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Trading  | December 9, 2017

Earlier this week we reported that as part of the stunning, unexpected collapse of South African retail giant Steinhoff, which also owns France-based Conforama furniture chain, Mattress Firm in the U.S. and Poundland in the U.K., none other than the ECB was unveiled as owning an unknown amount of its recently issued €800 million in 2025 bonds, which plunged from 85 to as little as 41 cents on Wednesday when the news hit



… and which we said would be sharply downgraded in the coming days as the rating agencies – once again painfully behind the curve – caught up with reality. That’s precisely what happened late on Thursday, when Moody’s cut its Baa3 rating by four notches deep into junk territory, highlighting “the uncertainties and implications for the company’s liquidity and debt capital structure.”

 After the downgrade- much to the humiliation of the ECB which has to explain why as part of its economic revitalization efforts, i.e. QE it is holding this pile of steaming garbage – Steinhoff bonds extended losses on Friday as the world paid increasingly more attention to the accounting scandal that’s threatening the survival of the global furniture and clothing retailer.

Meanwhile, whispers of Enron 2.0 have emerged as the investing community begins to appreciate the potential implications of Steinhoff’s implosion. For South Africa, the collapse of the company which employs 130,000 people worldwide, already has systemic implications. As Bloomberg reports, South African Finance Minister Malusi Gigaba said he’s “mindful” that many retirement and savings funds will be hurt by the loss in value and has asked the PIC to prepare a report on the extent of the exposure.

Still, unless South Africa is willing to fund a state bailout, the fate of Steinhoff, which has appears to be sealed.

I think it is the end,” Simon Brown, Johannesburg-based chief executive officer of trading company JustOneLap, told Bloomberg. “The end will be a break up. There are lots of decent businesses that others will want to buy and it’s likely they’ll fetch decent prices. so staff will mostly be fine, except in head office.”

“There’s no way back,” David Shapiro, deputy chairman of Sasfin Wealth in Johannesburg, said in emailed comments on Friday. “The worry is that there are a huge number of operating companies within the stable – if you were a supplier to these businesses would you sell goods on credit? I reckon they should file for Chapter 11 or business rescue and try and salvage what they can.”

That outcome would be a disaster not only for the ECB, which as we showed is a proud owner of an unknown amount of the company’s plunging bonds.

The fallout from the spectacular implosion also means that U.S. and European banks with billions of dollars at stake were told they’d have to wait another week to confront the global clothing and furniture retailer that’s engulfed in an accounting scandal, Bloomberg reported on Friday.  

The company on Friday delayed a meeting with lenders to Dec. 19 from Dec. 11, citing that full-year earnings that are typically discussed in the annual gathering haven’t been published. The owner of chains such as Mattress Firm in the U.S. and Conforama in France didn’t say whether it planned to report financials before Dec. 19.

Finding themselves in limbo, and in a communication lockout, is hardly good news for lenders who stand to lose massive amount should Steinhoff liquidation. Total exposure to lenders and other creditors was almost 18 billion euros ($21 billion) as of the end of March, with Bloomberg reporting that “long-term liabilities were 12.1 billion euros and short-term liabilities 5.87 billion euros.” Those are the most recent Steinhoff results available after it indefinitely postponed publishing full-year financials on Wednesday. The latest numbers will likely be even greater to account for the July issuance of the company’s 2025 bonds.

But the real dangers is what is not reported on the books: “The great unknown is the funding of the off-balance-sheet structures, which could spill over into fresh bank liability,” Adrian Saville, chief executive officer of Cannon Asset Managers in Johannesburg, told Bloomberg on Friday. The short-term debt could “fall over if the business fails,” he said.

It is unclear which banks are on the hook although in South Africa, Steinhoff has relationships with Standard Bank Group, Investec and a unit of FirstRand. Globally some of the lenders include Citigroup, Bank of America, HSBC and BNP Paribas.

Banks also have exposure to Steinhoff through loans provided to Chairman, billionaire Christo Wiese’s investment vehicles. Last year, the billionaire and largest shareholder of the company pledged 628 million of Steinhoff’s shares in collateral to borrow money from Citigroup, HSBC, Goldman Sachs Group Inc. and Nomura Holdings Inc. That was to participate in a share sale in conjunction with the acquisition of Mattress Firm and Poundland, according to a company statement. It’s unclear whether Wiese has repaid part of those loans since, Bloomberg notes. The value of all shares pledged as collateral is now 365 million euros, down from 2.2 billion euros a month ago.

Meanwhile, in a desperate attempt to salvage value, Steinhoff said after the market close on Friday that it had appointed a new sub-committee to improve corporate governance at the company.

The three non-executive directors are all existing board members, and are led by Johan van Zyl, the co-CEO of financial services firm African Rainbow Capital Ltd. Steve Booysen, an ex-head of lender Absa, and Heather Sonn, a former investment banker, make up the trio.

Steinhoff also said it was considering boosting liquidity by selling assets worth at least 1 billion euros. It also said one of its African subsidiaries would refinance long-term liabilities amounting to another 1 billion euros, while the possibility of recovering assets for around 6 billion euros was being investigated. All of these measures may help recoup some of the money owing to banks and investors, and while a complete loss on the $21 billion in exposure is unlikely, it seems virtually guaranteed that the banks will suffer steep haircuts on their Steinhoff exposure.

As will the ECB, which on Friday was rumored it was considering selling its Steinhoff bonds. It is not exactly clear how this would take place, since the ECB’s QE by definition only buys, not sells, at least for now.

One thing that is certain, however, is that this is just the beginning of the ECB’s balance sheet woes: as we showed on Wednesday using UBS data, the ECB now holds no less than 26 “fallen angel” equivalent bonds, amounting to €18 billion in notional exposure; both numbers are set to soar when the next recession hits and the bulk of the ECB’s holdings shift down in quality, leaving Mario Draghi and his henchmen dealing with countless credit committees in bankruptcy court as the European central bank finds itself the post-reorg equity holder of countless European companies.

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