Steinhoff is just too big to ignore

BLIND PUNT: VULTURE INVESTORS ARE PILING IN

Status of Steinhoff’s cash holdings still unknown.

Steinhoff International may look like a nonstarter for most investors: its former CEO 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 of bonds and over €1.5 billion of bank loans and private debt, according to four anonymous sources.

Their bet: a global retailer with businesses on four continents must have enough assets to offset losses they still don’t know about. 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,” said LNG Capital’s Louis Gargour, adding that Steinhoff’s finances are too opaque and complex for him to touch.

Steinhoff cratered on December 6 after acknowledging financial irregularities. Its stock plunged over 90%.

Christo Wiese quit as chairperson and SA authorities undertook an investigation.

Three months on, even creditors who signed a nondisclosure agreement haven’t obtained material information over the nature of the accounting issues, sources said. In a January 26 meeting, they were told to wait for PwC’s forensic analysis. While the company can’t say when the investigation will be over, it will have to come before over €1 billion of loans become 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 years, Steinhoff said on February 28.

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

Bondholders, including the ECB, took losses of as much as 50% to unload paper in December. Banks and private debtholders followed in January, offloading loans at discounts. US banks took losses of $1 billion on Steinhoff in the fourth quarter alone, mostly related to Wiese’s margin loans.

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

A crucial unknown is the status of Steinhoff’s cash holdings. It reported €3.1 billion in cash in March 2017. It also raised $1.2 billion in the September initial public offering of its SA arm. In December, when management said 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. Even still, “work remains to be done to ensure Steinhoff’s businesses have the necessary funding”, management said on February 28.

“The company must answer very substantial questions before we have an idea of how much money creditors could recover,” said SpreadResearch’s Anthony Giret.