in these matters, and the appointment of a new auditor midway through a financial year will lead to unacceptable delays in the completion of these statements. This in turn would affect the company’s dealings with all stakeholders, who require the certainty of audited financial statements,” the document read.

The supervisory board said it also believed Deloitte was best placed to apply the lessons of the 2017 audit and forensic processes in completing the 2018 audit.

Deloitte has been charged by the Independent Regulatory Board of Auditors for its role as auditor of African Bank before it was placed under curatorship. Deloitte also audited Leisurenet, which went into liquidation in 2000, after which two company executives were convicted of fraud. — Lisa Steyn