Enron Déjà Vu? Citi, BofA, HSBC, Goldman, BNP on the Hook as Steinhoff Spirals Down

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by Wolf Richter, Wolf Street:

$21 billion of debt. Off-balance-sheet entities. Moody’s wakes up, downgrades it four notches, with more to come.

Steinhoff International Holdings – which acquired nine companies in the past two years, including Mattress Firm Holding in the US, and which presides over a cobbled-together empire of retailers and assorted other companies in the US, Europe, Africa, and Australasia – issued another devastating announcement today: It cancelled its “private” annual meeting with bankers in London on Monday and rescheduled it for December 19.

This is the meeting when the company normally discusses its annual report with its global bankers. The annual report should have been released on Wednesday, December 6. But on precisely that day, the company announced cryptically that “accounting irregularities” had “come to light” that required “further investigation,” and that CEO Markus Jooste had been axed “with immediate effect,” and that it would postpone its annual report indefinitely.

This is raising serious questions about the company’s viability as a going concern. The lack of transparency doesn’t help.

To soothe investors, the company announced on Thursday that it was trying to prop up its liquidity by selling some units ASAP. And it made more cryptic statements: It “has given further consideration to the issues subject to the investigation and to the validity and recoverability” of some assets of “circa €6 billion” ($7 billion).

“The validity and recoverability” of assets worth $7 billion? The company is infamous for its opaque communications which equal its opaque corporate structure.

It’s considering selling “certain non-core assets that will release a minimum of €1 billion of liquidity.” It also “committed” to wringing out €2 billion from its subsidiary Steinhoff Africa Retail Limited (STAR) by refinancing “on better terms” some debt that the subsidiary owes the parent company, which the subsidiary should be able to handle, “given the strong cash flow.”

With these measures, it hopes “to be able to fund its existing operations and reduce debt.” Shareholders and bondholders were aghast.

The shares, traded in Frankfurt and held widely by international investors, had still been in the €5-range in June. But in August, German prosecutors said they were probing if Steinhoff had booked inflated revenues at its subsidiaries. Shares began to drop. By Tuesday, there were down 41% at €2.95.

On Wednesday, after the “accounting irregularities” had “come to light,” shares crashed 64% to €1.07. By Friday, they’d dropped to €0.47. Market capitalization plunged by about €18 billion ($21 billion) since June to €2 billion.

On Thursday, given the fiasco, Moody’s downgraded the company four notches in one fell swoop, from Baa3 (one notch above junk) to B1, which is well into junk, and added “on review for further downgrade.” It said:

Given that allegations of accounting irregularities were raised and rebutted in August 2017 and again in November 2017 it calls into question the quality of oversight and governance at Steinhoff.

The €800 million of bonds that Steinhoff Europe AG issued during the halcyon days of June 2017 had traded at over 100 cents on the euro in August. By Tuesday, they’d dropped below 85. On Wednesday they crashed to 56. On Friday, they closed at 46.56 cents on the euro:

Moody’s 4-notch downgrade with more downgrades likely shows once again how credit ratings are lagging indicators that merely give investors confirmation of what the plunge in price has already shown in gruesome detail.

But Steinhoff owes its banks a lot more than its bondholders – the same banks with which it was supposed to meet on Monday. According to Bloomberg, the company’s “total exposure to lenders and other creditors was almost €18 billion ($21 billion) as of the end of March.”

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