Banks that financed Steinhoff International’s rapid expansion have been left gauging their exposure – both financial and legal – to the South African retailer after “new information” emerged relating to possible accounting irregularities.
The company advised investors to “exercise caution when dealing in the securities of the group” in a statement on Wednesday, adding that “new information has come to light which relates to accounting irregularities requiring further investigation”.
CEO Markus Jooste, who presided over a massive expansion and dozens of acquisitions over the last decade, immediately quit following the announcement, leaving executive chairman and major shareholder Christo Wiese in charge while investigations continue.
That expansion was fuelled by successive debt and equity deals. The company has more than €6bn of debt, most of which is in the form of bank loans.
Citigroup, Goldman Sachs, HSBC and Nomura provided financing for Wiese last year to help him fund a €1.6bn cash injection into the company. The margin loan was backed by 628m shares in the retailer.
Those shares, which were worth more than €3bn at the time of the loan, have since plunged and were worth less than €300m on Friday. It is unclear whether and how much of that loan was sold on by the arranging banks, as the transaction was private.
“It’s very challenging to quantify and understand what has been done, what the impact on asset value and on earnings will be and therefore what potential impact there will be on Steinhoff’s ability to service its debt,” said a banker at one lender bank.
The possible accounting irregularities also come just months after two flagship capital markets transactions for the company – a €800m bond deal in July and the R15.4bn (US$1.2bn) IPO of its domestic retail business two months later.
Manager Magazin first reported in August that German regulators were investigating Jooste over the possible inflation of revenue figures. Steinhoff at the time said it “rejects the allegations of dishonesty contained in the statements”.
The report was published a day into bookbuilding on the Johannesburg IPO of the company’s South African business Steinhoff Africa Retail – or STAR – although banks on the deal decided to proceed with the transaction after reassurances from the parent.
“I don’t think the bankers or the lawyers or the other advisers should have cancelled at the time on the basis of the information given in due diligence calls and through the company,” said a banker who worked on the deal.
“If we have been lied to, then that is something as bankers that is very challenging to spot.”
A banker at another firm on the IPO dismissed the latest twist.
“There have been no complaints we have received so far,” he said. “There was feedback during the IPO for STAR on Steinhoff’s accounting, and there were always believers and detractors. But it has not been raised as a concern internally as yet.”
The bond issued in July was bid at 47 cents on Friday. Shares in STAR were at R17.50 compared to the IPO price of R20.50. Parent Steinhoff International shares were down a whopping 87% on the previous Friday.