Steinhoff fallout spreads the pain

The best term for what happens next at Steinhoff International, the nest of interrelated manufacturers and retailers listed as a conglomerate in Johannesburg and Frankfurt, is collateral damage. As it grapples with an accounting probe and €9.2bn of gross debt, the chairman now in charge must also deal with large loans taken out to buy stock.

The value of those shares fell two-thirds on Wednesday, after Steinhoff announced an investigation into accounting irregularities and the resignation of CE Markus Jooste. The collapse will keep its bankers busy. In September 2016, they lent €1.6bn to an entity controlled by the family of Christo Wiese, Steinhoff’s chairman, so it could buy 314-million shares or 7% of Steinhoff. The loan was made against 628-million existing shares.

That looked like a big margin of safety at the time. Not anymore. As of Wednesday, it was worth substantially less than €1.6bn. Large amounts of Steinhoff stock out on loan suggests the banks have already taken steps to protect themselves. Attention will turn to other holdings controlled by Wiese, such as his €1.3bn stake in Shoprite, as a potential source of cash. Steinhoff had this week exercised an option to buy that stake. That transaction must now be in doubt amid questions about the group’s ability to support its debt — and the €10bn of operating leases taken out by its various businesses.

Net debt of €6.5bn at the half-year stage works out to about three times earnings before interest, taxes, depreciation and amortisation. But financial results now await a review of Steinhoff’s accounting. Prosecutors in Germany have alleged the company booked transactions between entities that it may have been appropriate to disclose as related parties.

Some Steinhoff debt prices had already dropped sharply; retaining an investment-grade credit rating is the least of worries for investors holding them, including the European Central Bank. London, December 7