Steinhoff’s long euro bond to offset rand fall

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Steinhoff International has sold its longest maturity bonds, issuing in euros amid a plunge in the domestic currency of the South African furniture retailer that gets about half of its revenue from Europe.

The owner of France’s Conforama furniture chain sold e465 million (R7 billion) of January 2021 bonds, which can be converted to shares, on January 24, yielding 4 percent.

Rates on the company’s March 2018 euro-denominated convertible notes rose 40 basis points this year to 2.85 percent on Thursday, according to data compiled by Bloomberg.

Yields on bonds of diversified consumer companies in emerging markets on the JPMorgan Chase Cembi benchmark index, which is in dollars, are unchanged this year at 5.66 percent.

Steinhoff issued the securities amid a sell-off in emerging market assets, including South Africa’s sovereign bonds and the rand. The sale in euros, at its lowest rate, helped protect costs against the risk the rand will weaken further, according to Justin Craib-Cox at Aviva Investors in London.

“With the move we’ve seen in emerging market currencies, this was good timing,” Craib-Cox said. “As Steinhoff has got to the point where they earn more in euros, this helps create a natural hedge.”

The yield on Steinhoff’s 2021 bond fell 21 basis points on Thursday to 3.48 percent. The initial conversion price was set at R59.11 a share, based on a fixed exchange rate of R14.9199 to the euro, according to the company.

Steinhoff profit for the year to June last year rose 29 percent to R7.3bn as Europe exited its longest-ever recession and improving consumer confidence delivered a boost to sales.

The company’s shares gained 1.1 percent on the JSE on Thursday and a further 1.2 percent to R47.05 on Friday, valuing the company at R95.7bn. The company’s stock has gained 4 percent this year.

“It’s good to have our coffers full of good capital at good rates for the next seven years,” Mariza Nel, the company’s director for corporate services, said last month.

Steinhoff had not decided if it would use the proceeds to pay down its debt, Nel said.

The company was not planning to convert its nearest-term fixed bond, due in May 2016, as it was “still not economical to do that”, she said.

Should Steinhoff choose to use some of the capital raised to buy back a bond, it would probably choose the e420m convertible due in May 2017 as it had the company’s highest fixed bond coupon of 6.38 percent, Craib-Cox said.

Yields on South Africa’s rand bonds maturing in December 2026 dropped 6 basis points to 8.65 percent as of 7.51am on Friday.

The local currency has lost 4.6 percent against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg. It gained nearly 7c against the dollar to be bid at R11.0306 at 5pm on Friday.

“Steinhoff’s main risk is the health of the European recovery,” Mark Hodgson, a Cape Town-based analyst at Avior Research, said earlier this month. “For now, its European markets are fairly stable – it looks like good timing for this latest bond.”

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