Steinhoff on the brink

About 400 shareholders of South African-German furniture retailer Steinhoff International Holdings met for an annual general meeting in Amsterdam on Friday to discuss ways out of the hole the company finds itself in. 

Many others back in South Africa watched the event broadcast live to a conference center in Cape Town. 

South Africa's Public Investment Corp — which manages the pension funds of government workers and has a 10-percent stake — was particularly well represented.

"It will be turbulent as it is about the issue of who knew what when, and if there are legal claims to cushion the stock market loss of almost 97 percent," DSW spokesman Juergen Kurz told the German press agency DPA.

"Are we now hopelessly over-indebted or are there still prospects for this business model?" Kurz added. "We continue to have a situation in which we have no figures."

Steinhoff lost €11.3 billion ($13.7 billion) — over 90 percent — of its market value from December 5 to the end of 2017 after irregularities were noted in its financial reporting. Steinhoff said the issues relate to the viability of about €6 billion worth of assets on the balance sheet of operations in Europe.

"I can report that good progress has been made," Heather Sonn, chairperson of the supervisory board, told shareholders during Friday's meeting.

The German Protection Society for Bond Holders (DSW) has said Steinhoff was the greatest destroyer of capital on the German markets in 2017.

The company's bond yields ballooned to 14 percent — indicating the rising risk of taking on the company's debt — the week the scandal came out and Moody's soon after cut its credit ratings to junk, slashing them again three weeks later. Bondholders included the European Central Bank, which has now liquidated its holding.

Probes galore

The South African Financial Services Board (FSB) has opened an investigation into Steinhoff, backed by Finance Minister Nhlanhla Nene, while German and Austrian prosecutors have also been investigating possible accounting fraud since 2015.

South Africa's Independent Regulatory Board for Auditors and a Dutch auditing regulator have also begun probes into Deloitte's role. Deloitte signed off on Steinhoff's 2016 results — which now need to be restated. It said it will cooperate fully with investigations.

Another focus is on those who worked on the company's 2015 listing on the Frankfurt Stock Exchange, including Commerzbank. It and two other international banks allegedly made misleading statements at the IPO.

With 200 subsidiaries and affiliates, the Amsterdam-registered, Frankfurt- and Johannesburg-listed retailer was packaged to investors as a balance between developing and emerging markets.

It saw its share price triple between early 2012 and end-2016 as it expanded in the US and Europe from a base in South Africa.

Then in December 2015, investors forked out €5 per shares in a company that was still little known by international standards.

Commerzbank has not commented.

"There has been a lot of dishonesty going on here," a portfolio manager in a South Africa-based trading company told DW on condition of anonymity. "And this means we don't know exactly what we are dealing with, in terms of the real value of the company, its actual debts and so on," she said. "But this is fraud," she added.

Others were less sanguine. "This is the largest financial fraud in South Africa’s history," Adrian Saville, CEO of Cannon Asset Managers, told DW. 

Sitting comfortably?

Founded in 1964 in Lower Saxony, the company specialized at first in importing furniture from the Eastern bloc. Steinhoff restructured in 1998 and went public in Johannesburg. By 2011, it was considered the largest furniture company after Ikea in Europe and moved to the Frankfurt Stock Exchange.

It owns retail chains including Conforama in France, Poundland in the UK and Mattress Firm in the US, including the stores previously known as Sleepy's.

The company was even considered a candidate for the DAX, the index of the 30 most important stock exchange groups in Germany. This was followed by entry on the second stock exchange, the MDax.

But even as it debuted in Frankfurt, the tax investigators were already moving in.

The resignations of CEO Markus Jooste and billionaire Chairman Christo Wiese did little to dampen speculation and further dent an image carefully constructed.

"There was a huge cult built around Wiese and Jooste," Magda Wierzycka, chief executive officer of Sygnia, a Cape Town-based asset manager, told Bloomberg. "The icons of South African business have been brought down."

Irregularities emerge

Earnings statements for at least fiscal 2017, 2016 and 2015 will need to be restated. When it will publish its audited results for 2017 is anyone's guess, the fund manager said.

Instead of once €2.2 billion, the real estate of the company — that is the furniture stores and administrative buildings — should be worth just over €1 billion.

JPMorgan Chase & Co. reportedly asked in 2015 why Steinhoff's accounts lacked "pivotal information" in partucular detailing how it was generating revenue and why it appeared to focus on tax breaks.

Banks' angst

Steinhoff met bankers in London in December to negotiate a rollover of over €1 billion owed on a revolving credit facility. These include Citigroup, Bank of America, HSBC Holdings, FirstRand and BNP Paribas.

Lenders began to suspend or withdraw credit lines.

The company, they said, didn't have "detailed visibility" of the cash flows of its operating companies.

About €690 million in notional facilities has been rolled over to date and its Pepkor Europe unit has secured a €200-million loan facility, Bloomberg reported.

What does the future hold?

Steinhoff has hired PwC to investigate the wrongdoing and appointed Moelis & Co. to handle talks with lenders and AlixPartners LLP to advise on operations.

PwC said it had has reviewed over 320,000 documents and conducted discussions with involved parties, Sonn said.

The company could get back into "safe" debt territory by selling off its assets, but legal and regulatory issues could see this drag on for up to two years and above all we don't know how much the company is actually worth, how much it earns etc, the manager said.

Steinhoff's official net debt as of December 14 was €10.7 billion, of which €4.8 billion was for Steinhoff Europe, an operation based in Austria.

The company has earmarked assets that could be sold easily and has sold its stake in South African investment holding company PSG Group, raising $345 million. Other sales include a 17-percent stake in French online retailer Showroomprive and a store in Vienna for a combined €139 million. Steinhoff Africa Retail, a subsidiary known as STAR, is also refinancing loans with its parent company of $1.3 billion.

The company — which sells 40 furniture brands in over 30 countries worldwide — saw its Germany-listed shares rise 2.9 percent on Friday after it cut its stake in KAP Industrial to plug the liquidity gap.