Creditors call the shots at Steinhoff

The management of Steinhoff International Holdings is desperately fending off assorted creditors, lawsuits and other predators while trying to restore the multi-brand furniture and homeware retailer to some level of financial sustainability.

In a market update, management has simultaneously tried to assure shareholders that all is under control at the struggling retail and manufacturing firm, while announcing that it has asked creditors to allow an extension of the lock-up agreement, delaying it from October 20 to November 20.

In July this year, 90% of creditors agreed to the lock-up agreement (LUA), which gave management essential breathing space to restructure the debts belonging to the company. This includes that of Steinhoff Europe AG, Steinhoff Finance Holding GmbH and Stripes US Holding (Mattress Firm).

According to Danie van de Merwe, acting CEO of Steinhoff International, a number of significant steps have been made. “Over the last three months, we have made substantial progress with the restructuring process, achieving a number of important milestones necessary to stabilise the Group’s finances. During this period we have continued to receive significant support from creditors under the LUA and we remain in positive discussions with them.”

However, the request for an extension has to be an indication that negotiations are not that easy to finalise. “The reality is that Steinhoff has outstanding external debt of over €9.8 billion,” says Karl Gevers, head of research at Benguela Global Fund Managers. “While the LUA will avoid a default situation and buy Steinhoff time (three years), it also comes at a cost, with the LUA possibly adding over €1 billion per year to the debt, as interest and fees are rolled up.”

The bottom line is that Steinhoff is forced to work with creditors to avoid liquidation, he says. Hence the requirement for the LUA. Without this Steinhoff would be under even more pressure to liquidate assets at fire-sale prices (and most likely the better assets that would get a better bid) and refinance at much higher levels. “For creditors, it makes sense to wait to ensure they are fully repaid. On top of this, creditors are being paid quite well to wait (10% per annum).”

Steps taken include the sale of Austrian home furnishing subsidiary, Kika-Leiner, announced in July. In addition, an agreement has been reached to sell the puris Bad (bathroom) and Impuls Küchen (kitchen) furniture manufacturing businesses and assets, which were considered non-core to Steinhoff.

The financial restructuring of Hemisphere International Properties, which holds the European real estate portfolio, was completed in September, resulting in a new, secured, three-year term loan facility of about €775 million.

Greenlit Brands, formerly Steinhoff Asia Pacific Group, has also been refinanced. This includes the amendment and restatement of certain intragroup loans, as well as a new facility of AUD$256 million for the refinancing of existing debt. This will provide facilities for the Greenlit businesses through to maturity in October 2020.

All eyes are on Mattress Firm, which Steinhoff acquired for $3.8 billion (including $1.4 billion debt) two years ago and which filed for voluntary bankruptcy in October. A restructure is underway that will see about 700 of its 3 400 stores closed and funding injected in exchange for equity.

“The Mattress Firm restructuring is intended to strengthen Mattress Firm’s balance sheet, optimise its store footprint, and is expected to accelerate the turnaround of the business,” says Van der Merwe.

As part of the restructuring, Mattress Firm has become a subsidiary of Steinhoff Europe.

The voluntary Chapter 11 filing of Mattress Firm is a clear sign that the group is under strain, with a large retail footprint that is becoming a liability in light of online retail competition, says Gevers. “Mattress Firm’s liabilities exceed assets by €1 billion, so there was no way they could avoid the Chapter 11 filing (which is one step away from Chapter 7 liquidation).

“A successful restructure could give Mattress Firm some breathing room, but there won’t be much value left for shareholders. Even after a successful restructuring, we believe the business of Mattress Firm is low quality, and unlikely to recover,” he says.

“Creditors are in charge at Steinhoff, and as an equity holder, you are last in line. It would take a number of things to go right for there to be value left for shareholders, never mind the tax claims and shareholder claims.”

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