Steinhoff’s early redemption signals start of divorce

Steinhoff International Holdings’ intention to redeem its rand-denominated bonds that trade on the JSE may signal the start of the great unravelling of the company that has been built over the better part of 30 years.

This seems evident from discussions with two credit analysts Moneyweb spoke to in response to a statement by the company on Wednesday January 24, which states that Steinhoff Services Limited, the entity responsible for issuing debt locally, intends to redeem all R7.6 billion worth of bonds outstanding under its Domestic Medium-Term Programme.

“In this regard, Steinhoff Services Limited today sent a notice to holders of its notes under the programme (the “noteholders”) requesting written consent from the noteholders to reduce the maturity date to February 23 2018…..” the announcement reads.

The R7.6 billion in rand-denominated bonds comprise 12 issues with maturities as early as April this year and as far out as November 2022 (see graph below). Steinhoff also has €3.4 billion of bonds outstanding in Europe.

The credit rating on Steinhoff’s bonds was slashed deep into junk territory by ratings agency Moody’s in response to the admission of accounting irregularities at the company in early December.

“The bondholders will no doubt be very relieved,” says Nedbank CIB credit analyst  Jones Gondo. “I expect they will be redeemed at par value, which means they will get all their money back and in so doing, remove a lot of risk in their portfolios.”

The list of current bondholders includes some of the largest investment managers in the country, as can be seen from the table below:

Largest holders of Steinhoff rand-denominated bonds
SANLAM LTD	20.1%
RMB CAPITAL MARKETS PROP	10.6%
NEDGROUP INVESTMENTS	9.7%
STANLIB ASSET MANAGEMENT	6.4%
STANDARD BANK SA CAP MRKTS	6.3%
PASSIVES FUNDING	6.3%
STANLIB EXTRA INCOME FUND	3.4%
MMI GROUP LIMITED	3.3%
LIBERTY GROUP LTD	3.1%
ABSA BANK LIMITED	2.3%
INVESTEC MONEY FUND	1.5%
INVESTEC PLC	1.4%
MOMENTUM	1.3%
NGI FLEXIBLE INCOME FUND	1.3%
GOVERNMENT EMPLOYEES PENSION FUND	1.3%
INVESTEC CORPORATE BOND FD	1.2%
SBSA ITF MOMENTUM INC PI MAM	1.2%
DOLBERG SPENCER FINANCIAL SERVICES	0.9%
SBSA ITF NEDGROUP  INVESTORS OPPORTUNITY FUND	0.8%
INVESTEC HIGH INCOME FUND	0.7%
Others	17.1%
Source: Bloomberg

“I expect they would have sounded bondholders out before they even went and notified the market of their intentions,” said another credit analyst who wishes to remain anonymous. “But I am sure investors will be happy to get their money back, I just wonder where it is going to come from.”

According to Gondo, though, the intention to sell 29.5 million shares Steinhoff owned in financial services company PSG – announced and completed on Monday January 22 – was done exactly for this reason; to be able to settle debt of outstanding local bonds.

“That is certainly what I have been led to believe, and the amounts roughly correspond.”

Steinhoff raised gross proceeds of R7.1 billion though the exercise, meaning it will need to find another R500 million to complete redemption of the bonds (should holders agree to it).

But the question is why now? As has been made abundantly clear by the company, Steinhoff is facing a liquidity crisis as it battles to find the money to keep afloat following its damaging admissions and accusations of fraud undertaken by its previous CEO, Markus Jooste.

Read: Steinhoff shores up its financing

Clues can be found in the terms and conditions of the bonds, which provide the instruments issued both locally and offshore with “cross guarantees”. In the event Steinhoff defaulted on capital or interest repayments to the rand-denominated bondholders, as one of the more extreme forms of remedy, the bondholders could force other Steinhoff group companies to make good. It is explicitly stated in the conditions of the bond. This means that bondholders could seek redress from Steinhoff International Holdings, Steinhoff Investment Holdings, Steinhoff Africa Holdings, Ainsley Holdings, and the biggest cash generator of them all, Pepkor Holdings.

For the euro-denominated bondholder, the cross guarantee means their only claim would be to the holding company in Europe, not to the South African subsidiaries. But it is implied or assumed that the holding company will look to all of its subsidiaries for the money it owes.

Another feature of both sets of bonds is that of “cross default”. This means that if one set of bondholders goes into default, any other bondholder could call for their money back.

This entanglement was created as Steinhoff grew out of South Africa and then restructured. If Steinhoff defaults, it could well mean that one of the group companies in South Africa could be affected. So there exists a cross pollination of risk, and this is something that needed to be addressed if Steinhoff and Star are to stand separately from one another with each being able to fund its respective operations.

The final piece in the puzzle is the €1 billion debt owed by Star to its parent company. By settling with the local bondholders, Steinhoff paves the way for Star to begin issuing bonds itself. Once it can do that free of any risk of other bondholders laying claims against its assets, it will be able to issue debt quickly and repay its cash-thirsty parent. As a cherry on top, if bondholders agree to the redemption before January 31, it won’t matter if the JSE suspends the company’s debt from trading, as it would become a non-event.

Steinhoff’s response to Moneyweb’s questions reads as follows:

While the work on accounts restatements and forensic investigations are underway, Steinhoff is legally and otherwise constrained in what it is able to communicate to the public as such information may be price sensitive and is required to be released on Sens. In the circumstances we are unable to provide you with any more detail on your questions than has been included in our announcements and updates to the market.

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