Christo Wiese, the former chairman of Steinhoff ­Holdings. Picture: Waldo Swiegers/Bloomberg

CAPE TOWN - Hedge funds now hold most of Steinhoff International Holdings €3.5bn (R51 billion) of bonds and more than €1.5bn ( R21.8 billion) of bank loans and private debt, according to a report by Bloomberg. 

The company's shares fall drastically after its former chief executive resigned. He is currently being investigated for fraud, miscalculation of funds and missing cash worth $5bn (about R60bn). 

Despite these troubles, investors are not phased and buyers are still very much interested in the company. 

“If you are a big distressed-debt fund, then you must buy it, even if it’s little more than a blind punt,” Louis Gargour, owner of London-based credit fund LNG Capital.

He does say however that Steinhoff’s finances were too opaque and complex for him to touch. 

“There are few opportunities as big as Steinhoff out there.”

Buyers see the company as a global retailer with businesses on four continents that must have enough assets to offset losses they still don’t know about, according to Bloomberg. 

However, even as investigations geared up, investors battled over Steinhoff’s damaged securities.

While the company can’t say when the investigation will be over, it will have to come before more than R14.5 billion of loans are recalled in August, analysts told Bloomberg. 

The PriceWaterhouseCoopers investigation is digging deeper into off-balance sheet structures and transactions with related parties.

Bondholders, which included the European Central Bank, took losses of as much as 50% to unload paper in December, that just days earlier was trading near face value.

Banks and private debtholders including Commerzbank and Natixis followed in January, offloading loans at discounts of between 20% and 35%. 

US banks took losses of $1bn (R11.7 billion) on Steinhoff in the fourth quarter alone, mostly related to Wiese’s margin loans.

BACKSTORY

In a report published on December 6, short-seller Viceroy Research alleged that Steinhoff’s holding company was hiding losses in entities owned by associates of former CEO Markus Jooste.

Viceroy’s analysis concluded that Steinhoff’s earnings may be at least €1bn (R14.5 billion) lower after adjustments, wiping out most of the company’s expected profits.

“It is possible this is just the tip of the iceberg,” Viceroy said in the report. The dealings between Steinhoff’s units and non-related parties are often blurred.

Take Alvaglen Estates Limited, a Bahamas-based subsidiary of Steinhoff’s real estate arm, which owns properties in the UK. At least two of Alvaglen’s assets in the UK are managed by Formal Investments Limited of the British Virgin Islands, according to Land Registry records.

Steinhoff units operate out of warehouses that appeared in Formal’s portfolio, which was available on its website until last week.

Formal’s chairperson is Malcolm King, who is also a family friend of Jooste and a director of the company that manages a wine estate in Stellenbosch formerly owned by Wiese, according to newspapers and records. 

Malcolm King didn’t return emails and phone calls through Formal.

Steinhoff said in an email to Bloomberg that Formal manages certain Alvaglen properties in the UK but “to the best of our knowledge, Steinhoff has no other ongoing business relationships with Formal or Malcolm King”.

In at least one case, the complex structure of Steinhoff could play in favour of creditors.

Creditors including Attestor Capital, Centerbridge Partners, Farallon Capital Management, Silver Point Capital, and York Capital Management bought a large portion of the €1.6bn (R23.3 billion) of convertible bonds due in 2021 and 2022.

Bond documents show the notes are guaranteed by a predecessor of Steinhoff’s parent company, a unit now called Steinhoff International Holdings Proprietary Limited, SIHPL, which management defined as a “shell company” in a December 19 presentation.

That “shell company” is owed billions by the profitable South African division. 

The company confirmed in a presentation published on February 23 that SIHPL has a loan claim worth R24.6bn against the South African part of the Steinhoff group. 

The price of €1.1bn (R16.2 billion) of bonds due August 2022 spiked 10 cents on the euro to about 75 cents on the next trading day, according to data compiled by Bloomberg.

Others entangled in the complex web may not fare as well. Take the €4.8bn (R69 billion) of loans and bonds issued by Steinhoff Europe, the holding unit of operating divisions in Europe. 

The company has several sub-holdings, some of which booked loans worth billions that are difficult to trace.

Austria-registered Genesis Investment Holding has €2.2bn (R32 billion) of liabilities to unspecified affiliates. 

Additionally, AIH Investment Holdings reported €1.4bn (R20 billion) of loans to affiliates and €356m (R5.1 billion) of receivables in 2016.

The status of Steinhoff’s cash holdings remains unknown as:

The retailer reported €3.1bn (R45.1 billion) in cash as late as March 2017. 

It also raised $1.2bn (R14.1 billion) in the September initial public offering of its South African arm. In December, when management said that investors shouldn’t rely on its old financial reports, it didn’t say how much money was in its coffers.

Steinhoff then raised credit lines of about $700m (R8.2 billion) for units in the UK, US, and France from Davidson Kempner Capital Management, Barclays, and Tikehau Capital. Even still, “work remains to be done” to ensure Steinhoff’s businesses have the necessary funding, management said on February 28.

“Steinhoff said they had billions in cash last year, and raised more after the latest report, but still went out to raise new money to keep the company afloat,” said Anthony Giret, a credit analyst at SpreadResearch in France. “The company must answer very substantial questions before we have an idea of how much money creditors could recover.”

It was reported yesterday that Steinhoff raised R3.67 billion through an accelerated bookbuild of up to 450 million ordinary shares in KAP Industrial Holdings at a price of R8.15 a share.

Steinhoff said the book of demand was multiple times oversubscribed.

“The placing price represents a discount of 4.1percent to the KAP closing price on Monday,” Steinhoff said yesterday afternoon after the closing of the book-build.

The placing shares constitutes approximately 16.7percent of KAP’s issued share capital, and this will reduce Steinhoff stake in KAP to 26percent, down from 43percent. The troubled retailer said yesterday that it was taking steps to refinance or redeem the debt within its South African operations.

The launch of the bookbuild negatively affected KAP’s share price as it declined by 3.16percent to R8.23 a share on the JSE yesterday morning before ending the day at 0.47percent higher at R8.54.

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- BUSINESS REPORT ONLINE, BlOOMBERG