Steinhoff creditors explore options with lawyers; company working with full suite of advisors

13 December 2017

Steinhoff's — a South Africa-headquartered retailer — creditors are contemplating organizing ahead of a possible restructuring, and are seeking advice on the situation from law firms, according to two sources familiar with the situation.

 

Kirkland & Ellis is working with a group of convertible noteholders, the size of which is growing by the minute, said the first source familiar. Hogan Lovells is also in discussions with a number of creditors, including convertible holders, as well as funds contemplating buying into the structure, said the second source familiar.

 

The company has appointed law firm Linklaters to advise it, according to the first source familiar and a third source familiar. The company previously announced that it is working with financial advisor Moelis and turnaround specialist AlixPartners as uncertainty over the company’s financial position threatens to herald a full-blown liquidity crisis.

 

Steinhoff’s bonds and convertible notes collapsed last week, when the company announced that professional services firm PwC would undertake an investigation into accounting irregularities, and the resignation — with immediate effect — of CEO Markus Jooste.

 

The allegations focus on related party transactions that may have hidden losses at subsidiaries the group acquired during a debt-fueled buying spree over recent years. Steinhoff is looking into the “validity and recoverability of certain non-South African assets…which amount to circa EUR 6bn.”

 

The publication of audited results has been delayed, and Steinhoff warned of the risk that previous financial statements may need to be restated. A subsequent release noted that the Steinhoff’s audit committee is working with the company’s auditor, Deloitte, to publish the latest financials. An annual bank lender meeting has also been postponed until 19 December.

 

The company indicated that it was seeking to dispose of up to EUR 3bn in assets to protect liquidity, some EUR 1bn of which Steinhoff claims to already have received expressions of interest in. It also noted that subsidiary Steinhoff Africa Retail Limited (STAR) committed to a refinancing of long-term liabilities due to the company.

 

What, exactly, Steinhoff means by the STAR refi is unclear, said the first and second sources. Any plan to lever-up STAR to release liquidity in other parts of the group seems entirely implausible, the sources agreed.

 

Finding EUR 1bn of savings from refinancing ZAR 16bn (EUR 989m-equivalent) of parent company loans certainly appears challenging – even for the most creative of accountants.

 

Borrowing against unencumbered assets for the Africa operations may be another route, given the ZAR 64.5bn of non-current assets and ZAR 24.3bn of current assets (ZAR 7.76bn from loans due by Steinhoff and its subs). But a whopping ZAR 39.86bn of this is goodwill, and taking out intangibles gives a STAR asset base of just EUR 1.93bn.

 

With this said, a newswire report yesterday (12 December) indicated that a number of key lenders are willing to toll over the EUR 1bn owed by Steinhoff International Holdings NV on a EUR 2.9bn revolving credit facility.

 

Trade finance flight

 

Steinhoff faces the very real prospect of letters of credit (LC) providers and credit insurers “turning off taps,” noted a fourth source familiar with the situation. Trade finance providers of this generally pull back very quickly, being very risk averse, noted the first source familiar, although none of the sources were aware if Steinhoff’s credit lines have already been pulled.

 

The company’s advisors will likely be scrabbling to keep the lights on, keep local South African credit lines in place and reassure LC providers and credit insurers, said the third source. “If the day-to-day finance gets pulled then the whole thing could unwind very quickly. This could end up in multi-jurisdictional freefall.”

 

Acquisition fever

 

Steinhoff grew rapidly in the past two years, making acquisitions in Europe, the US and Africa at a frenetic pace fueled by debt issuance and several highly-dilutive equity fund raisings. In March 2015, it bought Pepkor for EUR 5.5bn and Mattress Firm of the US in September 2016 for USD 3.8bn. During the same month Tekkie Town in South Africa for EUR 230m, and Poundland of the UK for GBP 610m were also acquired. Just one month later, in October 2016, it paid another EUR 262m for Fantastic Holdings in Australia.

 

Finally, in August 2017 it spun out its African retail assets on the Johannesburg stock exchange in September 2017, whilst at the same time acquiring a 22.7% economic interest and 50% voting rights in its South African peer Shoprite via a complicated series of transactions. The stake is valued at ZAR 35.5bn (EUR 2.2bn).

 

With pools of debt issued against different parts of the group and limited disclosure and documentation, estimates of and divergence of recoveries for the various debt instruments are expected to be highly variable. A large portion of its assets consists of goodwill and intangibles, with allegations of more debt off-balance sheet there is a real danger of liabilities exceeding asset value.

 

Those reassured by the circa EUR 3.3bn cash balance (as at March 2017) and lack of short-term maturity triggers should be mindful of the lessons learned at Agrokor. In particular, the company has an excess length of payables of around 213 days, while its furniture competitors average between 50 and 75 days. Bringing this into line with its peers could wipe-out its existing cash balances. Trade payables are enormous at EUR 5.3bn. Worryingly, the cash conversion from EBIT is very low, at around 15%.

 

Round tripping

 

In its latest public financials (as at 30 March 2017), it lists gross debt of EUR 9.6bn. But this doesn’t include the latest Eurobond of EUR 800m launched in July, nor any debt that may be brought back on balance sheet, if allegations made by Viceroy Research are proved correct.

 

Estimations of the true debt stack vary enormously, with all the sources estimating the size to be significantly larger than that reported. A fifth source familiar with the situation estimates the off-balance sheet debt could add a further EUR 10bn of debt on top of the previously disclosed debt.

 

A day after the company announced that PwC would be looking into irregularities, Viceroy produced a scathing 35-page report, much of it focusing on two off-balance vehicles – Campion Capital and Southern View Finance. It claims that Steinhoff has issued expensive loans against Campion to purchase loss-making subsidiaries, and also hid loss-making consumer finance businesses via off-balance sheet entities. Viceroy says that these are being round-tripped, with losses capitalized via related party transactions.

 

Campion is controlled by an associate of the former CEO, and was run by Siegmar Schmidt, his predecessor from 1999 to 2013. Southern View, which is controlled by Steinhoff’s largest shareholder Christo Wiesse, kept a loss-making consumer loan portfolio off its books for several years before selling it to Campion, Viceroy alleges. The predatory consumer loans business was writing-off as many new loans as it was writing, says Viceroy, citing Southern View Finance UK 2016 financial statements.

 

Furniture delivery expectations

 

If the off-balance sheet and limited accounting disclosure weren’t enough to unnerve investors, there is also uncertainty on how to reconcile the debt, and ascertain claims on the various assets.

 

Steinhoff International Holdings NV is the parent and ultimate guarantor of the euro-denominated bond issues, Steinhoff Europe AG is the issuer of senior notes and schuldschein, Steinhoff Holding GMbH (Austria) is the convertibles issuer, and Steinhoff Services Limited is on the ZAR-denominated MTNs.

 

Whereas all entities share the same parental guarantees, there are a lack of cross-guarantees. Documentation is patchy, especially for the converts and the then investment grade Eurobonds, with a number of sources struggling to get hold of documents.

 

Some analysts believe the convertible notes, whilst sitting further away from the operating companies than the Eurobonds, appear structurally senior over a pool of real estate assets. The convertible issuer Steinhoff Holding GMbH is the 100% owner of Hemisphere International Properties BV, which holds most of Steinhoff’s stores and manufacturing facilities around the world that are then leased back to the operators. The properties have a book value of EUR 3.3bn, according to the 2016 annual report.

 

Conversely, the Eurobond issuer holds all of Steinhoff’s investments outside Africa and the US, and is seen as structurally senior to the convertibles.

 

But critically, the issuer does not hold the African assets – which had revenues of ZAR 51bn in the year to September 2016 and EBITDA of ZAR 5.78bn. The African assets were spun off as STAR – funded mostly by loans from the Dutch parent of around ZAR 16bn (EUR 989m). Finally, the US business Mattress Firm Holdings has its own syndicated loan facilities, with availability of circa USD 4bn.

 

by Chris HaffendenDavid Graves and Marion Halftermeyer