A Steinhoff International Holdings logo on display outside the company’s offices in Stellenbosch. Picture: BLOOMBERG
A Steinhoff International Holdings logo on display outside the company’s offices in Stellenbosch. Picture: BLOOMBERG

London/Johannesburg — Steinhoff International may look like a non-starter for most investors: its former CEO Markus Jooste 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 $5bn in cash.

Yet buyers have piled in.

Hedge funds now hold most of Steinhoff’s €3.5bn of bonds and more than €1.5bn of bank loans and private debt, according to four people familiar with the situation who asked not to be identified because the matter is private.

Their bet: a global retailer with businesses on four continents must have enough assets to offset losses they still don’t know about. What’s more, 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," Louis Gargour, owner of London-based credit fund LNG Capital, who says Steinhoff’s finances were too opaque and complex for him to touch. "There are few opportunities as big as Steinhoff out there."

Steinhoff cratered on December 6 after acknowledging financial irregularities. Its stock plunged more than 90% and in the aftermath the billionaire Christo Wiese quit as chairperson and South African authorities undertook an investigation.

Three months on, even creditors who signed a non-disclosure agreement with the company haven’t obtained material information over the nature of the accounting issues, people familiar with the matter said. In a January 26 meeting in London, they were told to wait for PwC’s forensic analysis, they said. While the company can’t say when the investigation will be over, it will have to come before more than €1bn of loans come due in August, analysts say.

Problems in Europe

The problems appeared to be concentrated in the central European business and resulted in an over-statement of assets, revenue, and profit figures, stretching back for years, the company said on February 28. The PwC investigation is digging deeper into off-balance sheet structures and transactions with related parties.

Even as investigations geared up, investors were pawing over Steinhoff’s damaged securities. Bondholders, which included the European Central Bank (ECB), took losses of as much as 50% to unload paper in December that just days earlier was trading near face value, according to data compiled by Bloomberg.

Banks and private debt-holders, including Commerzbank and Natixis, followed in January, off-loading loans at discounts of between 20% and 35%. US banks took losses of $1bn on Steinhoff in the fourth quarter alone, mostly related to Wiese’s margin loans.

In a report published on December 6, short-seller Viceroy Research alleged that Steinhoff’s holding company was hiding losses in entities owned by associates of former CEO Jooste. Viceroy’s analysis concluded that Steinhoff’s earnings may be at least €1bn lower after adjustments, wiping out most of the company’s expected profits. "It is possible this is just the tip of the iceberg," Viceroy said in the report.

If you are a big distressed-debt fund, then you must buy it, even if it’s little more than a blind punt ... There are few opportunities as big as Steinhoff out there
Louis Gargour

The dealings between Steinhoff’s units and non-related parties are often blurred. Take Alvaglen Estates, a Bahamas-based subsidiary of Steinhoff’s real estate arm, which owns properties in the UK. At least two of Alvaglen’s assets in the UK are managed by Formal Investments of the British Virgin Islands, according to land registry records. Steinhoff units operate out of warehouses that appeared in Formal’s portfolio, which was available on its website until last week.

Formal’s chairperson is Malcolm King, who is also a family friend of Jooste and a director of the company that manages a wine estate in Stellenbosch formerly owned by Wiese, according to South African newspapers and records. King did not return e-mails and phone calls through Formal.

Steinhoff said in an e-mail to Bloomberg News that Formal manages certain Alvaglen properties in the UK but "to the best of our knowledge, Steinhoff has no other ongoing business relationships with Formal or Malcolm King".

In at least one case, the complex structure of Steinhoff could play in favour of creditors. Creditors, including Attestor Capital, Centerbridge Partners, Farallon Capital Management, Silver Point Capital, and York Capital Management bought a large portion of €1.6bn of convertible bonds due in 2021 and 2022. Bond documents show the notes are guaranteed by a predecessor of Steinhoff’s parent company, a unit now called Steinhoff International Holdings (Pty) Ltd, which management defined as a "shell company" in a December 19 presentation.

That "shell company" is owed billions by the profitable South African division. The company confirmed in a presentation published on February 23 that Steinhoff International Holdings has a loan claim worth R24.6bn against the South African part of the Steinhoff group. The price of €1.1bn of bonds due August 2022 spiked €0.10 to about €0.75 on the next trading day, according to data compiled by Bloomberg.

Representatives at Silver Point and York declined to comment. Officials at Attestor, Centerbridge, and Farallon didn’t return e-mails and calls seeking comment.

Complex web

Others entangled in the complex web may not fare as well. Take the €4.8bn of loans and bonds issued by Steinhoff Europe, the holding unit of operating divisions in Europe. The company has several sub-holdings, some of which booked loans worth billions that are difficult to trace. Austria-registered Genesis Investment Holdings has €2.2bn of liabilities to unspecified affiliates. Lower down the chain, AIH Investment Holdings reported €1.4bn of loans to affiliates and €356m of receivables in 2016.

One of the crucial unknowns is the status of Steinhoff’s cash holdings. The retailer reported €3.1bn in cash as late as March 2017. It also raised $1.2bn in the September initial public offering (IPO) of its South African arm. In December, when management said that 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 $700m for units in the UK, US, and France from Davidson Kempner Capital Management, Barclays, and Tikehau Capital. Even still, "work remains to be done" to ensure Steinhoff’s businesses have the necessary funding, management said on February 28.

"Steinhoff said they had billions in cash last year, and raised more after the latest report, but still went out to raise new money to keep the company afloat," said Anthony Giret, a credit analyst at Spread Research in France. "The company must answer very substantial questions before we have an idea of how much money creditors could recover."