Steinhoff. Picture: BLOOMBERG/DWAYNE SENIOR
Steinhoff. Picture: BLOOMBERG/DWAYNE SENIOR

The Steinhoff International Holdings lock-up agreement (LUA), which was released to an unsuspecting public last week, is not for the faint-hearted.

It continues the Steinhoff tradition of remarkable complexity overwhelming all but the most determined of analysts.

"In the old days [before December 6 2017] trying to understand Steinhoff’s unwieldy structure was a full-time challenge. Now, trying to understand its restructure is almost as challenging," says one weary analyst.

At least, however, the 177-page document does help to explain why Steinhoff notched up R5.4m a day in legal and audit fees between December 2017 and end-March.

In between the dense legalese two things are made very clear.

First, the group is in an incredibly precarious position, and Louis du Preez is pretty much running the restructuring show. Most investors were all too aware of the precarious situation, and over the past few months some may have guessed at Du Preez’s dominant role in looking for a solution.

Du Preez, who was a corporate lawyer when he first emerged as a supervisory member of the Steinhoff board in May 2017, is Steinhoff’s go-to "obligor". The term, which conjures up images of something out of an Arnold Schwarzenegger movie, pops up regularly throughout the LUA. In the Steinhoff context, the term "obligor", which is relatively new to SA, refers to a bond issuer who is contractually bound to make all principal repayments and interest payments on outstanding debt. We know Du Preez is the main man, because he has signed off as obligor on behalf of nine of the 16 Steinhoff companies involved in the LUA.

If they can pull it off, Du Preez and chair Heather Sonn will be corporate heroes. But even if they don’t pull it off they will deserve kudos for their heroic efforts.

The LUA, which is due to become effective on July 20, will give Steinhoff three years’ breathing space, with creditors agreeing to hold off debt claims until December 2021.

Devin Shutte, head of investments at Robert Group, says it’s likely that in drawing up the LUA, Steinhoff consulted many of the bondholders and so had an indication of what they would accept. "The situation is not ideal for anyone, but if the LUA is not successful, then everyone loses," says Shutte.

It must also help that the bonds have recovered from the lows they fell to in December. This means that many of the "vulture funds" that swooped in then are already showing good returns. But that they are still trading at only about 50c in the euro indicates that Du Preez and Sonn face a daunting challenge.

The essential aspects of the LUA are that it refers only to the debt raised by Steinhoff Finance Holding, Steinhoff Europe AG (SEAG), Stripes US Holding Incorporated (SUSHI) and Steinhoff International Holdings. The SA operations, primarily Steinhoff Africa Retail and KAP, are not involved.

The agreement covers an estimated €9.4bn of debt and is offering a hefty 10% PIK (payment-in-kind, which includes interest and fees) return on that debt, which will be rolled up twice a year for the three years to 2021.

The 10%, which includes an "early-bird fee" for creditors who signed up early to the LUA, means the group will be adding almost €1bn a year to its debt burden, leaving it with a potential €13bn when the agreement expires.

It could be significantly worse if the creditors don’t get the necessary clearance to appoint independent directors to the board of a new entity. A new holding company will be placed just above Steinhoff Möbel Holding and will have oversight of SUSHI and SEAG. There are loose plans for a second to slot in just above Steinhoff Finance Holding.

The new holding company is set to play a critical role in overseeing the restructuring and ensuring that the interests of creditors are protected. If for any reason the creditors are unable to appoint directors to the new entity, then interest payment on their debt will increase from the hefty 10% to a daunting 15%.

Shutte says the creation of the holding company reflects how critical corporate governance issues are for Steinhoff creditors.

This means the rolled-up debt costs could be between €12bn and €14bn.

Given that there is absolutely no way Steinhoff will be able to pay this sort of bill, a debt-for-equity swap looks like an inevitable part of the planned restructuring.

The recent spike in the Steinhoff share price — up 133% over one month — has stalled an unrelenting eight-month free fall, but it may just be short-covering. Still, it suggests some investors are optimistic that the LUA will enable the Steinhoff team to rescue some value from the wreckage.

At some stage over the next few years, if things go well, shareholder support will be needed for the debt-for-equity swap.

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