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Trading  | December 6, 2017

While you were sleeping, the stock and bonds of a relatively unknown company in the US, but is a household name in much of the rest of the world, Steinhoff International Holdings NV, plunged after its chief executive officer resigned amid accounting irregularities, with the company announcing that it was indefinitely delaying the release of its results, citing a criminal and tax investigation in Germany that dates back to 2015, rocking a company that’s rapidly expanded from its roots in South Africa into a retail empire spanning Australia, Europe and the U.S.

As Bloomberg reported, the owner of the France-based Conforama furniture chain, Mattress Firm in the U.S. and Poundland in the U.K. and which employs 130,000 people worldwide, said late Tuesday that CEO Markus Jooste quit as it appointed auditor PwC to probe the matter. Prosecutors have said they’re looking into contracts valued in triple-digit millions of euros that appeared to have been conducted with third parties but may have actually involved different units within the company. The company said in August that “no evidence exists” that Steinhoff broke Germany’s commercial laws. It also said a report in Manager-Magazin that Jooste is among employees being investigated by German prosecutors contained information that was “wrong or misleading.”

Snarkily summarizing the scandalous events involving the aggressive acquiror, Bloomberg said “Retailers Can Forget About Being Bought by Steinhoff Now.”

While the back story behind this sprawling scandal – much of which has to do with South Africa’s culture of corporate corruption – and the company’s sudden implosion is fascinating…

The findings mark a striking turnabout for billionaire Chairman Christo Wiese, South Africa’s fourth-richest man and Steinhoff’s biggest shareholder, who’s taking over the CEO role on an interim basis. Since he bought into the company in 2014, he’s accelerated an acquisition drive alongside long-term ally Jooste. In addition to purchases like the U.K.’s Bensons for Beds, the company has made plays for appliance chain Darty in France and household-goods retailer Argos in Britain.


As recently as Nov. 3, Wiese bought 2 million Steinhoff shares at more than three times the price at which they were trading in Johannesburg on Wednesday. That deal alone has cost the chairman 87.7 million rand ($6.4 million). In October, Steinhoff bought back 78 million shares, a deal handled by Johannesburg-based PSJ Capital Pty Ltd. Jooste also resigned as a non-executive director of PSG.


Wiese had a net worth of $4.3 billion as of Tuesday, according to the Bloomberg Billionaires Index. He and Jooste, 56, both own properties in the scenic wine country around Cape Town, alongside other notable South African businessmen including Whitey Basson, who ran retailer Shoprite Holdings Ltd. for 37 years until earlier this year.

…. it’s what happened to the company’s publicly traded securities that was just as interesting, and could have far greater implications.

In kneejerk response to the news, Steinhoff’s stock slumped as much as 72% Wednesday in Frankfurt, wiping out more than €7 billion ($8.3 billion) in value, before closing 64% lower at €1.08 euros. The stock closed at €5.075 on its first day of trading in the German city in December 2015, when the company moved its primary listing from Johannesburg.

But it is what happened to the company’s bonds that mattered most: Steinhoff International debt plunged, with €800 million of senior unsecured bonds due in 2025 falling as much as 41 cents on the euro, to 42 cents, before rebounding modestly. What makes the collapse remarkable is that the notes were issued just six months ago, in July, and have a Baa3 investment-grade rating from Moody’s Investors Service.

But the real punchline is who was one of the bond buyers: this guy.

That’s right: the ECB has emerged as the most prominent, if not so proud, owner of Steinhoff 2025 bonds as a cursory look of the ECB’s latest holdings (courtesy of UBS) reveals:

An ECB official confirmed, telling Bloomberg that the central bank owns “some” of the January 2025 bonds, declining to elaborate on the size of the holding (although it is limited to 70% of the total issue size). As Bloomberg notes, the ECB bought into the 800 million-euro Steinhoff Europe AG bond in July, the same month the note was issued. It is also distinctly possible that the ECB bought the bonds directly from Steinhoff, bypassing the secondary market directly and monetizing what would soon be “half off” paper.

The Steinhoff notes are among the about 129 billion euros ($152 billion) of corporate debt bought by the ECB since June 2016 as part of efforts to “spur the euro-zone economy”. Little did the ECB know that one of its purchases would soon become its most prominent land mine.

While the central bank has limited its risk by only acquiring investment-grade notes, this will be cold comfort now. Incidentally, this reminds us of a question we asked on March 10, 2016, the day the ECB announced its CSPP program: “It is unclear what happens to those IG bonds that the ECB has purchased if and when they get downgraded to junk” which is precisely what is about to happen to Steinhoff bonds.

Furthermore, while there’s no obligation for bonds to be sold if they’re downgraded to junk, according to published guidelines, it is especially unclear what happens if – or rather when in the case of Steinhoff – a company whose bonds the ECB has bought files for bankruptcy, and the debt becomes equitized: this would force the ECB to hold equity in a post-reorganized company, something the ECB has no mandate for. What happens then?

For now, Moody’s rates the Steinoff 1.875% notes Baa3, its lowest investment grade. The bonds will soon be downgraded to junk.

Meanwhile, the ECB’s monetization of all European debt continues apace, and as of last Friday, the ECB held over 40% of Europe’s GDP on its balance sheet.

And while the chart above is the main reason why credit spreads have never been tighter and corporate bond yields, lower, it is also the potential time bomb that threatens to crush up the ECB’s credibility once more Steinhoff grenades blow up. And blow up they will: according to the latest breakdown of ECB holdings by UBS, the central bank now owns 26 “fallen angel”-equivalent bonds with a junk, or BB+ rating, amounting to €18 billion in notional debt.


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