Posted by on December 19, 2017 3:15 pm
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Categories: Bond Business Conforama Creditors Darty Economy Economy of Europe europe European Central Bank European System of Central Banks Eurosystem Eurozone france Investment Grade Kingfisher plc Mario Draghi None Rating Agencies recovery Steinhoff International

When yesterday we discussed the latest troubles facing embattled retailer Steinhoff, whose bonds are owned by none other than the ECB, we said that while the company’s bonds mature in 2025, its bankruptcy is at most months away. In retrospect, and in light of the latest news, that may have been optimistic, because it now appears that a bankruptcy may be imminent and is at most just weeks away. According to Bloomberg, Steinhoff – which is facing an accounting scandal that led to the recent departure of its CEO and destroyed most of the company’s value – said lenders are starting to cut off support.

The reason why Steinhoff is suddenly facing not only a solvency but liquidity crisis is that the company which owns Conforama in France, Mattress Firm in the U.S. and Poundland in the U.K. isn’t yet able to assess the magnitude of financial irregularities disclosed two weeks ago, it said in a presentation to lenders in London on Tuesday (presentation below). The South African company also said it didn’t know when it would be able to publish audited results for 2017 and 2016, nor whether additional years will need to be restated.

Furthermore, Steinhoff also revealed that it didn’t have “detailed visibility” of the cash flows of individual operating companies. The units rely on the company for working capital and “the forecast position for each operating company is evolving daily,” it said. PricewaterhouseCoopers has been hired to investigate the accounts, while AlixPartners LLP is working on an analysis of the cash flow.

In short, the company is flying blind with no budgeting and no corporate overnight.

The presentation also said that the company is still grappling with the task of getting to the bottom of the crisis, which has led to the resignations of CEO Markus Jooste and billionaire Chairman Christo Wiese. As Bloomberg adds, Steinhoff said earlier Tuesday that Chief Operating Officer Danie van der Merwe, 59, had been made interim CEO to helm the recovery attempt, while Conforama boss Alexandre Nodale will serve as his deputy in a new four-member management board.

Needless to say, the last thing secured creditors want, is not knowing the “revised” value of the collateral that secures their loans, especially in the case of a rollup which “suddenly” turned out to also be fraud. Hence: everyone is rushing to get out the back door. Predictably, Steinhoff’s shares – already decimated – resumed their plunge, and ended their recent dead cat bounce by slumping more than 205% in Frankfurt to the lowest since Dec. 8 before paring losses to trade 12 percent lower.

Finally, Steinhoff revealed that it had outstanding debt of 10.7 billion euros ($12.7 billion) as of Dec. 14, the slide below revealed. Almost 4.8 billion euros of that was in Steinhoff Europe AG, an operation based in Austria. About 690 million euros in notional facilities have been rolled over to date, according to the presentation.

As a reminder, the ECB is a creditor to Steinhoff Europe AG Austria.

Which brings us to the question he brought up yesterday: will, or rather when now that Steinhoff’s bankruptcy now appears imminent, will the ECB sell its Steinhoff bond holdings? As we showed yesterday, Mario Draghi appears to be getting ready to do just that. As BofA pointed out, Draghi seems to be taking a more defensive stance with regards to owning Fallen Angel bonds like Steinhoff’s.

Note that the CSPP Q&A has been updated as of 29th November 2017, and the paragraph on ECB selling now reads as follows:

Q1.5 Will the Eurosystem sell its holdings of bonds if they lose eligibility?

The Eurosystem may choose to, but is not required to sell its holdings in the event of a loss of eligibility, e.g. in case of a downgrade below the credit quality rating requirement.

Previously this phrasing was far more specific, with forced selling (or otherwise) not even presented as an option:

Q8 Will the Eurosystem sell its holdings of bonds if they lose eligibility? For example, if they are downgraded and lose investment grade status?

The Eurosystem is not required to sell its holdings in the event of a downgrade below the credit quality rating requirement for eligibility.

Of course, once the ECB breaks the seal and it become public knowledge that the world’s biggest hedge fund not only buys – as everyone had known – but also sells when it has to, all hell could break loose for those IG bonds on its books which are about to be downgraded to junk by one or more rating agencies, leading to the perilous scenario we described yesterday, in which “fallen angels” become very painful “falling knives.

Until then, we will just keep an eye on Mario Draghi for the answer how long he can continue to burn taxpayer money by holding insolvent bonds and pretending that nothing has changed…

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Steinhoff’s full presentation to (evaporating) investors is below (link)

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