Why South Africa's Steinhoff Could Be Next Enron: QuickTake Q&A

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Steinhoff Bonds Tumble on Moody's Cut to Junk

It could wind up being South Africa’s version of the Enron accounting scandal. Furniture retailer Steinhoff International Holdings NV captivated investors by growing into a global force, latterly under its former chairman, billionaire Christo Wiese. Now it’s drawing attention for all the wrong reasons. Shares in Steinhoff crashed 80 percent in two days after the company reported accounting irregularities. Wiese stepped down, Chief Executive Officer Markus Jooste resigned and the company is looking for leniency from its creditors.

1. Why such interest in Steinhoff?

The company has been a go-to choice for investors seeking a balance between developing and emerging markets. Its share price tripled between early 2012 and end-2016 as it expanded in the U.S. and Europe from a base in South Africa. It owns retail chains including Conforama in France, Poundland in the U.K. and Mattress Firm in the U.S., which encompasses the stores formerly known as Sleepy’s. Reflecting the global deal-making, the company has at least 200 subsidiaries and affiliates, it’s Amsterdam-registered and listed in Frankfurt and Johannesburg. Wiese and Jooste, meantime, are among the best-known members of a close-knit group of wealthy South African businessmen who have owned properties in the exclusive winelands around Cape Town.

2. What are the accounting irregularities?

Details remain sketchy. Steinhoff has said the issues relate to the viability of about 6 billion euros ($7.4 billion) worth of assets on the balance sheet of operations in Europe. Earnings statements for at least fiscal 2017, 2016 and 2015 will need to be restated. A decade ago, in a 56-page research report, analysts at JPMorgan Chase & Co. asked why Steinhoff’s accounts lacked “pivotal information” about where it was generating revenue and why it appeared to focus on tax breaks rather than the actual business. Susan Gawith, a portfolio manager who’s covered Steinhoff off and on for 18 years, said Steinhoff “reminds many in South Africa of Enron,” the U.S. energy company that went bust in 2001 after the revelation of systematic accounting fraud that kept debt off its balance sheets.

3. How badly has the company been wounded?

The company lost 11.3 billion euros, or more than 90 percent, of its market value from Dec. 5 to the end of last year. Bond yields blew out to more than 14 percent the week the scandal broke. And Moody’s Investors Service slashed the company’s credit ratings to junk and then slashed them again three weeks later.

4. What is Steinhoff negotiating with banks?

Steinhoff met bankers in London on Dec. 19, in part to try negotiate a rollover of more than 1 billion euros owed on a revolving credit facility, according to people familiar with the matter. Some of the lenders involved with Steinhoff include Citigroup Inc., Bank of America Corp., HSBC Holdings Plc, FirstRand Ltd. and BNP Paribas SA. At the meeting Steinhoff said lenders were increasingly suspending and withdrawing lines of credit and revealed that before the crisis it didn’t have “detailed visibility” of the cash flows of individual operating companies. Banks haven’t yet indicated whether they will grant Steinhoff the extensions needed to survive. However, about 690 million euros in notional facilities has been rolled over to date, according to a presentation given by the company at the meeting, and its Pepkor Europe unit has since secured a 180 million-pound ($248 million) loan facility.

5. What happens next?

The company said on Jan. 2 it still didn’t know when it would be able to publish audited results for 2017 and it’s likely that more than three years of earnings will need to be restated. Steinhoff had outstanding debt of 10.7 billion euros as of Dec. 14 and almost 4.8 billion euros of that was in Steinhoff Europe AG, an operation based in Austria. Despite the progress made on the debt rollover, more financial restructuring will need to be done to avoid collapse.

6. What else is Steinhoff doing to resolve the crisis?

Steinhoff has hired PwC to investigate the wrongdoing and appointed Moelis & Co. to handle discussions with lenders and AlixPartners LLP to advise on operations, including cash flow. It earmarked assets that could be sold easily, if necessary, and offloaded a stake in South African investment holding company PSG Group Ltd., raising about $345 million. Other disposals include a 17 percent stake in French online retailer Showroomprive and a flagship store in Vienna for a combined 139 million euros. Steinhoff Africa Retail Ltd., a subsidiary known as STAR, is refinancing loans with its parent company that amount to about 16 billion rand ($1.3 billion). On Jan. 11, Steinhoff said one of its South African units is considering an early redemption of all bond notes in issue.

7. Who is in the spotlight?

Jooste, Wiese and Chief Financial Officer Ben La Grange have all resigned, saying nothing about what went wrong, although La Grange remains at the company. Auditor Deloitte LLP, which signed off the 2016 results that now need to be restated, has said it will fully cooperate with investigations. Banks that provided funding to an entity controlled by Wiese have sold 98.4 million Steinhoff shares, exercising their security rights over stock held as collateral. Wiese also sold shares in Shoprite Holdings Ltd., of which he’s the chairman, to raise about 4.2 billion rand as he battles to remain liquid. New management including interim CEO Danie van der Merwe and his deputy, Conforama boss Alexandre Nodale, have the task of keeping Steinhoff afloat. Three non-executive directors have been told to keep a closer eye on governance. They include Steve Booysen, who was already head of the audit and risk committee.

8. Who is investigating?

South Africa’s Independent Regulatory Board for Auditors and a Dutch auditing regulator have begun probes into Deloitte’s role, while the Financial Services Board started an investigation into Steinhoff, backed by Finance Minister Malusi Gigaba. Hearings are scheduled to be held with South African lawmakers at the end of the month. A number of law firms, backed by wealthy funders, are trying to persuade investors to join class-action lawsuits, promising not to charge fees unless the case is successful. German and Austrian prosecutors have been investigating possible accounting fraud since 2015.

9. Who has suffered from the fallout?

The biggest loser in dollar terms is Wiese, Steinhoff’s largest shareholder, who has seen his net worth plunge to about $2.1 billion from more than $5 billion, according to the Bloomberg Billionaires Index. South Africa’s Public Investment Corp., which manages pension funds of government workers, has a 10 percent stake, which translates to a loss of more than $1 billion. The share prices of related companies have also slumped, including STAR, PSG, Shoprite and Tradehold Ltd., another Wiese business. Three South African lenders are owed more than 1.2 billion rand after a racehorse company Jooste was a director of failed to meet its financial commitments. Bondholders left in possession of junk-rated assets included the European Central Bank, which has now liquidated its holding. JPMorgan said Jan. 12 that it recognized a $143 million mark-to-market loss on a margin loan to a single customer related to Steinhoff, while Goldman Sachs Group Inc. is also likely to disclose a loss linked to the retailer, according to people briefed on the firm’s financial results. Traders have been spooked by the incident, and the shares of drugmaker Aspen Pharmacare Holdings Ltd. and real estate stocks including Resilient REIT Ltd. plunged and then recovered last week. That was credited to speculation that Viceroy Research, a group of individuals who have published a report into what they say are Steinhoff’s irregularities, may target a second South African company.

The Reference Shelf

  • The presentation to banks on Dec. 19
  • How a retailer built over five decades crumbled in two days. 
  • A profile of Christo Wiese, Steinhoff’s billionaire former chairman.
  • Steinhoff’s complex structure, with global entities stemming from the Netherlands to South Africa and the U.S. 
  • A chart showing Steinhoff’s looming debt payments.
  • An October interview with Steinhoff CEO Markus Jooste in Financial Mail.
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